TROY GROUP INC, S-1/A, 1999-04-13

TROY GROUP INC
S-1/A, 1999-04-13
COMPUTER & OFFICE EQUIPMENT

Previous: BEYOND COM CORP, 8-K, 1999-04-13

Next: EVERGREEN FIXED INCOME TRUST /DE/, N-14AE, 1999-04-13

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 1999

REGISTRATION NO. 333-51523
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------

AMENDMENT NO. 4
TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
--------------------------

TROY GROUP, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 3570 33-0807798
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

--------------------------

2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA 92705
(949) 250-3280

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------

PATRICK J. DIRK
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
TROY GROUP, INC.
2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA 92705
(949) 250-3280

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------

COPIES TO:

<TABLE>
<S> <C>
THOMAS C. THOMAS, ESQ. OBY T. BREWER III, ESQ.
MICHAEL J. KOLAR, ESQ. MICHAEL S. WACHHOLZ, ESQ.
Oppenheimer Wolff & Donnelly LLP Morris, Manning & Martin, L.L.P.
101 Park Center Plaza, Suite 300 1600 Atlanta Financial Center
San Jose, California 95113 3343 Peachtree Road, N.E.
(408) 795-3000 Atlanta, Georgia 30326
(404) 233-7000
</TABLE>

--------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value per share....................... $31,625,000 $9,285
</TABLE>

(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a).

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

SUBJECT TO COMPLETION, DATED , 1999

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

<PAGE>

2,500,000 SHARES

[TROY GROUP, INC. LOGO]

COMMON STOCK
------------

This is an initial public offering of shares of Troy Group, Inc. All of the
2,500,000 shares of Common Stock are being offered by Troy. We anticipate that
the initial public offering price will be between $9.00 and $11.00 per share.

Prior to this Offering, there has been no public market for our Common
Stock. Our Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "TROY."

----------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 4.

---------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price................................................... $ $
Underwriting discounts and commissions.................................. $ $
Proceeds, before expenses, to Troy...................................... $ $
</TABLE>

We have granted the underwriters a 30-day option to purchase up to an
additional 375,000 shares of Common Stock to cover over-allotments.

The underwriters expect to deliver shares against payment on or about
, 1999.

[LOGO] [JOSEPHTAL & CO. INC. LOGO]

THE DATE OF THIS PROSPECTUS IS , 1999

<PAGE>

[LOGO]

ENTERPRISE OUTPUT SOLUTIONS

[SCHEMATIC DIAGRAM SHOWING TROY ENTERPRISE OUTPUT SOLUTIONS DELIVERING OUTPUT
VIA THE INTERNET]

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Dilution.................................................................. 13
Unaudited Pro Forma Consolidated Statement of Operations.................. 14
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 30
Management................................................................ 40
Certain Transactions...................................................... 46
Principal Stockholders.................................................... 47
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 51
Underwriting.............................................................. 52
Legal Matters............................................................. 54
Experts................................................................... 54
Additional Information.................................................... 54
Index to Combined Financial Statements.................................... F-1
</TABLE>

------------------------

THROUGH AND INCLUDING , 1999 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO A DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING
AS AN UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR SUBSCRIPTION.

<PAGE>

PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL THE INFORMATION THAT YOU SHOULD
CONSIDER IN INVESTING IN OUR COMMON STOCK. WE ENCOURAGE YOU TO READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE SECTION TITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS.

OUR BUSINESS

We are a leading worldwide provider of enterprise output solutions that
enable organizations to electronically transmit and output information across
distributed computing environments. Our solutions consist of connectivity and
output enhancement products that are compatible with most operating systems and
protocols. Our connectivity products include software, firmware and hardware
that enable output devices such as printers and fax machines to better
communicate over networks and the Internet. Our output enhancement products
include software, firmware, hardware and imaging supplies that enhance the
functionality of these output devices. Our products and solutions reduce costs,
decrease processing time, enhance data integrity, provide security and allow
companies to facilitate e-commerce and better manage business processes.

Our products have been adopted in a wide variety of industries, including
telecommunications, financial services, computer hardware, automotive, personnel
and others. We have more than 9,000 customers in 55 countries, including
companies such as AT&T Corporation, BankAmerica Corporation, Brother Industries,
Eastman Kodak, Farmer's Insurance Group, Ford Motor Company, IBM, Manpower,
State Farm Insurance and Wells Fargo & Company. We market our products to
Fortune 1000 companies through a direct sales force and to other businesses
through our network of distributors and value-added resellers. Since 1993, we
have had a strategic relationship with Hewlett-Packard, covering development and
marketing of our output enhancement products. This relationship has evolved to
include our network and Internet technology. We also have strategic
relationships with ADP, IBM, PeopleSoft, Standard Register and Wind River.

OUR MARKET

The emergence and adoption of networks and the Internet is rapidly changing
the way organizations generate and distribute information. Historically, most
business information was created using legacy computer systems, printed and
delivered to users through physical means such as facsimiles, hand deliveries,
inter-office mail and the postal service. Technologies are now available to
effectively distribute information electronically to multiple end users both
within and outside an organization. In addition, many organizations are now
looking for entirely new output solutions that enable information to be
distributed to any number of output devices using the Internet. We believe
traditional information distribution and enterprise output solutions have not
kept pace with these technological advancements and new business requirements.
The lack of common computing platforms, protocols and other standards has
limited an organization's ability to take advantage of these technologies. As a
result, we believe that there is a need for enterprise output solutions that
allow organizations to electronically transmit and output information across
distributed computing environments without regard to protocol.

OUR CONNECTIVITY PRODUCTS

Our network connectivity products include print server firmware and hardware
products and a software-only solution. These products enable an organization to
distribute and output information across distributed computing environments. Our
network connectivity products are recognized worldwide for supporting more
protocols and network operating systems than other products on the market. As a
result, they are well suited for enterprises that have deployed many different
kinds of networks, computers and operating systems over wide geographic areas.

Our current Internet connectivity product, PrintraNet, is a software and
firmware solution that enables a user at one location to print to another
location over the Internet. PrintraNet offers a number of advantages, including
lower cost and higher quality than fax transmissions, and eliminates software
compatibility issues associated with e-mail. Our Internet connectivity products
under development will be

1
<PAGE>

designed to enable output devices, including currently installed printers
manufactured by Hewlett-Packard, IBM, Lexmark and Xerox, to communicate over the
Internet regardless of the sending device's protocol. In addition, we will
provide our multi-protocol solutions to these and other output device
manufacturers and end users to allow new output devices to communicate over the
Internet. We believe that we will have significant competitive advantages in
this market because we were one of the first to develop Internet printing
technology and have extensive protocol experience.

OUR OUTPUT ENHANCEMENT PRODUCTS

Our output enhancement products include software, firmware, hardware and
imaging supplies that enable standard laser printers to print MICR lines
(magnetic ink characters used on checks and other financial documents),
graphics, barcodes and forms. These products also enable a printer to perform
other functions not offered by most printer manufacturers such as auditing and
status checking, and provide security. Our MICR technology, including
proprietary imaging supplies, has helped us to become a worldwide leader in
financial document printing solutions.

By combining our MICR enhanced distributed output solutions with our
Internet software, we are currently developing technology that will offer the
capability to print a MICR encoded check remotely, including over the Internet.
This check will have all of the same attributes of a traditional check and will
be presented by a merchant through normal banking channels. We believe that this
capability will offer us a significant new growth opportunity due to the rapid
rise in e-commerce and the limited payment methods available to today's
e-commerce consumer. Our integrated solution will allow e-commerce consumers to
pay for goods and services with a check in a similar manner and with comparable
speed and security as is available for credit cards.

OUR BUSINESS STRATEGY

Our objective is to be a leading worldwide provider of enterprise output
solutions. Our strategy for achieving this objective includes:

- Accelerating the development and marketing of our Internet products;

- Introducing and enhancing products through research and development;

- Expanding and seeking new OEM relationships;

- Acquiring related businesses, products or technologies;

- Leveraging strategic alliances; and

- Expanding distribution channels to increase our focus on selling to
mid-size and smaller businesses.

OUR HISTORY AND STRUCTURE

We were originally incorporated in California in 1996 and reincorporated in
Delaware in May 1998. We are the result of various mergers and acquisitions
involving a company originally founded in 1982 by our existing shareholders. In
October 1998, we merged XCD Incorporated, a leading supplier of connectivity
solutions, into our subsidiary, Troy XCD, Inc. Today, our subsidiaries include
Troy XCD and Troy Systems International, Inc. Our principal executive offices
are located at 2331 South Pullman Street, Santa Ana, California 92705, and our
telephone number at that location is (949) 250-3280. Our trademarks include
TROY-Registered Trademark- and PrintraNet-TM-. Other trademarks, trade names or
service marks used in this Prospectus belong to their holders.

------------------------

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THE
RISKS FACED BY US DESCRIBED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.

2
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered........................ 2,500,000 shares
Common Stock to be outstanding after the
Offering.................................. 10,171,430 shares(1)
Use of proceeds............................. For working capital and general corporate
purposes, including possible acquisitions, and
to repay indebtedness. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... TROY
</TABLE>

SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following is a summary of more complete financial information provided
in our pro forma and consolidated financial statements. On October 30, 1998,
Troy and Troy Systems converted from S corporations to C corporations for
federal and state income tax purposes. The pro forma net income and pro forma
diluted net income per share data in this table assume that Troy and Troy
Systems were subject to corporate income taxes at an effective combined federal
and state income tax rate of 40.0% for the periods presented. Please see Note 1
in the notes to our consolidated financial statements.

<TABLE>
<CAPTION>
FEBRUARY 28, 1999
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................................................... $ 28 $ 19,087
Working capital........................................................................ 7,222 27,677
Total assets........................................................................... 19,586 38,143
Short-term notes payable............................................................... 496 --
Current portion of long-term debt...................................................... 959 59
Long-term debt, net of current portion................................................. 2,804 382
Stockholders' equity................................................................... 9,220 31,595
</TABLE>

- ------------------------------

(1) Excludes: (i) 1,564,298 shares of Common Stock reserved for issuance under
our stock option plans, of which options to acquire 326,957 shares are
outstanding at a weighted average exercise price of $0.42 per share and
options to acquire 530,000 shares which will be granted upon completion of
the Offering at an exercise price equal to the price per share to the public
in the Offering; (ii) up to 300,000 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of $3.50 per share;
(iii) up to 50,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $7.00 per share; (iv) up to
50,000 shares of Common Stock issuable upon exercise of outstanding warrants
at an exercise price of $3.50 per share; and (v) shares of Common Stock
equal to 10% of the shares sold in the Offering, issuable upon exercise of
the Representatives' Warrants. See "Management--Stock Option and Incentive
Plans," "Description of Capital Stock" and "Underwriting."

(2) Pro forma net income and pro forma diluted net income per share data give
effect to the October 30, 1998 conversion by Troy and Troy Systems from S
corporations to C corporations for federal and state income tax purposes and
assume that Troy and Troy Systems were subject to corporate income taxes at
an effective combined federal and state income tax rate of 40.0%. See Note 1
in the notes to our consolidated financial statements.

(3) As adjusted balance sheet data give effect to the sale of 2,500,000 shares
of Common Stock offered hereby at an assumed initial public offering price
of $10.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."

3
<PAGE>
RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES
OF OUR COMMON STOCK. IF THE EVENTS DESCRIBED BELOW OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF FUTURE OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

WE HAVE RECENTLY EXPANDED OUR BUSINESS TO OFFER CONNECTIVITY SOLUTIONS AND DO
NOT HAVE EXTENSIVE EXPERIENCE IN DEVELOPING AND MARKETING PRODUCTS FOR THIS
MARKET

Until recently, we focused mainly on developing and selling output
enhancement solutions that enabled businesses to distribute and print financial
documents. In October 1998, we acquired Troy XCD, including its products and
management. Following this acquisition, we expanded our business to offer output
solutions that allow enterprises to distribute and print information across
multi-protocol computing environments both within and outside the organization.
Because this is a recent focus for us, we do not have extensive experience in
this area, and we cannot assure you that we will be successful in developing or
marketing these types of connectivity solutions. In addition, our new focus on
connectivity solutions could cause our historical business to suffer. If we are
not successful in developing or selling connectivity solutions or if our
historical business declines as a result of our efforts in this area, our
business will be materially and adversely affected. See "Business--Industry" and
"--Business Strategy."

OUR INTERNET OUTPUT SOLUTIONS ARE STILL UNDER DEVELOPMENT AND EVEN IF
SUCCESSFULLY DEVELOPED MAY NOT GAIN MARKET ACCEPTANCE

Our Internet output solutions, including our e-commerce check payment
solution, are still under development, and we cannot assure you that we will be
able to complete these development efforts successfully or on a timely basis. In
addition, we cannot assure you that our Internet output solutions, even if
successfully developed, will be accepted by the marketplace. See
"Business--Industry" and "--Products and Services."

WE FACE RISKS ASSOCIATED WITH OUR STRATEGY OF GROWING THROUGH ACQUISITIONS

We intend to acquire technologies, product lines and businesses that will
complement our business and enable us to achieve our objective of becoming the
leading worldwide provider of enterprise output solutions. Acquisitions involve
risks, including that:

- we have limited experience in making acquisitions,

- we may experience difficulty in identifying, financing and completing
acquisitions at an acceptable cost,

- the companies we acquire may not operate profitably after we acquire them,

- we may not be able to assimilate the acquired products, technologies or
businesses into our ongoing business,

- an acquired company may take a disproportionate amount of management time
and energy, causing our existing business to suffer,

- we may lack the experience to enter new markets successfully,

- we may find it difficult to retain key employees of the acquired
businesses, an acquisition may dilute our stockholders' equity if
additional equity securities are issued, and

- we may be required to amortize acquisition expenses and acquired assets
over a relatively short period, causing our earnings to be below analysts'
expectations.

4
<PAGE>

See "Business--Business Strategy."

COMPETITION COULD REDUCE OUR EARNINGS

We face significant competition in developing and selling enterprise output
solutions. Many of our competitors have substantially greater financial,
development, marketing and personnel resources than we have. To remain
competitive, we believe that we must continue to provide:

- technologically advanced enterprise output solutions that satisfy the
demands of our customers,

- superior customer service,

- enhanced quality and reliability levels, and

- flexible and reliable delivery schedules.

We cannot assure you that we will be able to compete successfully against
our current or future competitors. Increased competition may result in price
reductions, lower gross margins and loss of market share. Any of these results
could reduce our earnings. See "Business--Competition."

OUR GROWTH STRATEGY FOCUSES TO A SIGNIFICANT EXTENT ON OUR INTERNET OUTPUT
SOLUTIONS AND THEREFORE DEPENDS ON THE CONTINUED DEVELOPMENT AND GROWTH OF THE
INTERNET

Our growth strategy depends to a significant extent on developing and
marketing our Internet output solutions. The successful implementation of this
strategy therefore depends on the continued development and growth of the
Internet. Rapid growth in the use of and interest in the Internet is a recent
development, and we cannot be certain that this growth will continue or that a
sufficiently broad base of organizations will use the Internet as a medium to
distribute and print information. The Internet may not prove to be a viable
medium for distributing and printing information for a number of reasons,
including:

- inadequate development of the necessary network infrastructure for
communication, access and server reliability,

- lack of development of complementary products, such as high-speed
communication lines,

- security and confidentiality concerns,

- delays in the development of or adoption of new standards and protocols
required to handle increased levels of Internet activity, and

- increased government regulation.

OUR BUSINESS DEPENDS ON THE CONTINUED DEMAND FOR PRINTED DOCUMENTS, INCLUDING
FINANCIAL DOCUMENTS

Because we focus on output solutions that allow enterprises to distribute
and print information, our business depends on the continued demand for printed
documents. Demand for these solutions could decline if businesses and
organizations move toward "paperless" environments and reduce their dependence
on printed documents. In addition, our output enhancement solutions are
dependent on the demand for printed financial documents. Demand for printed
financial documents may be reduced as a result of competition from alternate
financial document delivery or payment methods (such as electronic banking,
electronic commerce, on-line services and other electronic media). We cannot
assure you that changes in the business environment or competition from
alternate financial document delivery or payment methods will not significantly
erode the demand for our products and cause our business to suffer. See
"Business-- Industry" and "--Business Strategy."

5
<PAGE>

TECHNOLOGY IN OUR INDUSTRY EVOLVES RAPIDLY, AND WE MAY FAIL TO KEEP PACE

Rapid technological advances, obsolescence and large fluctuations in demand
characterize the market for our current products. Our existing and
development-stage products may easily become obsolete if our competitors
introduce newer or better technologies. To be successful, we must continually
enhance our existing products and develop and introduce new products. If we fail
to adequately anticipate or respond to technological developments or customer
requirements, or if we are significantly delayed in developing and introducing
products, our business will suffer. See "Business--Business Strategy" and
"--Research and Development."

A LARGE CUSTOMER ACCOUNTS FOR A MATERIAL PORTION OF OUR SALES AND OUR EARNINGS
WILL SUFFER IF WE LOSE THIS CUSTOMER

For the three months ended February 28, 1999, one of our consumable products
resellers accounted for 12.0% of our net sales. This reseller also accounted for
16.6% of our net sales for the fiscal year ended November 30, 1998, and 17.1% of
our net sales for the fiscal year ended November 30, 1997. We believe that a
significant portion of this reseller's sales are to a single customer. We cannot
assure you that this reseller will continue to buy products from us, or that
this reseller will continue to be able to sell our products to its significant
customer. There would be a material adverse effect on our business if sales to
this reseller decline or cease for any reason, including the reseller's loss of
its significant customer. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."

CERTAIN STRATEGIC RELATIONSHIPS ARE IMPORTANT TO OUR BUSINESS

We maintain and depend on strategic relationships with a number of
companies, including ADP, Hewlett-Packard, IBM, PeopleSoft, Standard Register
and Wind River. These relationships include supply, OEM and marketing
arrangements which are important to our business. Certain of these relationships
are not covered by written agreements and could be terminated at any time. If
our relationship with any of these companies were to end, our revenues and
earnings could fall. We cannot assure you that we will be able to maintain our
strategic relationships with these companies. See "Business--Strategic
Relationships."

WE SELL A SIGNIFICANT PORTION OF OUR PRODUCTS INTERNATIONALLY, WHICH EXPOSES US
TO CURRENCY FLUCTUATIONS AND OTHER RISKS

We sell a significant amount of our products to customers outside the United
States. International sales accounted for 24.1% of our net sales in the three
months ended February 28, 1999. International sales represented 16.2% of sales
in fiscal 1998 and 13.7% of sales in fiscal 1997. We expect that shipments to
international customers will continue to account for a material portion of our
net sales. Sales outside the United States involve the following risks, among
others:

- foreign governments may impose tariffs, quotas and taxes,

- political and economic instability may reduce demand for our products,

- restrictions on the export or import of technology may reduce or eliminate
our ability to sell in certain markets,

- potentially limited intellectual property protection may cause us to
refrain from selling in certain markets,

- we may face difficulties in staffing and managing international
operations, and

- we may face difficulties in collecting receivables.

6
<PAGE>

Because we denominate our international sales in U.S. dollars, currency
fluctuations could also cause our products to become less affordable or less
price competitive than those of foreign manufacturers. We cannot assure you that
these factors will not have a material adverse effect on our international
sales. Any adverse impact on our international sales would affect our results of
operations and would cause our business to suffer. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

PATRICK J. DIRK WILL CONTINUE TO HAVE SIGNIFICANT CONTROL OVER US

After the Offering, Patrick J. Dirk, our Chairman of the Board, President
and Chief Executive Officer, will beneficially own 5,692,857 shares of Common
Stock, or 56.0% of the shares of Common Stock outstanding. As a result, Mr. Dirk
will be able to elect our Board of Directors and control our business and
operations. See "Principal Stockholders."

OUR CURRENT STOCKHOLDERS WILL BENEFIT FROM THIS OFFERING

The Offering will provide substantial benefits to our current stockholders.
Among other benefits, the Offering is expected to:

- create a public market for the Common Stock,

- require our lenders to release contingent guarantees made by Patrick J.
and Mary J. Dirk and the Dirk Family Trust,

- result in the grant of options to purchase 180,000 shares of Common Stock
to existing stockholders, and

- permit current stockholders to realize the appreciation in the value of
their shares and options.

Our existing stockholders paid approximately $1,522,000 for their 7,671,430
shares of outstanding Common Stock. Assuming an initial public Offering price of
$10.00 per share, these stockholders will have an unrealized gain of
approximately $75.2 million after the Offering. See "Dilution" and "Certain
Transactions."

OUR QUARTERLY OPERATING RESULTS FLUCTUATE AS A RESULT OF MANY FACTORS

Our quarterly operating results fluctuate due to various factors. Some of
the factors that influence our quarterly operating results include:

- the mix of products sold in the quarter,

- life cycle stages of the products sold in the quarter,

- the availability and cost of components and materials,

- costs and benefits of new product introductions, and

- customer order and shipment timing.

Because of these factors, our quarterly operating results are difficult to
predict and are likely to vary in the future. If our earnings are below
financial analysts' expectations in any quarter, our stock price is likely to
drop. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS OR TO PROTECT OURSELVES AGAINST INFRINGEMENT CLAIMS OF OTHERS

We cannot be certain that the steps we have taken to protect our
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate our proprietary rights. Any such

7
<PAGE>

infringement or misappropriation could have a material adverse effect on our
future financial results. We also cannot be certain that we have not infringed
the proprietary rights of others. Any such infringement could cause third
parties to bring claims against us, resulting in significant costs, possible
damages and substantial uncertainty. See "Business--Patents and Proprietary
Rights."

WE DEPEND ON OUR EXECUTIVE OFFICERS FOR OUR SUCCESS

We are significantly dependent upon Patrick J. Dirk and our other executive
officers. There could be a material adverse effect on our business if we lose
the services of Mr. Dirk or any other executive officer. We do not have
employment or noncompete agreements with any of our executive officers, other
than with Robert S. Messina, our Executive Vice President. See "Management."

COMPLIANCE WITH GOVERNMENT REGULATIONS MAY CAUSE US TO INCUR UNFORESEEN EXPENSES

Our business is subject to a number of federal, state and local laws and
regulations. These regulations include laws and regulations promulgated by the
Environmental Protection Agency and similar state agencies regarding storing,
shipping, disposing, discharging and manufacturing hazardous materials and
hazardous and non-hazardous waste. Although we believe that our operations
materially comply with all current laws and regulations, we cannot assure you
that these regulations will not change. We also cannot assure you that
unforeseen environmental incidents will not occur, or that past contamination or
non-compliance with environmental laws will not be discovered on our current or
former properties. Any of these events could result in significant expense or
require changes in our operations, which could materially and adversely affect
our business. See "Business--Environmental and Regulatory Matters."

OUR FORMER STATUS AS AN S CORPORATION COULD EXPOSE US TO LIABILITY

From December 1989 to October 30, 1998, Troy and Troy Systems elected S
corporation status under the Internal Revenue Code. Although we believe that
Troy and Troy Systems met the S corporation requirements under the Code during
this period, the IRS has not challenged or made a determination as to our
status. If the IRS determines that Troy or Troy Systems did not meet the Code
requirements for S corporations, we could be liable for unpaid federal and state
income taxes for all or a part of the time that we elected S corporation status,
plus interest and possible penalties. See "Use of Proceeds" and "Certain
Transactions."

OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO USE THE PROCEEDS OF THIS OFFERING

We intend to use the majority of the proceeds of this Offering for working
capital and general corporate purposes, including possible acquisitions.
Approximately $3.8 million will be used to repay indebtedness. We have not
identified any more specific uses for the balance. As a result, our management
will have broad discretion to use a significant portion of the net proceeds as
we may determine. See "Use of Proceeds."

OUR BUSINESS COULD BE ADVERSELY AFFECTED BY YEAR 2000 COMPLIANCE ISSUES

Many computer systems and applications use two-digit date fields to identify
a given year. The so-called "Year 2000" or "Y2K" problem is the failure of
date-sensitive computing systems and applications to properly recognize and
process dates into and after the year 2000. These problems may cause incorrect
processing of financial and operational information, and could result in
business interruptions. We are currently seeking to identify and remediate our
Year 2000 risk. We have assessed the Year 2000 compliance status of our existing
software and hardware products, as well as our own internal software, hardware
and other non-information technology systems (such as telephones, environmental
systems and others). Based on our assessment, we believe that we have identified
necessary corrective actions to address Year 2000 problems in these areas, and
do not anticipate incurring significant additional costs to achieve Year 2000

8
<PAGE>

compliance. Although we believe that our assessment was appropriate, we cannot
assure you that we have identified all the potential Year 2000 issues in our
products and internal systems. Additionally, we do not currently know whether
our vendors, distributors or other significant business partners will
successfully achieve Year 2000 compliance for their products and internal
systems. If we or one of our significant business partners fails to identify and
correct all Year 2000 problems, there could be a material adverse effect on our
business. Our customers' Year 2000 issues could also cause them to delay
purchases of our products, which could impact our business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Compliance with Year 2000."

A SIGNIFICANT NUMBER OF SHARES ARE OR WILL BECOME AVAILABLE FOR SALE AND THEIR
SALE COULD DEPRESS OUR COMMON STOCK PRICE

Sales of a substantial number of shares of our Common Stock in the public
market after this Offering could adversely affect the market price for our
Common Stock and make it more difficult for us to sell equity securities at
times and prices that we determine to be appropriate. Of our 10,171,430 shares
of Common Stock outstanding after the Offering, 2,500,000 shares sold in the
Offering are expected to be freely tradable. The remaining 7,671,430 shares will
be restricted shares. All of our existing stockholders have agreed that they
will not, without the prior written consent of Cruttenden Roth Incorporated,
directly or indirectly sell any of these restricted shares for 180 days after
the date of this Prospectus. After this lock-up period expires, of these
restricted shares will be eligible for immediate public sale. Volume limitations
and other conditions of Rule 144 will apply to public sale of the balance of the
restricted shares although certain holders have been granted registration rights
which, if exercised, would cause their shares to be registered and eligible for
immediate sale. Public sales after this Offering may include shares issued under
outstanding options and warrants. We also intend to file a Registration
Statement on Form S-8 following this Offering. Under this Registration
Statement, holders of vested stock options may generally exercise and
immediately sell their shares to the public. See "Shares Eligible for Future
Sale."

POSSIBLE ISSUANCES OF PREFERRED STOCK AND ANTI-TAKEOVER PROVISIONS COULD AFFECT
THE PRICE OF OUR COMMON STOCK

Our Certificate of Incorporation authorizes our Board of Directors to issue
up to 5,000,000 shares of Preferred Stock. The Board can fix the rights,
preferences, privileges and restrictions (including voting rights) of shares of
Preferred Stock without stockholder approval. We do not presently intend to
issue shares of Preferred Stock. However, your rights as a holder of Common
Stock will be subject to, and may be adversely affected by, the rights of any
future Preferred Stock holders. Preferred Stock issuances may also cause
significant dilution in your interests as a stockholder. By issuing Preferred
Stock, we could also make it more difficult for a third party to acquire us.

Our stockholders do not have the right to cumulate their votes to elect
directors. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. These provisions, along
with Mr. Dirk's significant voting control and the ability of our Board of
Directors to issue shares of Preferred Stock, could prevent or delay any change
in our control. In turn, this could adversely affect Common Stock market prices.
See "Description of Capital Stock."

THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND TRADING PRICES
OF OUR COMMON STOCK MAY BE VOLATILE

There is currently no public market for our Common Stock. We cannot assure
you that an active trading market for our Common Stock will develop, or, if one
develops, that trading will continue. We will establish the initial public
Offering price through our negotiations with the representatives of the
underwriters and you should not view the price as any indication of prices that
will prevail in the trading market. The stock market from time to time
experiences significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may

9
<PAGE>

adversely affect the market price of our Common Stock. In addition, market
prices for shares of our Common Stock are likely to be highly volatile. Some
specific factors which may have a significant effect on Common Stock market
prices include:

- fluctuations in our operating results,

- our announcements or our competitors' announcements of technological
innovations or new products,

- regulatory actions,

- developments regarding patents or proprietary rights, and

- changes in stock market analyst recommendations regarding our Common
Stock, other comparable companies or the technology industry generally.

See "Underwriting."

NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public Offering price for a share of Common Stock is
substantially higher than the pro forma net tangible book value per share of
Common Stock. If you purchase shares of Common Stock in the Offering, you will
incur immediate and substantial dilution. Additional dilution in your shares is
likely to occur upon exercise of outstanding stock options and warrants. See
"Dilution."

WE DO NOT INTEND TO PAY DIVIDENDS

We intend to use any future earnings to grow our business and do not intend
to pay dividends in the foreseeable future. See "Dividend Policy."

10
<PAGE>

USE OF PROCEEDS

The net proceeds to us from the sale of the 2,500,000 shares of Common Stock
that we are offering are estimated to be approximately $22.4 million after
deducting the underwriting discount and estimated Offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that net
proceeds will be $25.9 million.

The net proceeds from the Offering will be used for working capital and
general corporate purposes, including acquisitions, and to repay indebtedness
under our term loans and revolving line of credit with Comerica Bank-California.
Potential acquisitions could include other technologies, product lines or
businesses that are complementary to our business. As of the date of this
Prospectus, we have not designated any other specific use for the net proceeds
of the Offering. Accordingly, our management will retain broad discretion in
deciding how to use a substantial portion of the net proceeds of the Offering.
We are conducting the Offering at this time to ensure that we have sufficient
capital for acquisitions when suitable candidates are identified and to enable
us to more readily use our Common Stock in acquisitions. See "Business--Business
Strategy." Pending the uses described above, we intend to invest the net
proceeds of the Offering in short-term, interest-bearing securities.

Our bank term loans had outstanding balances of approximately $472,000 and
$2,850,000 as of February 28, 1999. The first of these term loans bears interest
at the bank's reference rate (7.75% as of February 28, 1999) and matures on
November 1, 2000. The second of these term loans bears interest at the bank's
reference rate plus 0.50% and matures on November 1, 2003. Our revolving line of
credit had an outstanding balance of approximately $496,000 as of February 28,
1999 and bears interest at .25% below the bank's reference rate. As of February
28, 1999, the interest rate on our revolving line of credit was 7.50%. The
revolving line of credit has no expiration date. The proceeds from the term
loans and the revolving line of credit were used for working capital and to fund
the Troy XCD acquisition.

DIVIDEND POLICY

Following the completion of the Offering, our Board of Directors intends to
retain our earnings, if any, to support our operations and to finance expansion,
and does not intend to declare or pay cash dividends on the Common Stock in the
foreseeable future. Any dividends will be at the discretion of the Board of
Directors and will depend on our financial condition, results of operations,
capital requirements and such other factors as our Board of Directors may deem
relevant. In addition, our current revolving credit facility prohibits us from
paying cash dividends except for distributions for tax payments and pro rata
adjustments thereto.

11
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization and short-term notes
payable as of February 28, 1999. This table should be read in conjunction with
our consolidated financial statements and related notes appearing elsewhere in
this Prospectus. See "Use of Proceeds" and "Description of Capital Stock."

<TABLE>
<CAPTION>
FEBRUARY 28, 1999
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
(IN THOUSANDS)
Short-term notes payable............................................................... $ 496 $ --
--------- -------
--------- -------
Current portion of long-term debt...................................................... $ 959 $ 59
--------- -------
--------- -------
Long-term debt, net of current portion................................................. $ 2,804 $ 382

Stockholders' equity:
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized; no shares
issued and outstanding............................................................. -- --
Common stock, $0.01 par value per share, 50,000,000 shares authorized; 7,671,430
shares issued and outstanding, actual; 10,171,430 shares issued and outstanding, as
adjusted(2)........................................................................ 77 102
Additional paid-in capital........................................................... 1,724 24,074
Retained earnings.................................................................... 7,419 7,419
--------- -------

Total stockholders' equity......................................................... 9,220 31,595
--------- -------
Total capitalization........................................................... $ 12,024 $ 31,977
--------- -------
--------- -------
</TABLE>

- ------------------------

(1) As adjusted data give effect to the sale of 2,500,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."

(2) Excludes: (i) 1,564,298 shares of Common Stock reserved for issuance under
our stock option plans, of which options to acquire 326,957 shares are
outstanding at a weighted average exercise price of $0.42 per share and
options to acquire 530,000 shares which will be granted upon completion of
the Offering at an exercise price equal to the price per share to the public
in the Offering; (ii) up to 300,000 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of $3.50 per share;
(iii) up to 50,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $7.00 per share; (iv) up to
50,000 shares of Common Stock issuable upon exercise of outstanding warrants
at an exercise price of $3.50 per share; and (v) shares of Common Stock
equal to 10% of the shares sold in the Offering, issuable upon exercise of
the Representatives' Warrants. See "Management--Stock Option and Incentive
Plans," "Description of Capital Stock" and "Underwriting."

12
<PAGE>
DILUTION

Our net tangible book value as of February 28, 1999 was approximately $7.2
million or $0.94 per share. Net tangible book value per share represents our
total tangible assets less our total liabilities, divided by the number of
shares of our Common Stock outstanding.

After giving effect to the sale of the shares of Common Stock that we are
offering and after deducting underwriting discounts, commissions and estimated
Offering expenses, and without taking into account any other changes in our net
tangible book value after February 28, 1999, our net tangible book value as of
February 28, 1999 would have been approximately $30.1 million, or $2.96 per
share. This represents an immediate increase in net tangible book value of $2.02
per share to our existing stockholders and an immediate dilution in net tangible
book value of $7.04 per share to new investors in this Offering, as illustrated
in the following table:

<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share....................................... $ 10.00
Net tangible book value per share as of February 28, 1999........................... $ 0.94
Increase per share attributable to new investors in this Offering................... 2.02
---------
Adjusted net tangible book value per share after the Offering(1)...................... 2.96
---------
Dilution per share to new investors................................................... $ 7.04
---------
---------
</TABLE>

The following table summarizes, as of February 28, 1999, the number of
shares of Common Stock purchased from us by existing stockholders and by new
investors in the Offering, the total consideration reflected in our accounts and
the average price paid per share. The table assumes an initial public offering
price of $10.00 per share and that no shares are purchased in the Offering by
existing stockholders. To the extent existing stockholders purchase shares in
the Offering, their percentage ownership, total consideration and average
consideration per share will be greater than is shown.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........................... 7,671,430 75.4% $ 1,522,000 5.7% $ 0.20
New investors...................................... 2,500,000 24.6 25,000,000 94.3 10.00
------------ ----- ------------- -----
Totals(1)........................................ 10,171,430 100.0% $ 26,522,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>

- ------------------------

13
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

The following unaudited pro forma consolidated statement of operations is
presented to give effect to the October 30, 1998 acquisition of Troy XCD as if
the acquisition had been completed on December 1, 1997. Our historical statement
of operations data are derived from our audited consolidated financial
statements for the year ended November 30, 1998 included elsewhere in this
Prospectus, and reflect

- a pro forma adjustment for income taxes on S corporation income; and

- one month of operations of Troy XCD from the date of acquisition, October
30, 1998 to November 30, 1998.

The historical statement of operations data of Troy XCD includes eleven
months of operations consisting of the audited results of operations of Troy XCD
for the nine months ended September 30, 1998, (for which financial statements
are included elsewhere in this Prospectus) and the unaudited results of
operations from December 1, 1997 to December 31, 1997 and from October 1, 1998
to October 30, 1998. The pro forma condensed consolidated statement of
operations does not necessarily indicate the results of operations which would
have occurred had the acquisition been completed at such time, nor does it
necessarily indicate future results that may be expected. The unaudited pro
forma condensed consolidated statements of operations should be read in
conjunction with our historical consolidated financial statements and those of
Troy XCD, including the notes thereto, that are included elsewhere in this
Prospectus.

14
<PAGE>

UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1998

<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA
TROY GROUP, TROY XCD, ----------------------------
INC. INC. ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales......................................... $ 35,758,000 $ 5,070,000 $ -- $ 40,828,000
Cost of goods sold................................ 21,496,000 3,352,000 -- 24,848,000
------------- ------------- ------------- -------------
Gross profit................................ 14,262,000 1,718,000 -- 15,980,000
Operating expenses................................ 9,797,000 3,170,000 (632,000 (1) 12,335,000
------------- ------------- ------------- -------------
Operating income (loss)..................... 4,465,000 (1,452,000) 632,000 3,645,000
Interest expense.................................. 101,000 164,000 130,000(2) 395,000
------------- ------------- ------------- -------------
Income before income taxes (credit)......... 4,364,000 (1,616,000) 502,000 3,250,000
Pro forma provision for income taxes.............. 1,993,000 (596,000) (119,000 (3) 1,278,000
------------- ------------- ------------- -------------
Net income (loss)........................... $ 2,371,000 $ (1,020,000) $ 621,000 $ 1,972,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per share:
Basic......................................... $ 0.32 $ 0.26
------------- -------------
------------- -------------
Diluted....................................... $ 0.31 $ 0.25
------------- -------------
------------- -------------
Weighted-average shares outstanding:
Basic......................................... 7,514,000 157,000(4) 7,671,000
------------- ------------- -------------
------------- ------------- -------------
Diluted....................................... 7,745,000 157,000(4) 7,902,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

NOTE TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
GENERAL

On October 30, 1998, the Company completed the acquisition of Troy XCD in a
transaction that has been accounted for as a purchase. The cost of the
acquisition (including closing costs) was funded through bank borrowings and the
issuance of Common Stock.

Troy XCD operations for the one month period ended October 30, 1998 includes
a deferred compensation charge of $1,250,000.

Pro forma condensed consolidated statement of operations adjustments:

(1) Amortization with respect to intangibles acquired in the acquisition of
Troy XCD including goodwill of $57,000 and other intangibles of $168,000,
net of adjustment for in process research and development expense of
$857,000 that is not a recurring cost.

(2) Increase in interest expense resulting from the financing of Troy XCD
acquisition.

(3) Adjustment to provision for income taxes to reflect the tax benefit of
other intangibles amortization and interest expense at 40%.

(4) Adjustment to reflect the weighted average number of shares of Common
Stock issued in connection with the acquisition for the full fiscal year.

15
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated data presented below as of and for the fiscal years ended
November 30, 1996, 1997 and 1998 are derived from our audited consolidated
financial statements, included elsewhere in this Prospectus. The consolidated
financial data as of and for the fiscal years ended November 30, 1994 and 1995
are derived from our audited consolidated financial statements which are not
included in this Prospectus. The consolidated financial data as of and for the
three months ended February 28, 1998 and 1999 are derived from our unaudited
consolidated financial statements included elsewhere in this Prospectus. Such
unaudited consolidated financial statements have been prepared by us on a basis
consistent with our annual audited consolidated financial statements and, in the
opinion of our management, contain all normal recurring adjustments necessary
for a fair presentation of the consolidated financial position and the results
of operations for the applicable periods. Operating results in the three months
ended February 28, 1999 are not necessarily indicative of the results that may
be expected in the entire fiscal year ending November 30, 1999 or any subsequent
period. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and related notes and other
financial information included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, FEBRUARY 28,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales......................................... $ 17,583 $ 21,477 $ 28,161 $ 33,434 $ 35,758 $ 8,928 $ 11,400
Cost of goods sold................................ 10,566 13,560 17,408 19,597 21,496 5,358 6,799
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 7,017 7,917 10,753 13,837 14,262 3,570 4,601
Selling, general and administrative expenses...... 5,058 5,594 5,234 6,622 6,394 1,578 2,121
Research and development expenses................. 1,378 1,748 2,041 2,521 2,546 630 810
Purchased in process research and development..... -- -- -- -- 857 -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income.................................. 581 575 3,478 4,694 4,465 1,362 1,670
Interest expense.................................. 217 342 361 262 101 39 78
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes (credit)............... 364 233 3,117 4,432 4,364 1,323 1,592
Provision for income taxes (credit)............... 37 (80) 50 35 (70) 20 637
--------- --------- --------- --------- --------- --------- ---------
Net income........................................ $ 327 $ 313 $ 3,067 $ 4,397 $ 4,434 $ 1,303 $ 955
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma provision for income taxes(1)........... $ 146 $ 93 $ 1,247 $ 1,773 $ 1,993 $ 529
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma net income(1)........................... $ 218 $ 140 $ 1,870 $ 2,659 $ 2,371 $ 794
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma diluted net income per share(1)......... $ 0.03 $ 0.02 $ 0.25 $ 0.34 $ 0.31 $ 0.10 $ 0.12
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average diluted shares outstanding(2).... 7,500 7,500 7,500 7,759 7,745 7,812 8,002
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>

(SEE FOOTNOTES ON NEXT PAGE)

16
<PAGE>

<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................... $ -- $ -- $ 42 $ 100 $ 308 $ -- $ 28
Working capital............................ 955 1,426 3,910 5,173 5,806 5,723 7,222
Total assets............................... 8,312 9,597 11,324 11,749 18,918 12,416 19,586
Short terms notes payble................... 1,000 1,880 1,612 -- 1,190 313 496
Current portion of long-term debt.......... 1,305 990 688 754 959 634 959
Long-term debt, net of current portion..... 1,183 2,067 1,521 1,280 2,374 957 2,804
Stockholders' equity....................... 865 1,153 4,102 5,948 8,265 6,681 9,220
</TABLE>

- --------------------------

(1) Pro forma net income and pro forma diluted net income per share data give
effect to the conversion by Troy and Troy Systems from S corporations to C
corporations for federal and state income tax purposes and assume that Troy
and Troy Systems were subject to corporate income taxes at an effective
combined federal and state income tax rate of 40.0%. See Note 1 in the notes
to our consolidated financial statements.

(2) Excludes: (i) 1,564,298 shares of Common Stock reserved for issuance under
our stock option plans, of which options to acquire 326,957 shares are
outstanding at a weighted average exercise price of $0.42 per share and
options to acquire 530,000 shares which will be granted upon completion of
the Offering at an exercise price equal to the price per share to the public
in the Offering; (ii) up to 300,000 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of $3.50 per share;
(iii) up to 50,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $7.00 per share; (iv) up to
50,000 shares of Common Stock issuable upon exercise of outstanding warrants
at an exercise price of $3.50 per share; and (v) shares of Common Stock
equal to 10% of the shares sold in the Offering, issuable upon exercise of
the Representatives' Warrants. See "Management-- Stock Option and Incentive
Plans," "Description of Capital Stock" and "Underwriting."

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this Prospectus.
The following discussion and other parts of this Prospectus contain
forward-looking information that involves risks and uncertainties. Our actual
results could differ materially from those anticipated by forward-looking
information due to many factors, including those set forth under "Risk Factors"
and elsewhere in this Prospectus.

BACKGROUND

We are a leading worldwide provider of enterprise output solutions that
enable organizations to electronically transmit and output information across
distributed computing environments. Our products consist of connectivity and
output enhancement solutions that work with many operating systems and
protocols. We were originally incorporated in California in 1996 and were
reincorporated in Delaware in May 1998. We are the result of various mergers and
acquisitions involving a company originally founded in 1982 by the existing
shareholders. In October 1998, we acquired Troy XCD, a leading supplier of
connectivity solutions.

Prior to the Offering, Troy and Troy Systems elected to be treated for
federal and state income tax purposes as S corporations, except that Troy
Systems elected to be taxed as a C corporation under California income tax laws.
On October 30, 1998, Troy and Troy Systems terminated their S corporation
elections. The statements of operations data for all periods prior to October
30, 1998 include a pro forma provision for federal and state income taxes as if
we were subject to federal and state corporate income taxes for all such
periods. This pro forma provision is computed using an effective combined
federal and state income tax rate of 40.0%. See Note 1 in the notes to our
consolidated financial statements.

On October 1, 1997 we issued warrants to a consultant to purchase up to
300,000 shares of Common Stock of the Company at $3.50 per share. The warrants
vest upon the occurrence of two separate performance conditions. Warrants to
purchase 100,000 shares will vest when we become publicly owned and 200,000 will
vest when we complete certain acquisition transactions. The effect of the
warrants will be recorded as the performance conditions are met at the then
current fair value of the warrants vested. The warrants expire five years after
vesting. In connection with the acquisition of Troy XCD, warrants to purchase
50,000 shares of common stock vested under the acquisition criteria and we
recorded $210,000 for these warrants as part of the purchase price of Troy XCD.
Amounts recorded in connection with the vesting of the remaining warrants to
purchase 150,000 shares could materially impact our financial statements. On
October 30, 1998 in connection with the purchase of Troy XCD, we issued warrants
to a consultant to purchase 50,000 shares of Common Stock at $7.00 per share and
recorded another purchase price adjustment of $69,000. The warrants expire five
years after grant. Effective in May 1998, in connection with legal services
being provided in connection with the Offering, we issued a warrant to purchase
up to 50,000 shares of our Common Stock of the Company at $3.50 per share. The
effect of the warrants will be recorded when the performance condition is met at
the then current fair value of the warrant vested. See "Description of Capital
Stock--Warrants" and Note 9 in the notes to our consolidated financial
statements included elsewhere in this Prospectus."

OVERVIEW

Net sales are generated from the sale of our connectivity and output
enhancement products and services. We recognize revenue from the sale of our
products when the goods are shipped to the customer and we recognize service
revenue over the period of the contract on a straight-line basis. In the three
months ended February 28, 1999 and the fiscal years ended November 30, 1998 and
1997, a reseller of our imaging supplies, Cannon IV Inc., accounted for 12.0%,
17.1% and 16.6%, respectively, of our net sales, of

18
<PAGE>

which we believe a significant portion was sold to a single customer. We do not
have a written or oral contract with Cannon IV Inc. All sales are made through
purchase orders.

Cost of goods sold includes direct material and labor, warranty expenses,
license fees and manufacturing and service overhead. Inventories are stated at
the lower of cost (first-in, first-out) or market. Equipment is depreciated
using the straight-line method over the estimated useful life of the equipment.
Improvements to leased property are amortized over the lesser of the life of the
lease or the life of the improvements.

Selling, general and administrative expenses include the costs of the sales,
marketing and customer support staffs, other marketing expenses, management and
administrative personnel costs, professional services, legal and accounting fees
and administrative operating costs. We expense all of these costs when incurred.

Research and development expenses include costs associated with the
development of new products and significant enhancements of existing products,
and consist primarily of employee salaries, benefits and consulting expenses. We
expense research and development costs as they are incurred.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
information derived from our consolidated statements of operations expressed as
a percentage of net sales:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR
ENDED NOVEMBER 30, FEBRUARY 28,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................................. 61.8 58.6 60.1 60.0 59.6
--------- --------- --------- --------- ---------
Gross profit....................................................... 38.2 41.4 39.9 40.0 40.4
Selling, general and administrative expenses....................... 18.6 19.9 17.9 17.7 18.6
Research and development expenses.................................. 7.2 7.5 7.1 7.1 7.1
Purchased in process research and development...................... -- -- 2.4 -- --
--------- --------- --------- --------- ---------
Operating income................................................... 12.4 14.0 12.5 15.2 14.7
Interest expense................................................... 1.3 0.8 .3 0.4 0.7
--------- --------- --------- --------- ---------
Income before income taxes (credit)................................ 11.1 13.2 12.2 14.8 14.0
Provision for income taxes (credit)................................ 0.2 0.1 (.2) 0.2 5.6
--------- --------- --------- --------- ---------
Net income......................................................... 10.9% 13.1% 12.4% 14.6% 8.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma provision for income taxes............................... 4.4% 5.3% 5.6% 5.9%
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net income............................................... 6.7% 7.9% 6.6% 8.9%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1998

NET SALES. Net sales increased by $2,472,000 or 27.7% to $11.4 million in
the three months ended February 28, 1999 from $8.9 million in the three months
ended February 28, 1998. This increase was due primarily to an increase of $2.1
million in sales of print server software, firmware and hardware as a result of
the Troy XCD acquisition, and an increase of $1,100,000 in sales of our
proprietary imaging supplies and services. This increase was offset by a
$700,000 decrease in sales of our impact printers. We believe that impact
printer sales will decline in future periods because of continuing increases in
print quality and speed and continuing reductions in prices of non-impact
printers. Net sales were not significantly affected by price changes.

19
<PAGE>

COST OF GOODS SOLD. Cost of goods sold increased by $1,441,000 or 26.9% to
$6.8 million in the three months ended February 28, 1999 from $5.4 million in
the three months ended February 28, 1998. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales decreased
to 59.6% in the first three months of 1999 from 60.0% in the first three months
of 1998.

GROSS PROFIT. As a result of the above factors, gross profit increased by
$1,031,000 or 28.9% to $4.6 million in the three months ended February 28, 1999
from $3.6 million in the three months ended February 28, 1998. Gross profit as a
percentage of net sales increased to 40.4% in the first three months of 1999
from 40.0% in the first three months of 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $543,000 or 34.4% to $2,121,000 in the
three months ended February 28, 1999 from $1,578,000 in the three months ended
February 28, 1998. Of this increase, $358,000 was due to the acquisition of Troy
XCD, with the remainder primarily due to additional compensation for sales,
marketing and management personnel and sales commissions. Selling, general and
administrative expenses as a percentage of net sales increased to 18.6% in the
first three months of 1999 from 17.7% in the first three months of 1998.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $180,000 or 28.6% to $810,000 in the three months ended February
28, 1999 from $630,000 in the three months ended February 28, 1998. Of this
increase, $164,000 was due to the acquisition of Troy XCD. Research and
development expenses as a percentage of net sales was 7.1% in the first three
months of 1999 and 1998.

OPERATING INCOME. As a result of the above factors, operating income
increased by $308,000 or 22.6% to $1,670,000 in the three months ended February
28, 1999 from $1,362,000 in the three months ended February 28, 1998. Operating
income as a percentage of net sales decreased to 14.7% in the first three months
of 1999 from 15.2% in the first three months of 1998.

INTEREST EXPENSE. Interest expense increased by $39,000 to $78,000 in the
three months ended February 28, 1999 from $39,000 in the three months ended
February 28, 1998. This increase was due to increased borrowings under our line
of credit and term debt.

INCOME TAXES. Income taxes increased by $617,000 to $637,000 in the three
months ended February 28, 1999 from $20,000 in the three months ended February
28, 1998. This increase resulted when Troy and Troy Systems terminated their S
corporation tax elections as of October 30, 1998 and were thereafter taxed as C
corporations. After giving effect to the pro forma adjustments, income taxes as
a percentage of pretax income was 40% for both periods.

FISCAL YEAR ENDED NOVEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1997

NET SALES. Net sales increased by $2.3 million or 7.0% to $35.8 million in
the fiscal year ended November 30, 1998 from $33.4 million in the fiscal year
ended November 30, 1997. This increase was due primarily to a $2.5 million
increase in sales of our laser printers, a $1.9 million increase in sales of our
proprietary imaging supplies, and to a lesser extent to an $800,000 increase in
sales of our services and print server software, firmware and hardware. These
increases were partially offset by a $2.8 million decrease in sales of our
impact printers. Net sales were not significantly effected by price changes.

COST OF GOODS SOLD. Cost of goods sold increased by $1.9 million or 9.7% to
$21.5 million in the fiscal year ended November 30, 1998 from $19.6 million in
the fiscal year ended November 30, 1997. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales increased
to 60.1% in fiscal 1998 from 58.6% in fiscal 1997.

GROSS PROFIT. As a result of the above factors, gross profit increased by
$425,000 or 3.1% to $14.3 million in the fiscal year ended November 30, 1998
from $13.8 million in the fiscal year ended November 30, 1997. This increase was
primarily due to increased net sales partially offset by the effect of the
decline

20
<PAGE>

in sales of our impact printers which yielded a higher gross margin. Gross
profit as a percentage of net sales decreased to 39.9% in fiscal 1998 from 41.4%
in fiscal 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $228,000 or 3.4% to $6.4 million in the
fiscal year ended November 30, 1998 from $6.6 million in the fiscal year ended
November 30, 1997. Selling, general and administrative expenses as a percentage
of net sales decreased to 17.9% in fiscal 1998 from 19.9% in fiscal 1997. This
decrease was due primarily to renovation costs incurred during 1997.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $25,000 or 1.0% to $2.5 million in the fiscal year ended November
30, 1998 from $2.5 million in the fiscal year ended November 30, 1997. Research
and development expenses as a percentage of net sales decreased to 7.1% in
fiscal 1998 from 7.5% in fiscal 1997.

PURCHASED IN PROCESS RESEARCH AND DEVELOPMENT. During the fourth quarter of
1998, we incurred a one time charge associated with the acquisition of Troy XCD
of $857,000. This charge was to expense purchased in process research and
development that had not reached technological feasibility and had no
alternative future uses.

Troy XCD's network connectivity products include print server firmware,
hardware and a software-only solution. These products enable computer systems to
distribute and output information across distributed computing environments.
Troy XCD's network connectivity products are recognized worldwide for supporting
more protocols and network operating systems than other products on the market.
As a result, they are well suited for enterprises that have deployed many
different kinds of networks, computers and operating systems over wide
geographic areas.

Troy XCD's current Internet connectivity product, PrintraNet, is a software
and firmware solution that enables a user at one location to print to another
location over the Internet. PrintraNet offers a number of advantages, including
lower cost and higher quality than fax transmissions, and eliminates sofware
compatibility issues associated with e-mail. Troy XCD's Internet connectivity
products under development will be designed to enable output devices, including
currently installed printers manufactured by Hewlett-Packard, IBM, Lexmark and
Xerox, to communicate over the Internet regardless of the sending device's
protocol. In addition, Troy XCD will provide multi-protocol solutions to these
and other output device manufacturers and end users to allow new output devices
to communicate over the Internet. We believe that Troy XCD will have significant
competitive advantages in this market because they were one of the first to
develop Internet printing technology and have extensive protocol experience.

On October 30, 1998, Troy XCD had 16 in-process research and development
projects. These projects included the development of hardware, software and
firmware for interface cards, print servers and remote Internet printing. We
valued each of these projects using an income approach methodology. A number of
factors were used to determine value including the assignment of probability to
the projected product revenue streams, estimated gross margin contributions and
estimated stage of completion. Of these 16

21
<PAGE>

projects, four accounted for over 95% of the value assigned to the in-process
research and development. A summary of these projects is as follows:

<TABLE>
<CAPTION>
IN-PROCESS
ESTIMATED ANTICIPATED RESEARCH AND
COSTS COST TO COMPLETION DEVELOPMENT
PROJECT NO. NATURE INCURRED COMPLETE DATE VALUE
- ----------------- --------------------------------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 Ethernet interface card...................... $ 143,000 $ 13,000 Dec. 1998 $ 453,000
2 Print server hardware and firmware........... 26,000 9,000 March 1999 254,000
3 Data Products firmware....................... 53,000 31,000 Sept. 1999 63,000
4 Internet firmware and software............... 90,000 130,000 Dec. 1999 66,000
5 Others, twelve projects...................... Various Various Various 21,000
-------------
$ 857,000
-------------
-------------
</TABLE>

In-process research and development projects are time consuming and
difficult to complete. As of the acquisition date, the estimated remaining costs
to bring the projects under development to technological feasibility were
approximately $400,000. These outlays are expected to occur over a period of
approximately thirteen months following the acquisition. There is substantial
risk associated with the completion of each project, and there is no assurance
that each research and development project will yield either technological
functionality or commercial success. Furthermore, as is common to research and
development efforts, Troy XCD has previously experienced developmental setbacks
where the time required to fully develop critical technology driven steps and to
complete reliability testing have been underestimated. If the research and
development projects are not completed as planned, they will neither satisfy the
technological requirements of a rapidly changing market nor be cost effective.

The following is a description of the significant research and development
projects that were under development at the acquisition date:

PROJECT NUMBER 1. Troy XCD was in the process of developing an Ethernet
interface card with features including graphical interface, custom e-mail filter
for Internet printing and multi-language management utility support. Troy XCD
was completing the graphical interface and debugging the Ethernet interface
card. Once completed, various regulatory approvals will be required.

PROJECT NUMBER 2. Troy XCD was in the process of developing print server
hardware and firmware for a Hewlett-Packard family of EIO printers which will
support DEC LAT and Banyan VINES protocols. The design, layout and testing of
the printed circuit board needed to be completed.

PROJECT NUMBER 3. Troy XCD was in the process of developing modification
features for project number 1, the Ethernet interface card, including specific
virtual printer functions and status commands, pass-through functions for
control files and programming via the PCI bus. This product was at an untested
prototype stage.

PROJECT NUMBER 4. Troy XCD was in the process of developing firmware and
software that would allow remote Internet printing with increased levels of
print quality and color. Troy XCD was in the process of developing new security
and printing protocols.

As noted above, the projects in development as of the acquisition date are
expected to reach technological feasibility over the thirteen-month period
subsequent to that date. Cash flows from the sale of products incorporating
these technologies are expected to commence in fiscal 1999 and are forecasted
using a product life cycle approach. The low end of the range of estimated
future revenues was used to project future cash flows.

In estimating gross margins, we considered historical gross margin levels,
budgeted gross margin levels and estimated margins of unique projects. The
margins reflect historical experience and are expected to

22
<PAGE>

diminish over the product life cycle. Future selling, general and administrative
expense expectations also reflect historical experience, adjusted to reflect the
specific economics of each project. Research and development costs were included
in the valuation of the in-process research and development projects based upon
the estimated project completion costs and historical experience.

The expected operating margins for the in-process research and development
were reduced for charges for working capital employed and core technology
charges. The core technology charges represent an implied royalty charge that
quantifies the cost to the in-process technology for its utilization of the
developed or "core" technology.

In addition to contributory asset and core technology assessments, the
in-process research and development cash flow assumptions explicitly exclude any
contribution from research and development efforts remaining to be completed as
of the acquisition date. The relative contribution of completed research and
development efforts was assessed based upon several factors. These factors
include the development costs incurred to date, relative time spent on the
projects, the associated risks and an analysis of each of the primary tasks
completed versus the tasks required to complete the efforts. As of the
acquisition date, the individual in-process research and development projects
were approximately 15% to 90% complete.

The free cash flows (net of the various charges discussed above) generated
by the in-process technologies in future periods were discounted to their net
present value by applying appropriate discount rates. The estimated future cash
flows were discounted for the cost of money at rates ranging from 10% to 16%,
depending on the level of risk associated with a particular technology and the
current return on investment requirements of the market. These discount rates
reflect "risk premiums" of 0% to 60% over the 10% weighted average cost of
capital and were calculated using a capital asset pricing model. An additional
discount rate was applied for probability risk and project completion
uncertainty.

There have been no events or changes in circumstances through the date of
this Prospectus that suggest that our valuation assumptions were not reasonable.
Troy XCD has continued to develop the in-process technologies and anticipates
deploying these technologies in end-products in a timeframe and manner
consistent with the valuation projections.

OPERATING INCOME. As a result of the above factors, operating income
decreased by $229,000 or 4.9% to $4.5 million in the fiscal year ended November
30, 1998 from $4.7 million in the fiscal year ended November 30, 1997. Operating
income as a percentage of net sales decreased to 12.5% in fiscal 1998 from 14.0%
in fiscal 1997, primarily as a result of the in process research and development
charge.

INTEREST EXPENSE. Interest expenses decreased by $161,000 to $101,000 in
the fiscal year ended November 30, 1998 from $262,000 in the fiscal year ended
November 30, 1997. This decrease was due to reduced borrowings under our line of
credit, retirement of debt, and lower negotiated interest rates.

INCOME TAXES. Income taxes decreased by $105,000 to a credit of $(70,000)
in the fiscal year ended November 30, 1998 from $35,000 in the fiscal year ended
November 30, 1997. When Troy and Troy Systems terminated their S corporation
elections on October 30, 1998, we recorded a net deferred tax asset of $103,000.
This was done by recording a credit to income tax expense for temporary
differences between the reported amounts of assets and liabilities and their tax
bases. We expect that our effective combined federal and state tax rate will be
approximately 40% of pretax income in future periods.

FISCAL YEAR ENDED NOVEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1996

NET SALES. Net sales increased by $5.3 million or 18.7% to $33.4 million in
the fiscal year ended November 30, 1997 from $28.2 million in the fiscal year
ended November 30, 1996. This increase was due primarily to a $3.9 million
increase in sales of our proprietary imaging supplies (including significant
initial stocking orders for a new customer) and to a lesser extent to a $1.7
million increase in sales of laser

23
<PAGE>

printers. This increase was offset slightly by a $403,000 decrease in sales of
our impact printers and services. Net sales were not significantly affected by
price changes.

COST OF GOODS SOLD. Cost of goods sold increased by $2.2 million or 12.6%
to $19.6 million in the fiscal year ended November 30, 1997 from $17.4 million
in the fiscal year ended November 30, 1996. This increase was primarily due to
increased net sales partially offset by more favorable economies of scale,
primarily in the manufacturing of our proprietary imaging supplies. Cost of
goods sold as a percentage of net sales decreased to 58.6% in fiscal 1997 from
61.8% in fiscal 1996.

GROSS PROFIT. As a result of the above factors, gross profit increased by
$3.1 million or 28.7% to $13.8 million in the fiscal year ended November 30,
1997 from $10.8 million in the fiscal year ended November 30, 1996. This
increase was also attributable to increased sales of higher speed laser
printers, which tend to have more favorable margins. Gross profit as a
percentage of net sales increased to 41.4% in fiscal 1997 from 38.2% in fiscal
1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.4 million or 26.5% to $6.6 million in
the fiscal year ended November 30, 1997 from $5.2 million in the fiscal year
ended November 30, 1996. Of this increase, approximately $628,000 was due to
additional compensation for sales, marketing and management personnel and
increased sales commissions. This increase was also due to new product
introductions resulting from higher net sales, expenses associated with the
renovation of our California and West Virginia facilities and an increase in
rental expense at our West Virginia facility. Selling, general and
administrative expenses as a percentage of net sales increased to 19.9% in
fiscal 1997 from 18.6% in fiscal 1996.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $480,000 or 23.5% to $2.5 million in the fiscal year ended November
30, 1997 from $2.0 million in the fiscal year ended November 30, 1996. Of this
increase, approximately $205,000 was due to the addition of research and
development personnel. In addition, we engaged in significant development
activities relating to our higher speed laser printers and provided certain
specialized impact printer services to one of our customers. Research and
development expenses as a percentage of net sales increased to 7.5% in fiscal
1997 from 7.2% in fiscal 1996.

OPERATING INCOME. As a result of the above factors, operating income
increased by $1.2 million or 35.0% to $4.7 million in the fiscal year ended
November 30, 1997 from $3.5 million in the fiscal year ended November 30, 1996.
Operating income as a percentage of net sales increased to 14.0% in fiscal 1997
from 12.4% in fiscal 1996.

INTEREST EXPENSE. Interest expense decreased by $99,000 to $262,000 in the
fiscal year ended November 30, 1997 from $361,000 in the fiscal year ended
November 30, 1996. This decrease was due to reduced borrowings under our line of
credit and a lower negotiated interest rate.

STATE INCOME TAXES. State income taxes decreased by $15,000 to $35,000 in
the fiscal year ended November 30, 1997 from $50,000 in the fiscal year ended
November 30, 1996.

BACKLOG

We sell our products on a purchase order basis rather than through long-term
contracts. Because we typically ship product within 30 days of order and
customers may cancel or reschedule deliveries, we do not consider backlog to be
a reliable indicator of future financial results.

24
<PAGE>

COMPLIANCE WITH YEAR 2000

Many computer systems and applications were historically designed to use
two-digit date fields to designate a year. As a result, date-sensitive computing
systems may recognize the year 2000 as 1900, or not at all, which may cause
systems to incorrectly process financial and operational information.

Our potential areas of exposure to this so-called Year 2000 problem include
our products, our own internal information technology, or "IT" systems and other
"non-IT systems" having embedded technology or software, such as manufacturing
equipment and mechanical and telephone systems. Year 2000 issues may also affect
the business and operations of our vendors, customers and other business
partners.

STATE OF READINESS. In response to the Year 2000 problem, we are currently
reviewing all of our areas of potential exposure. The following summarizes our
progress to date:

- All of our current products and products under development have been
reviewed and are believed to be Year 2000 compliant.

- We are currently reviewing our internal IT systems with the assistance of
an outside consultant, and expect to complete the review in April 1999.
The final phases of this review currently underway involve review and
testing of our workstation hardware and software. Preliminary reports from
our consultant indicate that our internal accounting systems are Year 2000
compliant, and that certain of our PC's and network server software
programs are not Year 2000 compliant and will need to be replaced or
upgraded. We expect to replace these items by June 1999.

- We have reviewed the Year 2000 compliance status of our non-IT systems.
With the exception of certain toner manufacturing equipment, we have
determined them to be Year 2000 compliant. This toner manufacturing
equipment is currently being upgraded to increase capacity and will become
Year 2000 compliant as a result.

- To date, we have not undertaken any formal communication with our vendors,
customers and other business partners regarding their Year 2000
compliance. We expect that we will begin to do so no later than June 1999,
and expect to complete our assessment of third party compliance by no
later than November 1999.

COSTS. We do not separately track our internal Year 2000 costs (such as
personnel time spent on Year 2000 matters), but believe that they have been
immaterial to date. Our external costs to date have been less than $25,000 and
have primarily been the fees and expenses of our outside consultant. Although we
have not completed our assessment of all of our internal IT and non-IT systems,
the information that we have been provided to date leads us to believe that
additional costs to identify and remediate potential Year 2000 problems
(including the required PC and network server software replacement) are not
expected to exceed $50,000. We also do not expect that our Year 2000
identification and remediation efforts will cause a significant diversion of the
efforts of our employees or management away from other duties or information
technology initiatives. We cannot assure you, however, that our further
assessment will not identify Year 2000 problems requiring significant cost or
efforts to remediate or that we will not encounter unforeseen difficulties or
expense in obtaining Year 2000 solutions.

RISKS. Based upon our current information, we believe that our most
reasonably likely, worst case scenario as a result of the Year 2000 problem is
the risk that one or more of our significant vendors, customers or business
partners will not be Year 2000 compliant and that we fail to determine or react
to their Year 2000 problem on a timely basis. If the operations of any of our
significant vendors, customers or other business partners are disrupted due to
the Year 2000 problem, and we are unable to develop and implement an effective
contingency plan, our ability to purchase adequate supplies of raw materials,
manufacture, distribute and receive payment for our products, or to otherwise
carry on essential activities could be materially adversely impacted. Although
we plan to assess the Year 2000 readiness of these third parties during 1999, we
cannot assure you that we will be able to identify and plan around this risk.

25
<PAGE>

CONTINGENCY PLAN. To date, we have not developed any detailed contingency
plans to address the risk that our customers, vendors and other business
partners do not become Year 2000 compliant, as we have not yet begun to gather
data to assess our exposure to this risk. We have also not developed any
detailed contingency plans to address any failure of our internal IT or non-IT
systems to become Year 2000 compliant. To the extent that we identify third
party or other Year 2000 compliance issues that cannot be addressed on a timely
basis, we will seek to develop appropriate contingency plans in order to
mitigate our risks.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables set forth our unaudited consolidated quarterly results
of operations for each of the quarters in the fiscal years ended November 30,
1997 and 1998 and the three months ended February 28, 1999. This quarterly
information is unaudited, but has been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of our management,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the quarters presented
when read in conjunction with our audited consolidated financial statements and

26
<PAGE>

related notes included elsewhere in this Prospectus. The results of operations
for any quarter do not necessarily indicate the results that may be expected for
any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
1997 1998
-------------------------------------------------- ------------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 FEB. 28 MAY 31
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales.................................. $ 8,826 $ 8,286 $ 7,479 $ 8,843 $ 8,928 $ 9,394
Cost of goods sold......................... 5,290 4,933 4,249 5,125 5,358 5,398
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................... 3,536 3,353 3,230 3,718 3,570 3,996
Selling, general and administrative
expenses................................. 1,527 1,776 1,645 1,674 1,578 1,846
Research and development expenses.......... 582 663 588 688 630 598
Purchased in process, research and
development.............................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss).................... 1,427 914 997 1,356 1,362 1,552
Interest expense........................... 58 70 59 75 39 30
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
(credits)................................ 1,369 844 938 1,281 1,323 1,522
Income taxes (credits)..................... 11 7 7 10 20 23
----------- ----------- ----------- ----------- ----------- -----------
Net income................................. $ 1,358 $ 837 $ 931 $ 1,271 $ 1,303 $ 1,499
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

1999
---------
AUG. 31 NOV. 30 FEB. 28
----------- ----------- ---------
<S> <C> <C> <C>

Net sales.................................. $ 9,456 $ 7,980 $ 11,400
Cost of goods sold......................... 5,681 5,059 6,799
----------- ----------- ---------
Gross profit............................... 3,775 2,921 4,601
Selling, general and administrative
expenses................................. 1,543 1,427 2,121
Research and development expenses.......... 632 686 810
Purchased in process, research and
development.............................. -- 857 --
----------- ----------- ---------
Operating income (loss).................... 1,600 (49) 1,670
Interest expense........................... 22 10 78
----------- ----------- ---------
Income (loss) before income taxes
(credits)................................ 1,578 (59) 1,592
Income taxes (credits)..................... 24 (137) 637
----------- ----------- ---------
Net income................................. $ 1,554 $ 78 $ 955
----------- ----------- ---------
----------- ----------- ---------
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
----------------------------------------------------------------------------
1997 1998
-------------------------------------------------- ------------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 FEB. 28 MAY 31
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 59.9 59.5 56.8 58.0 60.0 57.5
----- ----- ----- ----- ----- -----
Gross profit............................... 40.1 40.5 43.2 42.0 40.0 42.5
Selling, general and administrative
expenses................................. 17.3 21.4 22.0 18.9 17.7 19.6
Research and development expenses.......... 6.6 8.0 7.9 7.8 7.1 6.4
Purchased in process, research and
development.............................. -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Operating income (loss).................... 16.2 11.1 13.3 15.3 15.2 16.5
Interest expense........................... 0.7 0.8 0.8 0.8 0.4 0.3
----- ----- ----- ----- ----- -----
Income (loss) before income taxes
(credits)................................ 15.5 10.3 12.5 14.5 14.8 16.2
Provision for income taxes (credits)....... 0.1 0.1 0.1 0.1 0.2 0.2
----- ----- ----- ----- ----- -----
Net income................................. 15.4% 10.2% 12.4% 14.4% 14.6% 16.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----

1999
-----------
AUG. 31 NOV. 30 FEB. 28
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0%
Cost of goods sold......................... 60.1 63.4 59.6
----- ----- -----
Gross profit............................... 39.9 36.6 40.4
Selling, general and administrative
expenses................................. 16.3 17.9 18.6
Research and development expenses.......... 6.7 8.6 7.1
Purchased in process, research and
development.............................. -- 10.7 --
----- ----- -----
Operating income (loss).................... 16.9 (0.6) 14.7
Interest expense........................... 0.2 0.1 0.7
----- ----- -----
Income (loss) before income taxes
(credits)................................ 16.7 (0.7) 14.0
Provision for income taxes (credits)....... 0.3 (1.7) 5.6
----- ----- -----
Net income................................. 16.4% 1.0% 8.4%
----- ----- -----
----- ----- -----
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of liquidity has been through cash generated from
operations and borrowings under our revolving credit facility and term loans.

Cash flows used in operating activities were $320,000 in the three months
ended February 28, 1999 compared to $252,000 provided by operating activities in
the three months ended February 28, 1998 and $4,603,000 in the fiscal year ended
November 30, 1998. The cash flows used in operating activities in the three
months ended February 28, 1999 were comparatively lower than in fiscal 1998 due
primarily to increases in accounts receivable and inventories and a decrease in
accrued expenses and accounts payable. The receivable increase resulted
primarily from higher sales in 1999. The increase in inventories resulted
primarily from increased levels to meet anticipated sales.

Cash flows used in investing activities were $193,000 in the three months
ended February 28, 1999 compared to $21,000 in the three months ended February
28, 1998 and $3,357,000 in the fiscal year ended

27
<PAGE>

November 30, 1998. Fiscal 1998 included higher than historical levels of
equipment and leasehold improvement purchases and included approximately $1.6
million for the acquisition of Troy XCD. For the balance of the fiscal year
ending November 30, 1999, we plan to spend approximately $800,000 on additional
purchases of equipment.

Cash flows provided by financing activities were $233,000 in the three
months ended February 28, 1999 compared to cash flows used in financing
activities of $331,000 in the three months ended February 28, 1998 and
$1,038,000 in the fiscal year ended November 30, 1998. Fiscal 1998 included
approximately $3.4 million of S corporation distributions and net additional
borrowings of approximately $2.4 million. For the balance of the fiscal year
ending November 30, 1999, we plan to pay down approximately $3.8 million of debt
from the proceeds of the Offering. See "Use of Proceeds."

We currently have two bank term loans and a revolving line of credit. One of
these term loans had an outstanding balance of approximately $472,000 as of
February 28, 1999. This term loan currently bears interest at a rate of 7.75%
and matures on November 1, 2000. The other term loan had an outstanding balance
of approximately $2,850,000 as of February 28, 1999 and currently bears interest
at a rate of 8.25%. This second term loan matures on November 1, 2003. Our
revolving line of credit had an outstanding balance of approximately $496,000 as
of February 28, 1999 and currently bears interest at a rate of 7.50%. The
revolving line of credit has no expiration date. Under the line of credit, we
are permitted to borrow 80% of eligible accounts receivable and 50% of eligible
inventories (up to a maximum of $2,500,000 for eligible inventories). As of
February 28, 1999, the amount available under the line of credit was
approximately $4.2 million. See "Use of Proceeds."

We believe that cash generated by operating activities, the net proceeds
from the Offering and funds available under our credit facility will be
sufficient to finance our operating activities for at least the next 12 months.
To the extent that the funds generated from these sources are insufficient to
finance our operating activities, we would need to raise additional funds
through public or private financing. We cannot assure you that additional
financing will be available on terms favorable to us, or at all.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the FASB issued SFAS No. 130 REPORTING COMPREHENSIVE INCOME,
and SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these statements will not impact our financial position, results of
operations or cash flows and any effect will be limited to the form and content
of our disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.

In October 1997, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The SOP is effective for
transactions entered into in fiscal years beginning after December 15, 1997. Our
management does not believe the adoption of SOP 97-2 will have a material effect
on our consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes. Market risk is attributed to all market risk sensitive
financial instruments, including long term debt.

28
<PAGE>

We do not engage in trading activities and do not participate in foreign
currency transactions or utilize derivative financial instruments. Accordingly,
our exposure to market risk is through our bank debt which bears interest at
variable rates. The debt consists of two term loans and a revolving line of
credit. The term loans require monthly principal payments of $75,000. All
borrowings bear interest based upon the reference rate per annum as announced by
the bank (7.75% at February 28, 1999). Based upon the balance of the bank debt
at February 28, 1999, an immediate and sustained increase in the reference rate
of 1% would cause our annual interest expense to increase by approximately
$28,000. See Note 7 in the notes to our consolidated financial statements.

29
<PAGE>

BUSINESS

OVERVIEW

INDUSTRY

In today's increasingly competitive market, an organization's ability to
make effective business decisions and respond to customers' ever increasing
demands depends to a large extent upon its ability to rapidly collect, organize
and distribute information. Information and documents regularly distributed by
businesses include checks, income statements, budgets, sales forecasts,
invoices, inventory listings, payroll reports, portfolio statements and packing
slips.

Historically, most of this information was created using legacy computer
systems, printed and typically delivered to users through physical means such as
facsimiles, hand deliveries, inter-office mail and the postal service. However,
over the past decade, there has been a dramatic migration of critical corporate
information from mainframe computer systems to distributed computing
environments. This shift has been driven largely by the widespread emergence and
adoption of enterprise software applications, networks and the Internet.
Although many enterprise software applications include basic reporting
functionality, they generally do not adequately address an enterprise's need to
electronically transmit and output information across distributed computing
environments.

The emergence and adoption of networks and the Internet is also changing the
way organizations generate and distribute information. Technologies are now
available to effectively distribute information electronically to multiple end
users both within and outside an organization. In addition, many organizations
are now looking for entirely new output solutions that enable distribution of
information to any number of output devices using the Internet. Due to this
fundamental shift in the way corporations store and manage data, IT departments
are now faced with the challenge of providing users with secure access to
business information residing in a broad range of distributed and fragmented
systems.

Today, organizations have the ability to deliver information through a
variety of mediums, including printers, fax machines and e-mail.

Traditional information distribution uses a print-and-distribute approach
whereby documents are printed, copied and physically distributed. This process
is inefficient, labor intensive, expensive and has

30
<PAGE>

security risks. Often, the blank forms needed in this process are purchased from
a commercial printer and never used.

Faxing is another common method for remote information distribution. The
general quality and reliability of fax machine output has become inadequate for
today's business requirements. For example, a fax transmission of a photograph
is slow, has low resolution and does not offer color as a finishing option. In
addition, fax transmissions rely on the use of often expensive
telecommunications services.

E-mail is a rapidly growing method for remote information distribution.
However, e-mail often presents software incompatibilities and can be time
consuming. In addition, e-mailed documents can be easily altered which may
present significant security issues.

To address the shortcomings of these methods, we believe that organizations
are seeking a unifying technology strategy that enables disparate devices to
efficiently send information over networks and the Internet for high quality
output by a wide range of output devices. Recently, Hewlett-Packard has
developed a comprehensive solution for distributing input from a broad range of
intelligent devices to compatible output devices. This solution, based upon
their JetSend protocol, allows JetSend enabled devices to transmit information
over the Internet for output on JetSend enabled output devices. In addition, the
Internet Engineering Task Force is in the process of adopting a related protocol
that is also intended to unify many disparate input and output devices so that
the Internet can be the universal transmission medium. There are also efforts
underway by major facsimile manufacturers to develop a common protocol to enable
facsimile machines to transmit and receive information over the Internet. To
date, however, there is no universal Internet output protocol.

Another significant area of change is the improved capabilities of laser
printers. Today, inexpensive laser printers have the ability to print most
common business documents. However, standard laser printers do not have the
capability to produce unique output such as financial documents. Unlike purchase
orders and invoices, financial document printing presents a number of
challenges. Perhaps the most significant is the printing of MICR lines, the
unique characters on the bottom of a check. The MICR line is printed with a
magnetic ink or toner that when magnetized emits a magnetic signal that
identifies each unique character. If the shape and/or the magnetics of the
characters do not meet specified standards, the banking system will reject the
document, which will then require costly manual handling. Due to the
difficulties in printing high quality MICR lines, the printing of financial
documents was historically done by third party commercial printers. Although
today's laser printers are capable of high quality output, they cannot print
MICR lines without customized software and specialty toners.

Another recent trend is the rapid rise in e-commerce. To date, businesses
and consumers have generally used credit cards as the primary method of payment
in e-commerce transactions. Most online merchants have very limited or no
options for those purchasers who desire to pay for goods and services by check.
Even when payment by check is permitted, a purchaser must send the check, which
then must clear through the banking system before the goods or services are
received. This process often takes 7-10 days. As a result, online merchants are
not able to offer their customers the same level of convenience and payment
options available in traditional stores.

Due to the shortcomings of traditional information distribution methods, we
believe that there is a need for enterprise output solutions that allow
organizations to electronically transmit and output information across
distributed computing environments.

TROY SOLUTION

Our software, firmware, hardware and imaging supplies are designed to
address the critical information distribution and output requirements of
enterprises and end users. Our products are designed to provide the following
benefits:

31
<PAGE>

BROADEST NETWORK PROTOCOL SUPPORT & SOFT PRINT SERVER. Our network
connectivity products are recognized worldwide for supporting more protocols and
network operating systems than other products on the market. With our
technologies, enterprises are able to electronically transmit and output
information across distributed computing environments. Our connectivity products
support Windows NT and UNIX, in addition to legacy systems such as Digital
Equipment Corporation VAX computers, Banyan VINES networks, HP 3000 computers
and IBM AS/400 computers. In addition, we are continuing to develop the soft
print server. Our soft print server will allow printer manufacturers and other
OEM customers to significantly reduce manufacturing costs by incorporating
networking capabilities directly in the processor on their printer controller,
rather than requiring a separate processor, memory and interface logic. Our soft
print server runs on printers with Wind River Vx Works, the most commonly used
embedded real-time operating system.

INTERNET OUTPUT CAPABILITIES. Our existing Internet output capability,
PrintraNet, allows a user at one location to print to another location over the
Internet. Our Internet connectivity products under development will allow our
customers' printers and fax machines to seamlessly receive documents over the
Internet, regardless of the protocol used by the sending device. We believe that
we will have significant competitive advantages in this market because we were
one of the first to develop Internet printing technology and have extensive
protocol experience.

ADVANCED OUTPUT ENHANCEMENT SOLUTIONS. Our output enhancement products
provide customers with functions not offered by most major original equipment
manufacturers. Our technology enables standard laser printers to print MICR
lines, graphics, barcodes and forms. It also enables a printer to perform other
functions such as auditing, status checking and security. These features
increase an enterprise's flexibility and customer service, eliminate costs
associated with forms obsolescence and enhance document security. This
technology works over networks and the Internet.

PROPRIETARY IMAGING SUPPLIES. We are recognized by our customers as a high
quality developer and manufacturer of proprietary imaging supplies. Our imaging
supplies are formulated for specific output devices. As new output devices are
developed, our chemical engineers combine their expertise with our advanced
research and development equipment to design proprietary formulations. Our
imaging supplies are then produced in a sophisticated, computerized
manufacturing facility. We are the only authorized MICR toner manufacturer for
Hewlett-Packard LaserJet printers and are the only authorized MICR toner
manufacturer for the IBM 3900 and InfoPrint 4000 family of high-speed laser
printers. The majority of our output enhancement products require our
proprietary imaging supplies.

E-COMMERCE CHECK PAYMENT SOLUTIONS. By combining our MICR enhanced
distributed output solutions with our Internet software, we are currently
developing technology that will offer the capability to print a MICR encoded
check remotely, including over the Internet. This check will have all of the
same attributes of a traditional check and will be presented by a merchant
through normal banking channels. We believe that this capability will offer us a
significant new growth opportunity due to the rapid rise in e-commerce and the
limited payment methods available to today's e-commerce consumer. Our integrated
solution will allow e-commerce consumers to pay for goods and services with a
check in a similar manner and with comparable speed and security as is available
for credit cards.

32
<PAGE>

BUSINESS STRATEGY

Our objective is to be a leading worldwide provider of enterprise output
solutions. Our strategy for achieving this objective includes:

ACCELERATING THE DEVELOPMENT AND MARKETING OF OUR INTERNET PRODUCTS. We
believe that the Internet will play a significant role in future commerce. We
intend to focus significant technical effort toward the development of Internet
output solutions. We also intend to focus on developing and marketing our e-
commerce check payment solution. By building on our current product lines and
utilizing our expertise in managing various protocols, we believe that we will
have significant competitive advantages in this market.

INTRODUCING AND ENHANCING PRODUCTS THROUGH RESEARCH AND DEVELOPMENT. We
achieved a leadership position in network solutions and our output enhancement
solutions by investing in research and development, introducing higher quality
products and focusing on satisfying the needs of both our OEM customers and end
users. We intend to continue to invest in research and development to enhance
our current technologies and introduce new products.

EXPANDING AND SEEKING NEW OEM RELATIONSHIPS. We intend to aggressively
expand existing and seek new OEM relationships. We intend to expand our
relationships with Hewlett-Packard, IBM, Brother and Standard Register by
developing solutions that support their products. We believe that this strategy
provides us with the opportunity to expand our market share and maintain and
enhance our technological position and expertise.

ACQUIRING RELATED BUSINESSES, PRODUCTS AND TECHNOLOGIES. A significant
aspect of our growth strategy has been the acquisition of complementary
businesses in order to achieve market presence, increase our customer base and
expand our product offerings to our customers and business partners. We intend
to acquire businesses or license products and technologies in the Internet and
network output solutions market. We currently have an experienced team, both
internal and external, executing and implementing our acquisition strategy.

LEVERAGING STRATEGIC ALLIANCES. We currently partner with various software,
firmware and hardware companies that offer solutions which assist us in meeting
our customers' enterprise output needs. We intend to continue to aggressively
pursue new strategic alliances that we believe will enable us to enter new
markets, expand our channels of distribution and enhance our product and service
offerings. We currently have management resources dedicated to developing
strategic alliances.

EXPANDING DISTRIBUTION CHANNELS TO INCREASE OUR FOCUS ON SELLING TO SMALL
AND MID-SIZE BUSINESSES. We believe that an increasing number of small and
mid-sized businesses will begin to use networks, the Internet and advanced
output solutions to facilitate their business needs. We intend to continue to
expand our distribution channels to increase our sales to these businesses.

PRODUCTS AND SERVICES

Our current product offerings consist of connectivity and output enhancement
solutions.

CONNECTIVITY SOLUTIONS

We offer a wide range of products that allow output devices to better
communicate over networks and the Internet. Our major product lines include:

PRINT SERVERS. Our print servers enable printers, plotters and other output
devices to be shared by many different kinds of computers on a network. Our
print servers are recognized worldwide for supporting more protocols and network
operating systems than other products on the market. This support makes our
print servers especially well-suited to enterprise networks that have deployed
many different kinds of computers and network operating systems over a wide
geographic area.

33
<PAGE>

SOFT PRINT SERVER. The soft print server is a software-only product that
incorporates the technologies of our other print servers. It is designed to
allow printer manufacturers and other OEM customers to incorporate networking
capabilities directly into the processor on their print controller. The soft
print server runs on printers with Wind River Vx Works, the most commonly used
embedded real-time operating system. The soft print server reflects our emphasis
on software products, and we expect to release it during the second calendar
quarter of 1999.

INTERNET OUTPUT SOLUTIONS. Our current Internet output product, PrintraNet,
is a software and firmware solution that enables a user at one location to print
to another location over the Internet. Our Internet output products under
development will be designed to enable output devices, including currently
installed printers manufactured by Hewlett-Packard, IBM, Lexmark and Xerox, to
communicate over the Internet regardless of the sending device's protocol. Such
devices could potentially include printers, fax machines, scanners, copiers,
digital cameras and more. For example, a scanner that uses Hewlett-Packard's
JetSend protocol could send a document to a printer that uses another Internet
printing protocol.

OUTPUT ENHANCEMENT SOLUTIONS

MICR SOLUTIONS. We offer three levels of high-quality MICR solutions based
on laser technology. Our laser solutions range in print speeds from 8 to 40
pages per minute and combine laser-quality business documents with high-quality
MICR. We have a value-priced line of font and toner kits that provide a high-
quality MICR solution on a user's existing Hewlett-Packard LaserJet. Our font
and toner kits upgrade a laser printer to accommodate MICR encoding, and store
custom logos, signatures and MICR fonts on the printer.

At the mid-level, we offer a new line of basic MICR printers combining all
the features and quality of a laser printer. We install these check printing
capabilities at our manufacturing facility. These value-priced, mid-level MICR
solutions are for customers who have printing requirements that include business
documents combined with checks. These printers are also ideal for check
producers who maintain secure operating environments and do not need printer
security features.

Our most advanced MICR printers incorporate added security features such as
built-in MICR sensors, password protection, keylocks and other important
security features. This high quality line of MICR printers is ideal for
customers who require a more dedicated and fully secure check printing solution.

We also offer one high-speed MICR solution based on impact technology. Our
impact MICR printers are designed to run in tandem with large, very high speed
laser printers manufactured by IBM and Xerox.

For those customers whose software does not support MICR printing, we also
offer our own MICR software solution. This solution is currently offered as a
part of our strategic relationship with PeopleSoft and enables PeopleSoft users
to distribute and print financial documents.

IMAGING SUPPLIES. Both our laser and impact printing solutions require our
ongoing imaging supplies, sales of which represent the largest portion of our
revenue. Our laser systems require toner cartridges while our impact systems
require MICR ribbons for operation. We are the only authorized MICR toner
manufacturer for Hewlett-Packard LaserJet printers and are the only authorized
MICR toner

34
<PAGE>

manufacturer for the IBM 3900 and InfoPrint 4000 family of high-speed laser
printers. In addition to our MICR toner and ribbons which support our printers,
we also offer other toners, ribbons and accessories for use by other printing
devices. These additional supplies include fluorescent and indelible ribbons,
post-encoding equipment (used to add the amount information to checks prior to
processing), jumbo rolls (large rolls of MICR ribbon, typically 42" wide,
manufactured to precise specifications), standard toner (for selected
manufacturers of printers and fax machines), paper handling accessories and
check security paper.

OUTPUT DEVICE ACCESSORIES. We have recently introduced our Paper Presenter.
This unique printer accessory delivers a printed page to a convenient location
for the user. Our Paper Presenter makes it possible to use a printer safely
inside an enclosure with other computer equipment and still deliver a printed
page outside the enclosure to the waiting user. This new product is ideal for
kiosk setups, under the counter at a hotel, or in a locked enclosure at a bank
teller station. Our Paper Presenter is compatible with both Hewlett-Packard
LaserJets and our MICR printers and is easily installed.

OTHER OUTPUT ENHANCEMENT PRODUCTS. We also have audit function, barcoding
and electronic forms enhancements in various stages of release. These
enhancements will reside on the printer DIMM (dual in-line memory module). The
DIMM is either bundled with the printer or sold separately. The audit features
will monitor any check data printed, including the account on which the check is
drawn, the amount of the check, and the check number and date. This feature
allows for easy reconciliation, specific user monitoring, check authorization,
batch run summaries and specific timeframe totals. The barcode feature will
support UPC symbol barcodes as well as newer, intelligent barcode standards.
These codes are considered "intelligent" barcodes because they are
two-dimensional, compacting many times the amount of data of more simple
barcodes in very limited space. Other output enhancement features include
electronic forms. This feature stores forms on the DIMM resident on the printer.
These stored forms decrease processing time and allow continued use of the
forms, regardless of changes in application software.

CASE STUDIES

STATE FARM specializes in selling and servicing personal line insurance
products through nearly 16,500 agents for over 66.2 million policies in the
United States and Canada. Starting in 1993, State Farm began using our financial
document printing solutions to provide local payment capability. Our solutions
significantly enhanced customer service and cash management while maintaining
centralized financial control at State Farm's corporate headquarters. In
addition, State Farm takes our financial document solutions on the road during
major catastrophes (tornadoes, floods, hurricanes and other natural disasters)
to quickly print out critical claims checks to their policyholders.

AUTOMATIC DATA PROCESSING INC. (ADP) formed a strategic alliance with us in
February 1997 to offer onsite, client-based payroll check printing for their
350,000 clients nationwide. ADP is recognized as one of the largest independent
computing service organizations in the United States. Two ADP software solutions
work with our financial document printing solutions: PC/PAYROLL-TM-, which
supports a "print-back" capability allowing payroll checks to be printed at the
client site, and SOFTPAY-TM-, a PC software package linked to ADP's payroll and
direct deposit services. Both ADP software programs in conjunction with our
financial document printing solutions allow ADP's clients to issue checks on
site. In addition to printing only at issuance time to better control funds, the
benefits of in-house check printing include eliminating delays and deliveries
for faster printing and distribution, and eliminating manual check writing to
prevent errors, incorrect checks and bank charges.

THE VIRGINIA DEPARTMENT OF TRANSPORTATION in Suffolk, Virginia, has
successfully evaluated and tested PrintraNet on their network. They intend to
use PrintraNet to print purchase orders generated in Suffolk at remote sites
throughout the state using the Internet. Currently it takes 12 steps to generate
a purchase order, and using PrintraNet will significantly reduce the number of
steps required because the computer in

35
<PAGE>

Suffolk can directly generate a hardcopy order at the remote site. In the future
they plan to use PrintraNet in the procurement department to post and receive
bids.

SALES AND MARKETING

We market products to Fortune 1000 companies through our direct sales force
of fifteen persons (thirteen domestically and two internationally) and market
products to small and mid-size businesses primarily through our network of
distributors and value-added resellers. We market our products internationally
in 55 countries, primarily through a distributor network.

We have more than 9,000 customers, including financial institutions,
insurance companies, payroll processing companies, corporations and government
agencies. AT&T Corporation, BankAmerica Corporation, Brother Industries, Eastman
Kodak, Farmer's Insurance Group, Ford Motor Company, IBM, Manpower, State Farm
Insurance and Wells Fargo & Company are among our customers, each of whom
purchased products during the last 12 months.

We believe that an increasing number of small and mid-size businesses will
begin to use networks and the Internet to facilitate their business needs. As a
result, we have increased the number of sales and support staff dedicated to
recruiting and training additional distributors and value-added resellers that
can help address the needs of these types of businesses.

We also intend to aggressively expand our existing OEM relationships and
seek new relationships. We intend to expand our relationships with Brother,
Hewlett-Packard, IBM and Standard Register by developing product solutions that
support their products. We believe that this strategy provides us with the
opportunity to expand our market share of products and maintain and enhance our
technological position and expertise. We currently have management resources
dedicated to recruiting and developing new OEM relationships.

We promote our products through our web sites, trade shows, advertising and
direct marketing materials as well as referrals from our strategic business
partners, including Hewlett-Packard, IBM, ADP, PeopleSoft, Standard Register and
Wind River.

We offer technical support, maintenance and on-site services, portions of
which are provided by third parties. We provide technical support through an 800
line from 7:00 AM to 5:00 PM (PST) and through our web-sites. We also provide
on-site service through yearly maintenance contracts or on a time and material
basis.

In addition to our technical support, maintenance and on-site services, for
over five years, we have maintained the MICR Technology Center, a research group
dedicated to providing solutions for MICR document processing problems. Members
of the testing facility for this research group have the ability to examine all
aspects of the MICR printing process to pinpoint where improvements can be made
and to ensure the highest quality MICR line.

STRATEGIC RELATIONSHIPS

For over six years, we have maintained a strategic relationship with
Hewlett-Packard in which we purchase Hewlett-Packard laser printers and modify
and enhance the printers. We then repackage, relabel and sell the printers as
MICR-enabled financial document printers under the Troy name. In addition, we
are a member of Hewlett-Packard's Engineering Support Partner Group, a select
group of third party solutions partners. As a member of this group, we work with
Hewlett-Packard on architecture issues for new product development and with
Hewlett-Packard's marketing group to implement joint marketing programs. We
believe that our current relationship with Hewlett-Packard gives us a
competitive advantage in marketing our products, primarily because of their
reputation as the leading provider of laser printers throughout the world.

36
<PAGE>

Under a joint marketing relationship with IBM, we sell our impact MICR
printers in conjunction with their high-speed laser printers. IBM also has an
agreement with us to purchase all of its MICR toner requirements for the IBM
3900 and InfoPrint 4000 family of high speed laser printers.

We are a Wind River, WindLink partner. An estimated 70% of all printers use
the Wind River Vx Works operating system. Wind River is promoting our soft print
server on its web site, in its third party catalog and with a datasheet. We have
participated in the most recent Wind River international sales meeting and will
do additional joint marketing activities with Wind River over the coming year.

Our strategic alliance with ADP was formed to offer a printer and software
solution for onsite, client-based payroll check printing to ADP's 350,000
clients nationwide. ADP is one of the largest independent computing service
organizations in the United States. ADP's payroll software is fully compatible
with our MICR printers. We offer ADP-approved MICR laser printers, toll-free
technical support, accessories, imaging supplies, product warranties and
maintenance agreements.

We are an OEM supplier to Standard Register. Standard Register is a
recognized leader in delivering document management systems, products and
services to healthcare, financial and general business markets. We private label
MICR and multi-purpose printers for Standard Register to be used in conjunction
with their various document management solutions including LINKUP-TM-, a check
printing software system, and PATIENT LINKUP-TM-, a hospital admissions and
document routing system.

We have a strategic alliance with PeopleSoft, a leading provider of
enterprise applications software. PeopleSoft's Alliance Solution Center (ASC),
located in their new Pleasanton headquarters, opened last year to develop
global, enterprise-wide software solutions and services. One of the primary
functions of the ASC is to execute joint research and development projects
between Hewlett-Packard, PeopleSoft and other strategic partners such as Troy.
Under our current agreement, we will provide MICR and multi-purpose printers and
software which will enable PeopleSoft customers to print financial documents,
barcodes, labels and standard business documents.

RESEARCH AND DEVELOPMENT

We have assembled a highly trained staff of software, electrical, mechanical
and chemical engineers. In addition, we invest significantly in highly
sophisticated research and development equipment. We currently employ 42 persons
in our research and development efforts.

Our principal research and development activities consist of:

- developing software and firmware solutions for connecting output devices
to networks and the Internet;

- developing e-commerce check payment solutions;

- developing new products that provide solutions for our strategic business
partners; and

- creating proprietary imaging supplies.

We seek customer feedback in the product design process in order to meet
changing requirements and are committed to developing functional and integrated
printing solutions in a rapid and efficient manner.

COMPETITION

The market for our products is highly competitive and subject to rapid
technological change. We currently compete principally on the basis of the
quality, flexibility, convenience and security of our printing solutions. We
believe that we compete favorably with respect to these factors as a result of:

- the breadth of our products' features;

- our knowledge, technical exposure and professionalism developed over time;

37
<PAGE>

- our strategic relationships; and

- an historical commitment to quality.

Although the prices of our products are generally higher than those of our
competitors, we have been able to maintain these prices as a result of advanced
technological features (including security), higher levels of quality and
value-added services.

CONNECTIVITY SOLUTIONS. The market for our network products is highly
competitive and subject to rapid technological change. We currently compete
principally on the basis of the extensive multiprotocol capabilities,
functionality and high performance of our products. In the print server market,
Intel, Osicom/ DPI, Axis Communications, Emulex and Lantronix offer competing
products that are suitable for multiprotocol enterprise network printing
applications. There are many other commodity print servers, including very
low-cost Taiwanese products, but such commodity print servers are not usually
suitable for enterprise networks due to inadequate protocol support and
features, limited customer support and low performance. Although Hewlett-Packard
makes print servers, we do not generally consider them a direct competitor. This
is because we are a Hewlett-Packard partner that provides the DEC and Banyan
VINES connectivity solutions that are not available on Hewlett-Packard products.
As a result, Hewlett-Packard often calls upon us to help them close printer
sales at customer sites that require DEC or Banyan connectivity.

To our knowledge, the only direct competitor for our new soft print server
software-only print server product is Auco, a Redwood City, California-based
software company. Other competition for soft print server are individual
protocol stacks available from a number of companies and in the public domain,
but such protocol stacks require a significant amount of additional software
development by the OEM in order to provide similar functionality to soft print
server.

Both the multi-protocol Internet document distribution market and the
e-commerce check payment market are just emerging. To our knowledge, there are
currently no direct competitors. Because of the projected growth of this market,
we will most likely experience increased competition in the future.

OUTPUT ENHANCEMENT SOLUTIONS. The primary competitors in MICR are ACOM
Computer, Inc., Delphax Systems, IBM, Lexmark International, Inc., Oce, Source
Technologies and Xerox. We also compete with companies who provide a MICR font
and toner solution without a printer. We believe that our current relationship
with Hewlett-Packard gives us a competitive advantage in the MICR printing
market primarily because of Hewlett-Packard's reputation as the leading provider
of laser printers to companies throughout the world.

IMAGING SUPPLIES. We compete in the toner and ribbon market primarily on
the basis of quality and service. Color Image is our most significant competitor
with respect to toner products. Our significant competitors with respect to
ribbons are Nu-Kote International, Commander Imaging Products Inc. and Fuji
Copian Corporation. We position ourselves with a pricing strategy that reflects
our quality, reliability, precision of formulation and available customer
support. Many small companies also offer remanufactured MICR cartridges that are
typically lower priced but less reliable than new MICR cartridges such as those
offered by us.

We also have several indirect competitors that offer certain products as an
alternative to financial document printing solutions, such as pre-printed
checks, check printing services and electronic payment systems, outsourcing for
payroll, on-line banking and payment systems for their clients. These companies
tend to provide an alternative to internal printing of checks and other
financial documents.

PATENTS AND PROPRIETARY RIGHTS

We have certain proprietary printing system components, manufacturing
processes, information, knowledge, trademarks and tradenames. We rely on a
combination of patent, trademark, trade secret and

38
<PAGE>

other intellectual property laws, nondisclosure agreements with employees and
internal confidentiality measures to protect our intellectual property rights
and confidential information. We seek patents from time to time on our products
and processes. The decision to seek additional patents is based on our analysis
of various business considerations such as the cost of obtaining a patent, the
likely scope of patent protection and the benefits of patent protection relative
to relying on trade secrets and other protection. We also rely on know-how and
continuing technological innovations to develop and maintain our competitive
position.

As of February 28, 1999, we held seven United States patents and one United
Kingdom patent. Our existing patents primarily cover components of our impact
printing systems. We have also filed applications for four additional United
States patents which are currently pending. There can be no assurance that our
issued patents will provide meaningful protection of our products and
technologies. In addition, patent applications can be denied or significantly
reduced before issuance. Moreover, there can be no assurance that third parties
will not assert intellectual property infringement claims against us or that, if
asserted, that we would prevail or be able to obtain any necessary licenses.

We also rely on proprietary manufacturing processes and techniques,
materials expertise and trade secrets applicable to the manufacture of our
products. We believe that these proprietary rights may provide us with a
competitive advantage as important, if not more important, than patent
protection. We seek to maintain the confidentiality of this proprietary
information by requiring employees who have access to proprietary information to
sign confidentiality agreements and by limiting access by outside parties to
such proprietary information. There can be no assurance, however, that these
measures will provide us with adequate protection of our proprietary information
or with adequate remedies in the event of unauthorized use or disclosure. In
addition, there can be no assurance that our competitors will not independently
develop or otherwise gain access to processes, techniques or trade secrets that
are similar or superior to ours. Finally, as with patent rights, legal action to
enforce trade secret rights can be lengthy and costly, with no guarantee of
success.

ENVIRONMENTAL AND REGULATORY MATTERS

Our operations are subject to numerous domestic and international laws and
regulations, particularly relating to environmental matters that impose
limitations on the discharge of pollutants into the air, water and soil and
establish standards for the treatment, storage and disposal of solid and
hazardous wastes. We are also required to have permits from a number of
governmental agencies in order to conduct various aspects of our business.
Compliance with these laws and regulations is not expected to have a material
adverse effect on our capital expenditures, earnings or our competitive
position. There can be no assurance, however, that future changes in
environmental laws or regulations, or in the criteria required to obtain or
maintain necessary permits, will not have a material adverse effect on our
operations.

EMPLOYEES

As of February 28, 1999, we employed approximately 154 persons. None of our
employees are represented by a labor union or covered by a collective bargaining
agreement. We have not experienced any work stoppages and consider relations
with our employees to be good.

FACILITIES

We currently lease approximately 37,000 square feet of space for our
headquarters in Santa Ana, California. Our other facilities are located in
Irvine, California, where we lease approximately 14,000 square feet used by Troy
XCD, and in Wheeling, West Virginia where we lease approximately 77,000 square
feet for a manufacturing facility. We consider our present facilities to be
sufficient for our current operations.

39
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTOR, DIRECTOR NOMINEES AND OTHER KEY EMPLOYEES

The following table contains certain information about our executive
officers and directors as of February 28, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Patrick J. Dirk............................. 59 Chairman of the Board, sole Director, President and Chief
Executive Officer of Troy, Chairman of the Board and Chief
Executive Officer of Troy Systems International and Chairman
of the Board, Chief Executive Officer and sole director of
Troy XCD
Robert S. Messina........................... 48 Executive Vice President of Troy and President and Chief
Operating Officer of Troy Systems International
Brian P. Dirk(1)............................ 34 Vice President and Director Nominee of Troy and Vice President
International Sales of Troy Systems International
Del L. Conrad............................... 53 Chief Financial Officer, Treasurer and Secretary of Troy and
Vice President, Chief Financial Officer and Secretary of Troy
XCD
Norman B. Keider(1)(2)...................... 67 Director nominee
John B. Zaepfel(1)(3)....................... 61 Director nominee
William P. O'Reilly(1)(2)................... 52 Director nominee
Gene A. Bier(1)(3).......................... 59 Director nominee
</TABLE>

- ------------------------

(1) Will become a director upon completion of this Offering.

(2) Member of the Compensation Committee upon completion of this Offering.

(3) Member of the Audit Committee upon completion of this Offering.

EXECUTIVE OFFICERS, DIRECTOR AND DIRECTOR NOMINEES

PATRICK J. DIRK has been our Chairman of the Board, sole director, President
and Chief Executive Officer since he co-founded Troy with his wife in May 1982.
Mr. Dirk is also the founder, Chairman of the Board and Chief Executive Officer
of Troy Systems International, and is the Chairman of the Board, Chief Executive
Officer and sole director of Troy XCD. Since March 1984, Mr. Dirk has served as
a director of Eltrax Systems, Inc., a managed network services company that
provides communication products and services for enterprise wide networks. Mr.
Dirk co-founded Eltrax in March 1984 and served as its Chairman of the Board
from February 1995 until August 1995. From 1973 until 1982, Mr. Dirk was
employed in various capacities by Kroy Inc., a manufacturer of automated
lettering machines and related products, serving most recently as President and
a director from 1980 to 1982. Mr. Dirk also serves as a member of the boards of
directors and advisory boards of several private companies, none of which
compete with Troy. Mr. Dirk devotes substantially all of his efforts to Troy and
its subsidiaries.

ROBERT S. MESSINA has been the Executive Vice President of Troy since April
1998 and the President and Chief Operating Officer of Troy Systems International
since December 1996. From December 1995 through December 1996, Mr. Messina
served as the Executive Vice President and General Manager of Troy Systems
International and from July 1994 through December 1995 he served as its Vice
President Sales and Marketing. From January 1992 through March 1994, he was the
General Manager of Omninote, a division of Telautograph Corp., a network
communications company.

40
<PAGE>

BRIAN P. DIRK has been our Vice President since May 1996. He was a member of
our Board of Directors from that date until October 30, 1998. He will again
become a Director upon the completion of this Offering. Mr. Dirk's primary
responsibility is Vice President of Business Development. His duties include
managing our acquisition strategies and staff. Prior to this, he served as Vice
President of International and Federal Government Sales. Since joining us in
1989, Mr. Dirk has held various training and management
positions, including Director of Business Development, International Sales
Manager, Special Projects Manager, Telesales Representative and Purchasing
Agent. Mr. Dirk is the son of Patrick J. Dirk, our Chairman of the Board and
Chief Executive Officer.

DEL L. CONRAD has been our Chief Financial Officer, Treasurer and Secretary
since April 1998 and also serves as Vice President, Chief Financial Officer and
Secretary of Troy XCD. Mr. Conrad served as the Vice President of Finance and
Administration of Troy Systems International from March 1995 to April 1998. From
August 1991 to March 1995, he served as a consultant on mergers and
acquisitions, bank financing and operations. From June 1981 to July 1991, Mr.
Conrad was a partner with McGladrey & Pullen, LLP, a public accounting firm.

DIRECTOR NOMINEES

NORMAN B. KEIDER will become a director upon completion of this Offering.
Since August 1993, Mr. Keider has been a self employed management consultant.
Mr. Keider served as a managing director of A.T. Kearney, an executive search
consulting firm from January 1989 to August 1993. From April 1986 to January
1989, he was a partner with Keider-Zupsic Associates, an executive search
consulting company. Mr. Keider also served as a partner for Arthur Young &
Company, an accounting and consulting company from December 1979 to April 1986.
From January 1978 to December 1979, he was a self employed consultant for
acquisition searches. From December 1972 to January 1978, Mr. Keider was the
President and Chief Executive Officer of Atlas Powder Company, a manufacturer of
commercial explosives.

JOHN B. ZAEPFEL will become a director upon completion of this Offering.
Since June 1991, Mr. Zaepfel has been a Managing Partner of the Zaepfel Group, a
middle market consulting firm specializing in strategic facilitation and
planning. Mr. Zaepfel has served as Chief Executive Officer of several
companies. He currently serves as a director for ten companies including two
publicly traded companies, RemedyTemp, Inc. and Pro-Dex, Inc. From January 1985
to May 1989, Mr. Zaepfel was the founder and Chief Executive Officer of CPG
International, Inc., a manufacturer and marketer of fine art, graphic art,
engineering, drafting and media supplies. From 1974 to 1984, Mr. Zaepfel was
President and Chief Executive Officer of Chartpak and Pickett Industries,
wholly-owned subsidiaries of Times Mirror. Mr. Zaepfel was General Manager of
Chartpak, a division of Avery International from 1990 to 1993.

WILLIAM P. O'REILLY will become a director upon completion of this Offering.
Mr. O'Reilly has been the Chief Executive Officer of Eltrax Systems, Inc. since
January 1997. Mr. O'Reilly has also been the Chairman of the Board of Directors
of Eltrax since August 1995 and a director of Eltrax since July 1995. For the
past 15 years, Mr. O'Reilly has been a private investor and entrepreneur who has
managed several business ventures. In 1989, Mr. O'Reilly formed a group of
investors to acquire Military Communications Center, Inc., where he served as
Chairman of the Board and Chief Executive Officer from 1989 to 1994. In 1986,
Mr. O'Reilly founded Digital Signal, Inc., a provider of fiber optic capacity to
long distance carriers in the telecommunications industry. Mr. O'Reilly served
as Digital Signal's Chief Executive Officer from 1986 to 1989. In 1980, Mr.
O'Reilly founded Lexitel Corporation, a long distance carrier that was
subsequently acquired by ALC Communications, Inc., and served as its Chairman of
the Board and Chief Executive Officer from 1980 to 1984. Mr. O'Reilly is also a
director of two public companies, Charter Communications, Inc., a builder and
operator of international communication networks which provides voice, video and
data services, and World Access, Inc., a value added reseller of
telecommunications equipment.

41
<PAGE>

GENE A. BIER will become a director upon completion of this Offering. Since
1987, Mr. Bier has been the President and Chief Executive Officer of XCORP
Business Development, Inc., a consulting and investment company. From July 1986
to February 1996, Mr. Bier was a director of Eltrax Systems, Inc. and served as
its Chairman from September 1989 to March 1990. From June 1983 to January 1987,
Mr. Bier was Chief Executive Officer of U.S. West Communications, formerly
Minnesota Northwestern Bell. From September 1978 to June 1983, he was Vice
President and from August 1963 to September 1978, he held various positions in
the Bell System. Mr. Bier has served on the boards of many local organizations,
including the Minnesota Business Partnership, Inc., the Greater Minneapolis
Metropolitan Housing Corporation, the United Way of Minneapolis and the
Metropolitan Medical Center. Mr. Bier was Chairman of the Greater Minneapolis
Chamber of Commerce, the Governor's Jobs Training Council, the Minnesota State
Lottery Board and the Urban Coalition.

OTHER KEY EMPLOYEE

THOMAS O. TULOWITZKI has been a Senior Vice President Engineering of Troy
Systems since March 1996 and directs research and development of our output
enhancement products. From February 1991 to March 1996, Mr. Tulowitzki served as
a Manager of Sustaining Engineering for Danka Business Systems PLC, an
independent supplier of photcopiers, facsimiles and other and related automated
office equipment. From September 1989 to January 1991, he was self employed.
From August 1964 to August 1989, Mr. Tulowitzki held various technical and
management positions with Xerox.

BOARD OF DIRECTORS COMPENSATION

Our directors are elected annually and serve until the next annual meeting
of stockholders or until their successors are duly elected and qualified. We do
not currently pay fees to the members of the Board of Directors.

Effective upon completion of this Offering, non-employee directors will
receive $1,500 for each regular meeting of the Board of Directors, $750 for each
special meeting of the Board of Directors and $750 for each meeting of the Audit
Committee and Compensation Committee. In addition, directors are reimbursed for
travel expenses for attending meetings of the Board and any Board or advisory
committees. Upon the completion of this Offering, each non-employee director
will be granted a ten-year option to purchase an aggregate of 30,000 shares of
Common Stock at the initial public Offering price. Each option will vest as to
10,000 shares 90 days after this Offering and as to 5,000 shares per year over
the next four years.

COMMITTEES

The Board of Directors has established an Audit Committee and a Compensation
Committee which will become active upon completion of this Offering. The Audit
Committee provides assistance to the Board in satisfying its fiduciary
responsibilities relating to accounting, auditing, operating and reporting
practices and reviews the annual financial statements, the selection and work of
our independent auditors and the adequacy of internal controls for compliance
with corporate policies and directives. The Compensation Committee reviews
general programs of compensation and benefits for all employees and makes
recommendations to the Board concerning executive officer and director
compensation.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to the commencement of this Offering, we had no Compensation Committee
but the Board of Directors performed equivalent functions. Mr. Patrick Dirk
served as our Chairman and Chief Executive Officer and set the compensation of
the executive officers. Upon completion of this Offering, Messrs. Keider and
O'Reilly will become members of the Compensation Committee. Messrs. O'Reilly and

42
<PAGE>

Patrick Dirk, our Chairman of the Board, President and Chief Executive Officer,
are both members of the Board of Directors of Eltrax Systems, Inc. Mr. O'Reilly
is the Chief Executive Officer of Eltrax.

EXECUTIVE COMPENSATION

The following table provides information concerning cash and non-cash
compensation paid to or earned by our Chief Executive Officer and each of our
other executive officers whose salary and bonus exceeded $100,000 for the fiscal
year ended November 30, 1998:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) COMPENSATION(3)
- ---------------------------------------------- --------- ---------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Patrick J. Dirk .............................. 1998 $ 225,000 $ 68,730 $ 9,855 $ 8,511
Chairman of the Board, President and Chief
Executive Officer
Robert S. Messina ............................ 1998 160,000 90,768 5,400 9,502
Executive Vice President
Brian P. Dirk ................................ 1998 115,000 114,106 3,825 5,776
Vice President
Del L. Conrad ................................ 1998 130,000 16,250 4,050 8,715
Chief Financial Officer, Treasurer and
Secretary
</TABLE>

- ------------------------

(1) Cash bonuses earned have been included as 1998 compensation, even though
such bonuses were paid in 1999. Represents performance bonuses of $68,730,
$45,500, $50,000 and $16,250 for Messrs. Patrick Dirk, Messina, Brian Dirk
and Conrad, respectively. Also includes commissions of $45,268 and $64,106
for Messrs. Messina and Brian Dirk.

(2) Represents $5,250, $5,400, $3,825 and $4,050 for automobile usage for
Messrs. Patrick Dirk, Messina, Brian Dirk and Conrad and $4,605 for
reimbursement of social club membership fees for Mr. Patrick Dirk.

(3) Includes $5,000, $4,041, $3,058 and $3,812 for Messrs. Patrick Dirk,
Messina, Brian Dirk and Conrad, respectively, for matching contributions
under Troy's 401(k) Plan and $3,511, $5,461, $2,718 and $4,903 as the value
of insurance premiums paid by Troy on behalf of Messrs. Patrick Dirk,
Messina, Brian Dirk and Conrad, respectively, under a medical insurance
arrangement.

No stock options were granted to, and no options were exercised by, Messrs.
Patrick Dirk, Messina, Brian Dirk or Conrad during the fiscal year ended
November 30, 1998.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table summarizes the value of options held by Messrs. Patrick
Dirk, Messina, Brian Dirk and Conrad at November 30, 1998. For purposes of the
table, value is based on the difference between the fair market value of the
shares of Common Stock as of the date of this Prospectus (assuming an initial
public Offering price of $10.00 per share) and the exercise price of the options
ranging from $0.41

43
<PAGE>

to $0.45 per share. Options are in-the-money if the market value of the shares
exceeds the option exercise price.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT FISCAL
FISCAL YEAR END YEAR END
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Patrick J. Dirk..................... -- -- -- --
Robert S. Messina................... -- 244,990 -- $ 2,349,454
Brian P. Dirk....................... -- 81,967 -- 782,785
Del. L. Conrad...................... -- -- -- --
</TABLE>

EMPLOYMENT AGREEMENTS

On November 27, 1996, we entered into a non-competition agreement with
Robert Messina regarding his services as President and Chief Operating Officer
of Troy Systems International. Under the terms of this agreement, we granted Mr.
Messina an option to purchase 244,990 shares of Common Stock at an exercise
price of $0.41 per share. This option is fully vested and terminates on November
25, 2006. Our agreement with Mr. Messina requires him to maintain the
confidentiality of our proprietary information and prohibits him from engaging
in competitive activity for a three-year period after his termination. If Mr.
Messina's service with us is terminated during fiscal 1999 or 2000 without
cause, whether actual or constructive, we must pay Mr. Messina $300,000. Such
payment is payable in 36 equal monthly installments.

We generally enter into confidentiality and non-disclosure agreements with
our technical personnel. Pursuant to the terms of these agreements, employees
agree to confidentiality restrictions and to assign to us any reports,
blueprints, data, writings and technical information prepared by them during
their employment that relate to our business.

STOCK OPTION AND INCENTIVE PLANS

Our 1998 Stock Incentive Plan was adopted by the Board of Directors and
approved by the stockholders in April 1998. A total of 1,200,000 shares of
Common Stock have been authorized for issuance under the 1998 Plan, plus any
shares (37,341 as of the date of this Prospectus) that are not issued under our
1996 Stock Option Plan. The 1998 Plan provides for the grant to eligible
recipients of:

- options to purchase Common Stock that qualify as "incentive stock options"
("Incentive Options"), within the meaning of Section 422 of the Internal
Revenue Code;

- options to purchase Common Stock that do not qualify as Incentive Options
("Non-Qualified Options");

- awards of shares of Common Stock that are subject to certain forfeiture
and transferability restrictions that lapse after specified employment
periods ("Restricted Stock Awards");

- rights entitling the recipient to receive a payment from us, in the form
of shares of Common Stock, cash or a combination of both, upon the
achievement of established performance or other goals ("Performance
Units");

- awards of shares of Common Stock ("Stock Bonuses"); and

- rights entitling the recipient to receive a payment from the Company, in
the form of shares of Common Stock or cash, or a combination of both,
equal to the difference between the market value of one or more shares of
Common Stock and the exercise price of such shares under the terms of such
right ("Stock Appreciation Rights").

Incentive Options and Non-Qualified Options are collectively referred to
herein as "Options," and Options, Restricted Stock Awards, Performance Units,
Stock Bonuses and Stock Appreciation Rights are

44
<PAGE>

collectively referred to herein as "Awards." The 1998 Plan provides for the
granting of Options at an exercise price that is not less than 100% of the fair
market value of one share of our Common Stock on the date of grant for Incentive
Options, and 85% of the fair market value of one share of our Common Stock on
the date of grant for Non-Qualified Options.

In the event a "change in control" of Troy occurs, then, if approved by the
Compensation Committee of the Board of Directors:

- all outstanding Options and Stock Appreciation Rights held at least six
months will become immediately exercisable in full and will remain
exercisable for the remainder of their terms, regardless of whether the
participant remains in the employ or service of the Company or any
subsidiary;

- all outstanding Restricted Stock Awards held at least six months will
become immediately fully vested; and

- all outstanding Performance Units and Stock Bonuses will vest and/or
continue to vest in the manner determined by the Compensation Committee
and reflected in the award agreement.

In addition, the Compensation Committee, without the consent of any affected
participant, may determine that some or all participants holding outstanding
Options will receive cash in an amount equal to the excess of the fair market
value immediately prior to the effective date of such change in control over the
exercise price per share of the Options.

For purposes of the 1998 Plan, a "change in control" of Troy will be deemed
to have occurred, among other things, upon:

- the sale or other disposition of substantially all of our assets;

- the approval by our stockholders of a plan or proposal for the liquidation
or dissolution of Troy;

- a merger or consolidation to which we are a party if our stockholders
immediately prior to the merger or consolidation beneficially own,
immediately after the merger or consolidation, securities of the surviving
corporation representing (A) more than 50%, but not more than 80%, of the
combined voting power of the surviving corporation's then outstanding
securities unless such transaction was approved in advance by the
directors as of the effective date of the 1998 Plan or by any persons who
subsequently become directors and whose election or nomination was
approved by a majority vote of the directors comprising the Board as of
the effective date of the 1998 Plan (the "Incumbent Directors"), or (B)
50% or less of the combined voting power of the surviving corporation's
then outstanding securities (regardless of any approval by the Incumbent
Directors);

- any person becoming, after the effective date of the 1998 Plan, the
beneficial owner of (A) 20% or more, but less than 50%, of the combined
voting power of our outstanding securities (unless such transaction was
approved in advance by the Incumbent Directors), or (B) 50% or more of the
combined voting power of our outstanding securities (regardless of any
approval by the Incumbent Directors);

- the Incumbent Directors cease for any reason to constitute at least a
majority of the Board; or

- any other change in control of Troy of a nature that would be required to
be reported pursuant to Section 13 or 15(d) of the Exchange Act.

The terms of the 1996 Plan are substantially similar to those of the 1998
Plan, including the pricing of Options, although the 1996 Plan does not provide
for the grant of Performance Units, Restricted Stock Awards or Stock Bonuses or
the acceleration of any vesting of Options upon a "change in control."

45
<PAGE>

full at various times through November 25, 2006. Upon consummation of this
Offering, we intend to grant options to purchase an aggregate of 530,000 shares
of Common Stock to certain key employees and directors. Such options will have
an exercise price equal to the price per share to the public in this Offering.

CERTAIN TRANSACTIONS

Prior to April 1998, Troy and Troy Systems were 100% beneficially owned by
Patrick J. and Mary J. Dirk as trustees under The Dirk Family Trust UTD March 6,
1990 (the "Family Trust"), the trustee of The Dirk 1997 Education Trust, the
trustees of the Dirk 1998 Alaska Trust, Brian P. Dirk and Patrick J. Dirk's
other three children (the "Dirk Stockholders"). Effective May 31, 1998, the Dirk
Stockholders contributed the stock of Troy Systems beneficially owned by them to
Troy in exchange for an aggregate of 1,124,772 shares of our Common Stock. The
percentage ownership of the Dirk Stockholders in Troy did not change as a result
of the contribution of their Troy Systems stock.

In November 1993, we borrowed, pursuant to a non-negotiable promissory note
(the "Dirk Note"), an aggregate of approximately $1.6 million from Patrick J.
Dirk and Mary J. Dirk, as trustees of the Family Trust. The proceeds of the Dirk
Note were used for working capital purposes. The Dirk Note bore interest at a
rate of 7.0% per annum. We made payments to the Family Trust for the years ended
November 30, 1996, 1997 and 1998 in the amounts of $163,000, $349,000 and
$375,000, respectively. During 1998, the Dirk Note was paid off.

We lease a total of 77,000 square feet at our West Virginia facility from
Dirk Investments, Inc. Dirk Investments is wholly-owned by the Dirk
Stockholders. This lease expires on September 1, 2000 and provides for rent,
effective as of December 1997, of approximately $21,200 per month. Total rental
payments made by us for the years ended November 30, 1996, 1997 and 1998 were
approximately $158,000, $168,000 and $250,000 respectively. In 1993, Dirk
Investments secured loans to acquire and improve the West Virginia facility. One
loan, which had an original principal balance of $800,000 (the "WVEDA Loan"),
bears interest at a rate of 5.0% and is repayable over 20 years. The second loan
has a principal balance of $350,000, bears interest at an initial rate of 7.95%
for five years and thereafter, adjusted on an annual basis, at a rate equal to
the minimum national prime rate published in the Wall Street Journal plus 2%.
This second loan also has a term of twenty years. The third loan, which had an
original principal balance of $700,000, bears interest at an interest rate of
6.612% per year and is repayable in monthly installments through February 21,
2014. Troy Systems and Patrick and Mary Dirk guaranteed repayment of $500,000 of
the amounts outstanding under the WVEDA Loan. In June 1998, Troy Systems was
released from this guarantee.

We paid pro rata distributions to the Dirk Stockholders. In fiscal years
ended November 30, 1996, 1997 and 1998, these distributions totalled $118,000,
$2.6 million and $3.6 million, respectively.

We and the Dirk Stockholders are parties to a Tax Allocation and
Indemnification Agreement relating to our respective income tax liabilities. We
have agreed to indemnify the Dirk Stockholders for any adjustments causing an
increase in their federal and state income tax liability (including interest and
penalties) related to tax years prior to October 30, 1998, unless such
adjustments result in or are related to a corresponding decrease in their
federal and state income tax liability with respect to another S corporation
taxable year. Subject to certain limitations, this agreement also provides that
the Dirk Stockholders will reimburse us for any amounts refunded to them as a
result of the loss of the S corporation status of Troy or Troy Systems. Any
payment made by us to the Dirk Stockholders pursuant to this agreement may be
considered by the Internal Revenue Service or state taxing authorities to be
nondeductible by Troy or Troy Systems for income tax purposes.

All future transactions, including any loans from us to our officers,
directors, principal shareholders or affiliates, will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.

46
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership of
our Common Stock (a) by each stockholder who is known by us to own beneficially
more than 5% of the outstanding Common Stock; (b) by each director and director
nominee; (c) by each executive officer named in the Summary Compensation Table
under the heading "Executive Compensation;" and (d) by all our directors and
executive officers as a group, both before and after the Offering.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OWNERSHIP(1)
BENEFICIALLY ----------------------------------
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
Patrick J. Dirk(2)............................................. 5,692,857 74.2% 56.0%
Mary J. Dirk(2)................................................ 5,692,857 74.2 56.0
Brian P. Dirk(3)............................................... 503,752 6.5 4.9
Suzanne M. Anderson(4)......................................... 421,786 5.5 4.1
Kristine L. Gigerich(4)........................................ 421,786 5.5 4.1
Lorrie A. Brown(4)............................................. 421,786 5.5 4.1
Robert S. Messina(5)........................................... 244,990 3.1 2.4
Del L. Conrad.................................................. -- -- --
Norman B. Keider............................................... -- -- --
John B. Zaepfel................................................ -- -- --
William P. O'Reilly............................................ -- -- --
Gene A. Bier................................................... -- -- --
All directors and executive officers as a group (4
persons)(6).................................................. 6,441,599 80.5 61.4
</TABLE>

- ------------------------

(1) For the purpose of calculating the percentage beneficially owned, the number
of shares of Common Stock deemed outstanding "Before Offering" includes: (i)
7,671,430 shares of Common Stock outstanding as of February 28, 1999; and
(ii) shares of Common Stock subject to options held by the person or group
that are currently exercisable or exercisable within 60% days from the date
of this Prospectus ("Presently Exercisable Options"). The number of shares
of Common Stock deemed outstanding after this Offering includes an
additional 2,500,000 shares offered hereby. Except as otherwise indicated in
the footnotes to this table, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock listed as
beneficially owned by them. The address of the beneficial owners is 2331
South Pullman Street, Santa Ana, California 92705.

(2) Includes 5,692,857 shares of Common Stock held by Patrick J. and Mary J.
Dirk as trustees under the Family Trust. Excludes 120,000 shares of Common
Stock held by the trustee of The Dirk 1997 Education Trust ("Education
Trust"), 187,143 shares of Common Stock held by the trustees of the Dirk
1998 Alaska Trust ("Alaska Trust"), 375,000 shares of Common Stock held by
each of Brian P. Dirk and the three other adult children of Patrick J. and
Mary J. Dirk and 81,967 shares of Common Stock issuable upon exercise of
Presently Exercisable Options held by Brian P. Dirk.

(3) Includes 81,967 shares issuable under Presently Exercisable Options and
46,785 shares of Common Stock held by Mr. Brian Dirk as a trustee under the
Alaska Trust.

(4) Includes 46,786 shares of Common Stock held by such person as a trustee
under the Alaska Trust.

(5) Consists of shares issuable under Presently Exercisable Options.

(6) Includes an aggregate of 326,957 shares issuable under Presently Exercisable
Options.

47
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of consists of 50,000,000 shares of
Common Stock, $0.01 par value per share, and 5,000,000 shares of preferred stock
that are undesignated as to series. The following description of our capital
stock does not purport to be complete and is qualified by reference to our
Certificate of Incorporation and applicable law.

COMMON STOCK

As of February 28, 1999, there were 7,671,430 shares of Common Stock issued
and outstanding, held of record by twelve stockholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders and are not entitled to cumulate votes. The
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of legally available funds. Upon our
liquidation, dissolution or winding up, the holders of Common Stock are entitled
to share ratably in all assets that are legally available for distribution after
payment of all debts and other liabilities, subject to the prior rights of any
holders of preferred stock then outstanding. The holders of Common Stock have no
preemptive, subscription, redemption, sinking fund or conversion rights. All
outstanding shares of Common Stock are fully paid and nonassessable. The shares
of Common Stock to be issued upon completion of this Offering will also be fully
paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without action by the
stockholders, to designate and issue any authorized but unissued shares of
preferred stock in one or more series and to designate the rights, preferences
and privileges of each such series, any or all of which may be greater than the
rights of Common Stock. It is not possible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of holders of the
Common Stock until the Board of Directors determines the specific rights of the
holders of such shares. However, the effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock, impairing the liquidation rights of the Common Stock and delaying
or preventing a change in control of Troy without further action by the
stockholders. We have no present plans to issue any shares of preferred stock.

OPTIONS

As of February 28, 1999, we had outstanding options to purchase an aggregate
of 326,957 shares of Common Stock at a weighted average exercise price of $0.42
per share. These options are exercisable in full at various times through
November 25, 2006. All outstanding options provide for antidilution adjustments
in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in our
corporate structure. Upon consummation of this Offering, we intend to grant
options to purchase an aggregate of 530,000 shares of Common Stock to certain
officers, directors and employees. Such options will have an exercise price
equal to the initial public Offering price.

WARRANTS

Effective as of October 1, 1997, in connection with a consulting agreement
between Troy and Broadland Capital Partners, we issued Broadland a warrant to
purchase up to 300,000 shares of Common Stock at an exercise price of $3.50 per
share. The warrant was issued to Broadland for:

- assisting us in focusing our business plan and strategy in preparation for
a public offering;

- identifying and analyzing comparable companies;

- identifying and conducting due diligence on potential investment bankers;

48
<PAGE>

- assisting us in evaluating and negotiating with potential underwriters;

- assisting us in the public offering process, including participating in
drafting sessions, collecting information and preparing road show
strategies and materials;

- assisting us in preparing to become a public company, including advising
us regarding investment community expectations and introducing us to
potential market makers and research analysts;

- assisting us in identifying and negotiating with potential acquisition
candidates; and

- providing such other services in connection with this Offering as may be
requested from time to time.

As amended, the warrant will vest as to 100,000 shares upon Troy becoming
publicly owned and as to 200,000 shares upon certain acquisition transactions.
The warrants will expire five years after they vest. This warrant vested as to
50,000 shares upon completion of the acquisition of Troy XCD in October 1998.

In May 1998, in connection with legal services provided to us, we issued a
warrant to an individual to purchase up to 50,000 shares of Common Stock at an
exercise price of $3.50 per share. The warrant was issued to the individual for:

- assisting in drafting our offering and other legal documents in connection
with our initial public offering;

- assisting the Chief Executive Officer in the completion of the
underwriters' due diligence investigation;

- providing necessary legal opinions required by an underwriting agreement;
and

- providing such other services in connection with this Offering as
requested by the Chief Executive Officer from time to time.

In October 1998, we issued warrants to purchase 50,000 shares of Common
Stock to a consultant in connection with the acquisiton of Troy XCD. These
warrants have an exercise price of $7.00 per share.

REGISTRATION RIGHTS

Under the terms of its warrant, Broadland or its transferee are entitled to
have the shares of Common Stock issued upon exercise registered under the
Securities Act if registration is required by any governmental authority under
any federal or state law in connection with their issuance.

In connection with our acquisition of Troy XCD, we also granted registration
rights to the former XCD shareholders covering the 171,430 shares of our Common
Stock that they received in the transaction. Upon a majority demand of these
holders at any time after October 30, 1999, these registration rights require us
to register these shares of Common Stock under the Securities Act. If demand
registration does not occur for any reason, the holders are entitled to include
their shares in any registration statement that we file (other than those filed
with respect to acquisitions or employee benefit plans). We have no obligation
to register any of the shares issued in the Troy XCD acquisition if the holder
would have substantially the same opportunity to sell the shares under Rule 144
under the Securities Act or any other exemption from registration.

ANTI-TAKEOVER PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW

We are subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business

49
<PAGE>

combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, in the case of affiliates or associates of the
corporation, within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have anti-takeover effects with
respect to transactions not approved in advance by the Board of Directors, such
as discouraging takeover attempts that might result in a premium over the market
price of the Common Stock.

Our Certificate of Incorporation eliminates the right of stockholders to act
by written consent without a meeting unless such written consent is unanimous.
In addition, stockholders are not entitled to cumulative voting in the election
of directors. The authorization of preferred stock makes it possible for the
Board of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
Troy. The foregoing provisions of our Certificate of Incorporation and the
Delaware General Corporation Law may have the effect of deferring hostile
takeovers or delaying changes in control of management of Troy.

LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION

Our Certificate of Incorporation limits our directors' liability to the
fullest extent permitted under the Delaware General Corporation Law.
Specifically, our directors are not liable to us or our stockholders for
monetary damages for any breach of fiduciary duty by such a director, except for
liability for:

- any breach of the director's duty of loyalty to us or our stockholders,

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,

- corporate distributions, including dividends, stock distributions and
redemptions, which are in contravention of restrictions in Delaware law,
our Certificate of Incorporation or Bylaws, or any agreement to which we
are a party, and

- any transaction from which a director derives an improper personal
benefit.

This provision will generally not limit liability under state or federal
securities laws.

Delaware law and our Certificate of Incorporation provide that we shall,
under certain circumstances and subject to certain limitations, indemnify any
person made or threatened to be made a party to a proceeding by reason of that
person's former or present official capacity with Troy against judgments,
penalties, fines, settlements and reasonable expenses. Any such person is also
entitled, subject to certain limitations, to payment or reimbursement of
reasonable expenses in advance of the final disposition of the proceeding.

We have also entered into indemnification agreements with all of our
directors and executive officers. Under these agreements we have agreed to
indemnify and hold each harmless from and against any claims, liability, damages
or expenses incurred by them in or arising out of their status, capacities and
activities with respect to Troy to the maximum extent permitted by Delaware law.
We believe that these agreements are necessary to attract and retain qualified
persons as directors and executive officers.

TRANSFER AGENT AND REGISTRAR

U.S. Stock Transfer Corporation is our transfer agent and registrar.

50
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Following this Offering, we will have 10,171,430 shares of Common Stock
outstanding, assuming no options or warrants are exercised after February 28,
1999. All the shares we sell in this Offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares held by our affiliates, as that term is defined in Rule 144 under the
Securities Act may generally only be sold in compliance with the limitations of
Rule 144 described below.

The remaining 7,671,430 shares of Common Stock held by existing stockholders
are considered restricted under Rule 144. Generally, restricted securities that
have been owned for a period of at least two years may be sold immediately after
the completion of this Offering and restricted securities that have been owned
for at least one year may be sold 90 days after the completion of this Offering.
Holders of all of the restricted securities have entered into lock-up agreements
under which they have agreed not to sell any Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of the
underwriters' representatives. The representatives may, in their sole discretion
at any time without notice, release any portion of the shares subject to the
lock-up agreements during this period. Following expiration of the 180-day
period, of the restricted securities will be eligible for sale in the
public market without restriction. Volume limitations and other conditions of
Rule 144 will apply to public sale of the balance of the restricted shares
although certain holders have been granted registration rights which, if
exercised, would cause their shares to be registered and eligible for immediate
sale. Following this Offering, we also intend to file a Registration Statement
on Form S-8 covering shares issuable under our 1998 Plan and 1996 Plan, thus
permitting the resale of such shares by non-affiliates in the public market
without restriction under the Securities Act.

Because there has been no public market for shares of our Common Stock, we
are unable to predict the effect that sales made under Rule 144, pursuant to
future registration statements, or otherwise, may have on any then prevailing
market price for shares of the Common Stock. Nevertheless, sales of a
substantial amount of Common Stock in the public market, or the perception that
such sales could occur, could adversely affect market prices.

51
<PAGE>

UNDERWRITING

The underwriters named below, acting through their representatives,
Cruttenden Roth Incorporated and Josephthal & Co. Inc., have severally agreed
with us, subject to the terms and conditions of the underwriting agreement, to
purchase the number of shares of Common Stock opposite their names below. The
underwriters are obligated to purchase and pay for all such shares, subject to
certain legal matters and various other conditions.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Cruttenden Roth Incorporated...............................................
Josephthal & Co. Inc.......................................................
-----------------
Total......................................................................
-----------------
-----------------
</TABLE>

The representatives have advised us that they propose to offer the shares of
Common Stock to the public at the Offering price set forth on the cover page of
this prospectus. The underwriters may allow selected dealers (who may include
the underwriters) a concession not in excess of $ per share, and the
underwriters and such dealers may reallow a discount of not in excess of $ per
share to other dealers. After completion of the Offering, the public offering
price, concession and discount to dealers and other selling terms may be changed
by the representatives. The Common Stock is offered subject to receipt and
acceptance by the underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.

We have granted the underwriters an option to purchase up to 375,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this prospectus. This
option is exercisable for 30 days from the date of this Prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
be committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
underwriters may exercise such option solely to cover over-allotments, if any,
in the sale of the shares.

We have agreed to sell to the representatives, for nominal consideration, a
warrant representing the right to purchase shares of Common Stock equal to 10%
of the shares sold in this Offering, at an exercise price per share equal to
120% of the price per share to the public. The warrant is exercisable during the
period beginning one year after the date of this Prospectus and ending on the
fifth anniversary of the date of this prospectus. The warrant includes a net
exercise provision under which the holder may exercise the warrant by paying the
exercise price using shares of Common Stock issuable upon exercise of such
warrants valued at the fair market value at the time of the exercise. For one
year from the date of this Prospectus, the warrant is not transferable, except
to officers and stockholders of the representatives. The holders of the warrant
have certain limited rights or registration of the Common Stock issuable upon
exercise of the warrant. Any profits realized by the representatives upon the
sale of the warrant or the securities issuable upon its exercise may be deemed
additional underwriting compensation.

The underwriting agreement provides that we will indemnify the underwriters
and their controlling persons against certain liabilities under the Securities
Act or will contribute to payments the underwriters and their controlling
persons may be required to make in respect thereof. We are generally obligated
to indemnify the underwriters and their respective controlling persons in
connection with losses or claims

52
<PAGE>

arising out of any untrue statement of a material fact contained in this
Prospectus or in related documents filed with the Securities and Exchange
Commission or with any state securities administrator or arising out of any
omission to state in any of such documents any material fact required to be
stated in such documents or necessary to make the statements made in such
documents, in light of the circumstances under which they were made, not
misleading. In addition, we are generally obligated to indemnify the
underwriters and their respective controlling persons in connection with losses
or claims arising out of any breach of any of our representations, warranties,
agreements or covenants contained in the underwriting agreement.

The foregoing is a summary of the principal terms of the underwriting
agreement; it does not purport to be complete and is qualified in its entirety
by reference to the form of underwriting agreement that has been filed as an
exhibit to our Registration Statement of which this Prospectus is a part.

We and each of our existing stockholders have agreed not to, without the
prior written consent of Cruttenden Roth Incorporated, directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
as amended, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock, currently owned or
later acquired either of record or beneficially (as defined in Rule 13d-3 under
the Exchange Act) by us, or publicly announce our intention to do any of the
foregoing, for a period of 180 days after the date of this Prospectus.

The representatives have advised us that the underwriters do not intend to
confirm sales of Common Stock offered by this Prospectus to any account on which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered by this Prospectus.

In order to facilitate the offering of the Common Stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the underwriters may over-allot in
connection with this offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the underwriters may bid for, and purchase, shares of
the Common Stock in the open market. The underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in this Offering, if the underwriters repurchase previously distributed
Common Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the underwriters may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the Common
Stock above market levels that may otherwise prevail. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise, and if commenced, may be discontinued at any time. The underwriters
are not required to engage in these activities, and may end any of these
activities at any time.

Before this Offering, no public market for our securities has existed. The
initial public offering price for the Common Stock will be determined by
negotiations among us and the representatives. The factors to be considered in
determining the initial public offering price will include our history and the
prospects for our business and the industry in which we operate, our past and
present operating results and the trends of such results, our future prospects,
an assessment of management, the general condition of the securities markets at
the time of the offering and the prices for similar securities of comparable
companies.

53
<PAGE>
LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for us
by Oppenheimer Wolff & Donnelly LLP, San Jose, California. Certain legal matters
relating to this Offering will be passed upon for the underwriters by Morris,
Manning & Martin, L.L.P., Atlanta, Georgia.

EXPERTS

Our financial statements as of November 30, 1997 and 1998, and for each of
the three years in the period ended November 30, 1998 and the financial
statements of XCD Incorporated as of September 30, 1998 and for the nine months
then ended included in this Prospectus and Registration Statement have been
audited by McGladrey & Pullen, LLP, independent auditors, as set forth in their
reports appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given on the authority of such firm as
experts in accounting and auditing.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission, a Registration
Statement under the Securities Act with respect to the shares of Common Stock
that we are offering. This Prospectus does not contain all the information that
is set forth in the Registration Statement and the related exhibits and
schedules. For further information regarding Troy and our Common Stock,
reference is made to the Registration Statement and to its exhibits and
schedules. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
by such reference. A copy of the Registration Statement may be inspected without
charge at the SEC's offices at 450 Fifth Street, N.W., Washington D.C. 20549,
and at the SEC's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of all or any part of the Registration Statement may be
obtained from the SEC's Public Reference Section in Washington D.C., upon the
payment of prescribed fees. The SEC maintains a Web site (http://www.sec.gov)
that contains reports, proxy statements and other information that has been or
will be filed by us.

We intend to furnish holders of the Common Stock with future annual reports
containing audited financial statements certified by independent auditors, and
future quarterly reports for each of the first three quarters of each year
containing unaudited financial information.

54
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TROY GROUP, INC.
- -----------------------------------------------------------------------------------------------------------

Independent auditor's report............................................................................. F-2

Consolidated balance sheets.............................................................................. F-3

Consolidated statements of operations.................................................................... F-4

Consolidated statements of stockholders' equity.......................................................... F-5

Consolidated statements of cash flows.................................................................... F-6

Notes to consolidated financial statements............................................................... F-7

Independent auditor's report on the schedule............................................................. F-19

Schedule II--valuation and qualifying account............................................................ F-20

XCD INCORPORATED

Independent auditor's report............................................................................. F-21

Consolidated balance sheet............................................................................... F-22

Consolidated statement of income......................................................................... F-23

Consolidated statement of stockholders' equity........................................................... F-24

Consolidated statement of cash flows..................................................................... F-25

Notes to consolidated financial statements............................................................... F-26
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS

To the Board of Directors
Troy Group, Inc.
Santa Ana, California

We have audited the accompanying consolidated balance sheets of Troy Group,
Inc. and subsidiaries as of November 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended November 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Troy Group,
Inc. and subsidiaries as of November 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1998, in conformity with generally accepted accounting principles.

McGLADREY & PULLEN, LLP

Anaheim, California
January 6, 1999

F-2
<PAGE>

TROY GROUP, INC

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------- FEBRUARY 28,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(Unaudited)
ASSETS

Current assets:
Cash.............................................................. $ 100,000 $ 308,000 $ 28,000
Accounts receivable, less allowance for doubtful accounts 1997
$164,000; 1998 140,000; 1999 $145,000........................... 5,509,000 6,379,000 7,514,000
Income tax refund receivable...................................... -- 319,000 --
Inventories....................................................... 3,831,000 5,783,000 5,940,000
Prepaid expenses and other........................................ 254,000 50,000 56,000
Deferred tax assets............................................... -- 766,000 766,000
------------- ------------- -------------
Total current assets.......................................... 9,694,000 13,605,000 14,304,000

Equipment and leasehold improvements, net........................... 1,500,000 1,905,000 1,862,000

Other assets........................................................ 555,000 3,408,000 3,420,000
------------- ------------- -------------
Total assets.................................................. $ 11,749,000 $ 18,918,000 $ 19,586,000
------------- ------------- -------------
------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Checks issued not yet presented for payment....................... $ 173,000 $ 42,000 $ 539,000
Note payable...................................................... -- 1,190,000 496,000
Current portion of long-term debt................................. 754,000 959,000 959,000
Accounts payable.................................................. 1,670,000 2,868,000 2,715,000
Accrued expenses.................................................. 1,724,000 2,544,000 1,761,000
Income taxes payable.............................................. -- -- 394,000
Deferred service revenue.......................................... 200,000 196,000 218,000
------------- ------------- -------------
Total current liabilities..................................... 4,521,000 7,799,000 7,082,000
------------- ------------- -------------
Long-term debt, net of current portion (including $375,000 in 1997
payable to the majority stockholder).............................. 1,280,000 2,374,000 2,804,000
------------- ------------- -------------
Deferred tax liabilities -- 480,000 480,000
------------- ------------- -------------
Commitments and contingencies

Stockholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000
shares, issued 1997 7,500,000 shares; 1998 and 1999 7,671,430
shares.......................................................... 75,000 77,000 77,000
Preferred stock, no par value, authorized 5,000,000 shares, issued
none............................................................ -- -- --
Additional paid-in capital........................................ 247,000 1,724,000 1,724,000
Retained earnings................................................. 5,626,000 6,464,000 7,419,000
------------- ------------- -------------
Total stockholders' equity.................................... 5,948,000 8,265,000 9,220,000
------------- ------------- -------------
Total liabilities and stockholders' equity.................... $ 11,749,000 $ 18,918,000 $ 19,586,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE>

TROY GROUP, INC

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, FEBRUARY 28,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Net sales............................... $ 28,161,000 $ 33,434,000 $ 35,758,000 $ 8,928,000 $ 11,400,000

Cost of goods sold, (including:
$158,000; $168,000; $250,000 $64,000;
and $67,000 in rent paid to majority
stockholders)......................... 17,408,000 19,597,000 21,496,000 5,358,000 6,799,000
------------ ------------ ------------ ------------ ------------
Gross profit...................... 10,753,000 13,837,000 14,262,000 3,570,000 4,601,000
------------ ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative... 5,234,000 6,622,000 6,394,000 1,578,000 2,121,000
Research and development.............. 2,041,000 2,521,000 2,546,000 630,000 810,000
Purchased in process research and
development......................... -- -- 857,000 -- --
------------ ------------ ------------ ------------ ------------
7,275,000 9,143,000 9,797,000 2,208,000 2,931,000
------------ ------------ ------------ ------------ ------------
Operating income.................. 3,478,000 4,694,000 4,465,000 1,362,000 1,670,000

Interest expense, (including $61,000;
$33,000; $11,000; $6,000; and none
paid to majority stockholders) 361,000 262,000 101,000 39,000 78,000
------------ ------------ ------------ ------------ ------------
Income before income taxes
(credit)........................ 3,117,000 4,432,000 4,364,000 1,323,000 1,592,000

Provision for income taxes (credit)..... 50,000 35,000 (70,000) 20,000 637,000
------------ ------------ ------------ ------------ ------------
Net income........................ $ 3,067,000 $ 4,397,000 $ 4,434,000 $ 1,303,000 $ 955,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma net income (unaudited):
Historical income before income
taxes............................... $ 3,117,000 $ 4,432,000 $ 4,364,000 $ 1,323,000
Pro forma provision for income
taxes............................... 1,247,000 1,773,000 1,993,000 529,000
------------ ------------ ------------ ------------
Pro forma net income.............. $ 1,870,000 $ 2,659,000 $ 2,371,000 $ 794,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per share:
Basic (1996, 1997 and 1998 pro
forma).............................. $ 0.25 $ 0.35 $ 0.32 $ 0.11 $ 0.12
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted (1996, 1997 and 1998 pro
forma).............................. $ 0.25 $ 0.34 $ 0.31 $ 0.10 $ 0.12
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted-average shares outstanding:
Basic................................. 7,500,000 7,500,000 7,514,000 7,500,000 7,671,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted............................... 7,500,000 7,759,000 7,745,000 7,812,000 8,002,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>

TROY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1995.............. 7,500,000 $ 75,000 $ 247,000 $ 831,000 $ 1,153,000
Dividends............................. -- -- -- (118,000) (118,000)
Net income............................ -- -- -- 3,067,000 3,067,000
----------- ------------- ------------- ------------- -------------
Balance, November 30, 1996.............. 7,500,000 75,000 247,000 3,780,000 4,102,000
Dividends............................. -- -- -- (2,551,000) (2,551,000)
Net income............................ -- -- -- 4,397,000 4,397,000
----------- ------------- ------------- ------------- -------------
Balance, November 30, 1997.............. 7,500,000 75,000 247,000 5,626,000 5,948,000
Issuance of common stock.............. 171,430 2,000 1,198,000 -- 1,200,000
Issuance of common stock warrants..... -- -- 279,000 -- 279,000
Dividends............................. -- -- -- (3,596,000) (3,596,000)
Net income............................ -- -- -- 4,434,000 4,434,000
----------- ------------- ------------- ------------- -------------
Balance, November 30, 1998.............. 7,671,430 77,000 1,724,000 6,464,000 8,265,000
Net income (unaudited)................ -- -- -- 955,000 955,000
----------- ------------- ------------- ------------- -------------
Balance February 28, 1999 (unaudited)... 7,671,430 $ 77,000 $ 1,724,000 $ 7,419,000 $ 9,220,000
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE>

TROY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, THREE MONTHS ENDED
---------------------------------------- FEBRUARY 28,
1996 1997 1998 --------------------------
------------ ------------ ------------ 1998 1999
------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 3,067,000 $ 4,397,000 $ 4,434,000 $ 1,303,000 $ 955,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 680,000 617,000 682,000 161,000 224,000
Purchased in process research and
development.......................... -- -- 857,000 -- --
Provision for doubtful accounts........ 209,000 65,000 134,000 3,000 3,000
Deferred taxes......................... -- -- (77,000) -- --
Changes in working capital components,
net of effects from purchase of Troy
XCD, Inc.
(Increase) decrease in:
Accounts receivable................ (1,738,000) (369,000) (16,000) (896,000) (1,138,000)
Income tax refund receivable....... -- -- (211,000) -- 319,000
Inventories........................ (517,000) 404,000 (1,209,000) 34,000 (157,000)
Prepaid expenses and other......... (17,000) (125,000) 244,000 (48,000) (6,000)
Increase (decrease) in:
Accounts payable................... 616,000 227,000 894,000 245,000 (153,000)
Accrued expenses................... (142,000) 346,000 (1,125,000) (560,000) (783,000)
Income taxes payable............... -- -- -- -- 394,000
Deferred service revenue........... (104,000) 10,000 (4,000) 10,000 22,000
------------ ------------ ------------ ------------- -----------
Net cash provided by (used in)
operating activities............... 2,054,000 5,572,000 4,603,000 252,000 (320,000)
------------ ------------ ------------ ------------- -----------
Cash flows from investing activities:
Purchase of Troy XCD, Inc................ -- -- (1,638,000) -- --
Purchase of equipment and leasehold
improvements........................... (301,000) (197,000) (917,000) (15,000) (136,000)
Increase in other assets................. (1,000) (561,000) (802,000) (6,000) (57,000)
------------ ------------ ------------ ------------- -----------
Net cash (used in) investing
activities......................... (302,000) (758,000) (3,357,000) (21,000) (193,000)
------------ ------------ ------------ ------------- -----------
Cash flows from financing activities:
Borrowings on notes payable.............. 12,875,000 17,498,000 10,291,000 2,867,000 5,503,000
Payments on notes payable................ (13,143,000) (19,110,000) (9,101,000) (2,554,000) (6,197,000)
Proceeds from issuance of debt........... -- 1,000,000 2,876,000 -- 670,000
Principal payments on debt............... (848,000) (1,175,000) (1,577,000) (443,000) (240,000)
Payments on life insurance loans......... -- (201,000) -- -- --
Increase (decrease) in checks issued not
presented for payment.................. (476,000) (217,000) (131,000) 295,000 497,000
Dividends paid........................... (118,000) (2,551,000) (3,396,000) (496,000) --
------------ ------------ ------------ ------------- -----------
Net cash provided by (used in)
financing activities............... (1,710,000) (4,756,000) (1,038,000) (331,000) 233,000
------------ ------------ ------------ ------------- -----------
Net increase (decrease) in cash...... 42,000 58,000 208,000 (100,000) (280,000)
Cash, beginning of period.................. -- $ 42,000 100,000 100,000 308,000
------------ ------------ ------------ ------------- -----------
Cash, end of period........................ $ 42,000 $ 100,000 $ 308,000 $ -- $ 28,000
------------ ------------ ------------ ------------- -----------
------------ ------------ ------------ ------------- -----------
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

The Company is a leading worldwide provider of enterprise output solutions
that enable organizations to electronically transmit and output information
across distributed computing environments. The Company provides connectivity and
output enhancement solutions to over 9,000 customers, including many of the
Fortune 1,000 Companies. The Company's connectivity products include software,
firmware and hardware that enable output devices such as printers and fax
machines to better communicate over networks and the Internet. The Company's
output enhancement products include software, firmware, hardware and imaging
supplies that enhance the functionality of these output devices.

REORGANIZATION

In May of 1998, the Company and Troy Systems International, Inc. entered
into a restructuring and reorganization arrangement. Prior to that date, these
two companies had common ownership. As a result of the restructuring and
reorganization; (i) the Company reincorporated in Delaware; (ii) Troy Systems
International, Inc. became a wholly-owned subsidiary of Troy Group, Inc. and the
former stockholders of Troy Systems International, Inc. received shares of Troy
Group, Inc.; and (iii) the Company effected a 910.7468-for-one stock split. This
reorganization has been accounted for as if it occurred as of the beginning of
the earliest period presented in these consolidated financial statements. The
reporting entity includes the consolidated financial statements of Troy Group,
Inc., Troy Systems International, Inc. (the "Subsidiary") and Dirk Worldwide,
Inc., a foreign sales corporation (FSC) previously owned by the individual
retirement accounts of the stockholders. The FSC is included in these
consolidated financial statements because it provided an integral function in
the Troy Group's tax strategies and on July 14, 1998, the stockholders of the
FSC contributed their stock to Troy Group, Inc. In addition, the reporting
entity includes the results of Troy XCD, Inc. since the date of its acquisition
(see Note 2).

A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:

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 period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries. All material intercompany balances
and transactions are eliminated in consolidation.

CHECKS ISSUED NOT YET PRESENTED FOR PAYMENT

Through the use of concentration accounts, the Company's cash is accumulated
daily and applied to the outstanding balance of the revolving line of credit
(Note 6). Under this program, idle funds are minimized. The Company's liquidity
is thereby maintained in the form of its ability to draw funds against the
revolving line of credit. All checks issued not yet presented for payment are
classified as a liability.

F-7
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost. Equipment is
depreciated using the straight-line method over their estimated useful lives,
currently five years. Improvements to leased property are amortized over the
lesser of the life of the lease or life of the improvements.

INTANGIBLE ASSETS

Intangible assets consists of customer lists, core technology, assembled
workforce and goodwill which are being amortized on a straight line basis over 5
to 15 years.

REVENUE RECOGNITION

The Company recognizes revenue when goods are shipped to the customer.
Service revenue is recognized over the period of the contract on a straight-line
basis.

PRODUCT RETURNS AND WARRANTIES

The Company records a provision for estimated product returns and warranties
at the time the revenue is recognized.

ADVERTISING POLICY

The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was approximately $164,000, $94,000
and $84,000 in fiscal years 1996, 1997 and 1998, respectively, net of marketing
development funds received from a supplier of $30,000 in fiscal year 1996. There
were no marketing development funds received in fiscal years 1997 and 1998.

RESEARCH AND DEVELOPMENT POLICY

The Company expenses research and development costs as they are incurred.
The Company incurs research and development costs in developing new products.

INCOME TAXES

For the eleven months ended October 31, 1998 and for the years ended
November 30, 1997 and 1996, and prior years, the Company, with the consent of
its stockholders, elected to be taxed under sections of federal and state income
tax law, which provide that, in lieu of corporation income taxes, the
stockholders separately account for their pro rata shares of the Company's
income, deductions, losses and credits. The Company's stockholders terminated
this election effective as of October 30, 1998.

Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences

F-8
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to fair value of the shares to be received at the measurement date.
Nonemployee stock-based transactions are accounted for under the requirements of
Statement No. 123 "Accounting for Stock Based Compensation" which requires
compensation to be recorded based on
the fair value of the securities issued or the services received, whichever is
more reliably measurable.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash, accounts receivable,
accounts payable and notes payable. The book value of these instruments are
considered to be representative of their fair value.

PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS

The Company terminated the S corporation election for itself and its
subsidiary effective as of October 30, 1998. The pro forma statement of
operations information included in these financial statements is to show what
the significant effects might have been on the historical statements of
operations had the Company and its subsidiary not been treated as S corporations
for income tax purposes. The pro forma information reflects a provision for
income taxes at an effective rate of 40% in the fiscal years ended November 30,
1996, 1997 and 1998, after giving effect in 1998 to the nondeductibility of
purchased in process research and development and the nontaxability of the
increase in the cash surrender value of officer life insurance. The pro forma
net income per share is based on the weighted average number of shares of common
stock outstanding during the period.

EARNINGS PER SHARE

Basic EPS is computed as net income divided by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options
(none, 259,000 and 231,000 shares in the fiscal year ended November 30, 1996,
1997 and 1998, respectively; and 312,000 shares and 331,000 shares in the three
months ended February 28, 1998 and 1999, respectively). Diluted EPS does not
include contingently issuable options because the conditions for issuance have
not been met. The dilutive effect of options which were not included in the
total of diluted shares for 1998 because the effect was antidilutive was 63,000
shares.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period

F-9
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 1. NATURE OF BUSINESS, REORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.

In October 1997, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The SOP is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Management of the Company does not believe the adoption of SOP 97-2 will have a
material effect on the Company's consolidated financial statements.

RECLASSIFICATION

Certain reclassifications have been made to the 1997 consolidated balance
sheet to conform to the 1998 presentation with no effect on stockholder's equity
or net income.

UNAUDITED INTERIM FINANCIAL INFORMATION

The interim financial information presented herein as of and for the three
months ended February 28, 1998 and 1999 reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation for the periods
presented. Such adjustments are of a normal recurring nature. The interim
financial information is not intended to be a complete presentation in
accordance with generally accepted accounting principles. The February 28, 1999
interim financial statements are not necessarily indicative of the results in
the entire fiscal year ending November 30, 1999, or any subsequent period.

NOTE 2. BUSINESS COMBINATION

On October 30, 1998, the Company acquired all of the outstanding shares of
Troy XCD Inc. (formerly XCD Incorporated), a manufacturer of print server
hardware and firmware in exchange for 171,430 shares of $.01 par value common
stock and $1,550,000 in cash. The total acquisition cost was $3,117,000 and was
allocated as follows:

<TABLE>
<S> <C>
Current assets, including $663,000 of deferred tax assets....... $2,568,000
Equipment and leasehold improvements............................ 155,000
Customer list................................................... 100,000
Core technology................................................. 953,000
Assembled workforce............................................. 150,000
Purchased in process research and development................... 857,000
Current liabilities assumed..................................... (2,049,000)
Long-term deferred tax liability................................ (480,000)
Goodwill........................................................ 863,000
----------
$3,117,000
----------
----------
</TABLE>

F-10
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 2. BUSINESS COMBINATION (CONTINUED)

The acquisition has been accounted for as a purchase and results of
operations of Troy XCD, Inc. since the date of acquisition are included in the
consolidated financial statements.

Unaudited pro forma consolidated results of operations for the years ended
November 30, 1997 and 1998 as though Troy XCD, Inc. had been acquired as of
December 1, 1996 after giving effect of the termination of the Company's
subchapter S election are as follows:

<TABLE>
<CAPTION>
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Sales.......................................................... $ 39,159,000 $ 40,828,000
Pro forma net income........................................... 2,567,000 1,972,000
Pro forma net income per share:
Basic........................................................ 0.33 0.26
Diluted...................................................... 0.32 0.25
</TABLE>

The above amounts reflect pro forma adjustments for amortization of
intangibles, the elimination of the charge for purchased in process research and
development, interest expense and number of shares outstanding. This pro forma
financial information does not purport to be indicative of the results of
operations had the Troy XCD, Inc. acquisition actually taken place at the
earlier date.

PURCHASED IN PROCESS RESEARCH AND DEVELOPMENT

On October 30, 1998, Troy XCD, Inc. had 16 research and development projects
in process. These projects included the development of hardware, software and
firmware for interface cards, print servers and printing over the internet to
remote locations. Troy assigned value to each of these projects using an income
approach methodology. A number of factors were used to determine value including
the assignment of probability to the projected product revenue streams,
estimated gross margin contributions, and estimated stage of completion. Of
these 16 projects, four accounted for over ninety-five percent of the value
assigned to the in process research and development. A summary of these projects
is as follows:

<TABLE>
<CAPTION>
IN-PROCESS
ESTIMATED ANTICIPATED RESEARCH AND
NO. COSTS COST TO COMPLETION DEVELOPMENT
-- NATURE INCURRED COMPLETE DATE VALUE
------------------------------------------------------ ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 Ethernet interface card............................... $ 143,000 $ 13,000 Dec. 1998 $ 453,000

2 Print server hardware and firmware.................... 26,000 9,000 March 1999 254,000

3 Data Products firmware................................ 53,000 31,000 Sept. 1999 63,000

4 Internet firmware and software........................ 90,000 130,000 Dec. 1999 66,000

5 Others, twelve projects............................... Various Various Various 21,000
------------

$ 857,000
------------
------------
</TABLE>

F-11
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 2. BUSINESS COMBINATION (CONTINUED)

PROJECT NUMBER 1--XCD was in the process of developing an ethernet interface
card with features that include a graphical interface, custom e-mail filter for
internet printing, and multilanguage support for management utilities. XCD was
completing the graphical interface and debugging the ethernet interface card.
Once completed, various regulatory approvals will be required.

PROJECT NUMBER 2--XCD was in the process of developing print server hardware
and firmware for a Hewlett-Packard family of EIO printers which will have DEC
LAT and Banyan VINES protocol support. The design and layout of the printed
circuit board and testing needed to be completed.

PROJECT NUMBER 3--XCD was in the process of developing modification features
for project number 1, the ethernet interface card, including specific virtual
printer functions and status commands, pass-through functions for control files,
and programming via the PCI bus. This product was at an untested prototype
stage.

PROJECT NUMBER 4--XCD was in the process of developing firmware and software
that would allow the printing of jobs via the internet from one location to
another with increased levels of print quality and color. The company was in the
process of developing new security and printing protocols.

If the above projects are not completed timely, the Company would miss
future opportunities and could lose existing customers and market share.

NOTE 3. INVENTORIES

Inventories consisted of the following as of November 30, 1997 and 1998 and
February 28, 1999:

<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials....................................... $ 2,188,000 $ 3,954,000 $ 4,160,000
Work-in-process..................................... 470,000 495,000 433,000
Finished goods...................................... 1,173,000 1,334,000 1,347,000
------------ ------------ ------------
$ 3,831,000 $ 5,783,000 $ 5,940,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

NOTE 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consisted of the following as of
November 30:

<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Machinery and equipment........................................... $ 5,063,000 $ 5,957,000
Furniture and fixtures............................................ 304,000 646,000
Leasehold improvements............................................ 1,202,000 1,135,000
------------ ------------
6,569,000 7,738,000
Less accumulated depreciation and amortization.................... 5,069,000 5,833,000
------------ ------------
$ 1,500,000 $ 1,905,000
------------ ------------
------------ ------------
</TABLE>

F-12
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 5. OTHER ASSETS

Other assets consisted of the following as of November 30:

<TABLE>
<CAPTION>
1997 1998
---------- ------------
<S> <C> <C>
Intangible assets, net of accumulated amortization of $15,000....... $ -- $ 2,051,000
Deferred stock offering costs....................................... -- 502,000
Cash surrender value of officers life insurance..................... 446,000 814,000
Other............................................................... 109,000 41,000
---------- ------------
$ 555,000 $ 3,408,000
---------- ------------
---------- ------------
</TABLE>

NOTE 6. NOTE PAYABLE

The Company has a $5,000,000 line-of-credit agreement with a bank. As of
November 30, 1998, there was $1,190,000 in borrowings outstanding against the
line of credit. Borrowings bear interest at the lesser of the bank's reference
rate (7.75% at November 30, 1998) less 0.25% or the bank's LIBOR rate (5.62% at
November 30, 1998) plus 2% and are limited to 80% of eligible accounts
receivable and 50% of eligible inventories. The agreement may be terminated by
either party. In connection with the line-of-credit agreement, the Company has a
$500,000 standby letter-of-credit sublimit agreement of which approximately
$300,000 was outstanding at November 30, 1998. This line of credit is secured by
substantially all of the Company's assets. In connection with its borrowing
arrangements, the Company is subject to certain financial covenants (see Note
9). As of November 30, 1998, the Company had approximately $3,500,000 in
availability under this line of credit.

NOTE 7. LONG-TERM DEBT

Long-term debt consisted of the following as of November 30, 1998:

<TABLE>
<S> <C>
Notes payable, bank............................................. $2,876,000
4% economic development note payable............................ 359,000
5% industrial and business development note payable............. 98,000
---------
3,333,000
Less current maturities......................................... 959,000
---------
$2,374,000
---------
---------
</TABLE>

Notes payable, bank, bear interest based on the bank's reference rate (7.75%
as of November 30, 1998) and the bank's reference rate plus 0.50%, mature
through 2003; and are secured by substantially all assets. One note contains a
provision for personal guarantees by the majority stockholders if total
liabilities to tangible effective net worth is greater than two to one. Another
note is subject to certain financial covenants (see Note 9). During the three
months ended February 28 1999, the Company borrowed an additional $670,000 under
these same terms.

The economic, industrial and business development notes payable mature
through 2005. The notes are secured by certain equipment and the personal
guarantees of the majority stockholders of the Company. One of the notes is
secured by a fourth trust deed on real property owned by a company related
through common ownership to the majority stockholders.

F-13
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 7. LONG-TERM DEBT (CONTINUED)

As of November 30, 1998, future maturities of long-term debt are as follows:
1999 $959,000; 2000 $911,000; 2001 $667,000; 2002 $599,000; 2003 $72,000;
thereafter $125,000

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following as of November 30, 1997 and
1998:

<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Compensation...................................................... $ 1,539,000 $ 1,868,000
Other............................................................. 185,000 676,000
------------ ------------
$ 1,724,000 $ 2,544,000
------------ ------------
------------ ------------
</TABLE>

NOTE 9. STOCKHOLDERS' EQUITY

PREFERRED STOCK

STOCK OPTION PLAN

The Company has reserved 1,564,298 shares for issuance under the Company's
1998 Stock Incentive Plan and 1996 Stock Option Plan, of which 326,957 shares
are subject to outstanding options as of November 30, 1998. Option prices for
the incentive stock options will be 100% of the fair market value of the stock
on the date the option is granted. For incentive options granted to 10% or more
stockholders, the option price is 110% of the fair market value of the stock on
the date the option is granted. Option prices for the nonqualified stock options
shall not be less than 85% of the fair market value of the stock on the date the
options are granted. In fiscal year 1996, Troy granted options to acquire
326,957 shares at a weighted-average option price of $0.42 per share. The
options vest over five to ten years from the grant date. Vesting will accelerate
upon the sale of more than 51% of the issued and outstanding shares of the
Company's voting common stock or upon the conversion of Troy to a public
company. There were no options granted in fiscal year 1997 and 1998 and no
options have been exercised or expired in fiscal years 1997 or 1998. There are
no options exercisable as of November 30, 1997 or 1998. In connection with the
acquisition of Troy XCD, Inc., the Company has committed to grant options to
acquire a total of 150,000 shares to five individuals upon the conversion of the
Company to a public company at the same price per share as the initial price of
the stock to the public.

As permitted under generally accepted accounting principles, grants under
these plans to employees are accounted for following APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for grants under the stock option plan. Had compensation cost been determined
based on the minimum fair value method prescribed in FASB Statement No. 123,
fiscal year 1997 and 1998 net income after the pro forma provision for income
taxes and the related basic and diluted pro forma net income per share would
have been reduced to $2,653,000, $0.35 and $0.34 and $1,722,000, $0.23 and
$0.22, respectively. In determining the pro forma amounts above, the value of
each grant is

F-14
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)

estimated at the grant date using the minimum fair value method prescribed in
Statement No. 123, with the following weighted-average assumptions for grants in
fiscal year 1996: no dividends for all years, risk-free interest rate of 5.86%
and 5.98%, expected lives of 5 and 10 years, and expected amounts to be
exercised of 100%. The weighted average fair value of the options granted in
fiscal year 1996 was $0.16 per share.

STOCK WARRANTS

On October 1, 1997 and as amended on December 30, 1998, the Company issued
warrants to a consultant to purchase up to 300,000 shares of common stock of the
Company at $3.50 per share. The warrants vest upon the occurrence of two
separate performance conditions. Warrants to purchase 100,000 shares will vest
upon the Company becoming publicly owned and 200,000 will vest upon certain
acquisition transactions. The effect of the warrants will be recorded as the
performance conditions are met at the then current fair value of the warrants
vested. The warrants expire five years after vesting. In connection with the
acquisition of Troy XCD, Inc., the Company issued warrants to purchase 50,000
shares of common stock under the acquisition criteria and recorded $210,000 in
connection with the purchase of Troy XCD, Inc. (Note 2). On October 30, 1998,
the Company issued warrants to a consultant of the Company to purchase 50,000
shares of common stock at $7.00 per share and recorded $69,000 in connection
with the purchase of Troy XCD, Inc. (Note 2). The warrants expire five years
from the date granted. Effective in May 1998, in connection with legal services
being provided in connection with an offering of the Company's common stock, the
Company issued a warrant to purchase up to 50,000 shares of common stock of the
Company at $3.50 per share. The effect of the warrants will be recorded when the
performance condition is met at the then current fair value of the warrant
vested. The warrant expires five years after it vesting.

EMPLOYEE STOCK PURCHASE PLAN

The Company has adopted a stock purchase plan covering substantially all
employees and has reserved 200,000 shares for issuance under this plan. No
shares can be purchased until a registration of the Company's common stock is
declared effective.

RETAINED EARNINGS

The Company and its subsidiary are limited by the terms of certain debt
agreements to pay dividends up to the amount necessary for the stockholders to
pay their pro rata share of income taxes on the Company's income.

NOTE 10. LEASE COMMITMENTS AND RENT EXPENSE

The Company leases its operating facilities under noncancelable operating
lease agreements, one of which is with a company related through common
ownership (see Note 11). Rent expense in fiscal years 1996, 1997 and 1998 was
approximately $288,000, $352,000 and $414,000 respectively. Future minimum
rental commitments under these leases in the fiscal years ending November 30 are
as follows: 1999 $528,000; 2000 $464,000; 2001 $195,000; 2002 $117,000; 2003
$39,000 (total $1,343,000 of which $445,000 is to the related party).

F-15
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 11. RELATED PARTY TRANSACTIONS AND GUARANTEE OF INDEBTEDNESS

In fiscal year 1993, the Company entered into an agreement to lease
operating facilities from a company related through common ownership. The
agreement expires in September 2000 and requires monthly payments of
approximately $21,200.

The Company's obligations under its term loan with a bank, contains a
provision for guarantees by the majority stockholders if total liabilities to
tangible effective net worth is greater then two to one.

In fiscal years 1996, 1997 and 1998, the Company made principal payments on
the notes payable to stockholders of $175,000, $373,000 and $375,000
respectively.

NOTE 12. INCOME TAX MATTERS

As a result of the October 30, 1998 S corporation election termination, on
that date the Company recorded a net deferred tax asset of $103,000 by a credit
to income tax expense for temporary differences between the reported amounts of
assets and liabilities and their tax bases.

Deferred taxes charged to income during 1998 consisted of the following:

<TABLE>
<S> <C>
Effect of change in tax status.................................................. $(103,000)
Change in net deferred tax asset................................................ 26,000
---------
$ (77,000)
---------
---------
</TABLE>

Net deferred tax assets consist of the following components as of November
30, 1998:

<TABLE>
<S> <C>
Deferred tax liabilities:
Receivable allowance and valuation............................................ $(275,000)
Customer list, core technology and assembled workforce........................ (480,000)
---------
(755,000)
---------
Deferred tax assets:
Inventories valuation......................................................... 305,000
Accrued compensation.......................................................... 465,000
Accrued warranty and other.................................................... 49,000
Equipment and leasehold improvements.......................................... 29,000
Net operating loss carryforward............................................... 222,000
---------
1,070,000
---------
Net deferred tax assets..................................................... $ 315,000
---------
---------
</TABLE>

The net deferred tax assets have been classified on the accompanying
consolidated balance sheet as of November 30, 1998 as follows:

<TABLE>
<S> <C>
Current assets.................................................................. $ 766,000
Noncurrent assets............................................................... 29,000
Long-term liabilities........................................................... (480,000)
---------
$ 315,000
---------
---------
</TABLE>

F-16
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 12. INCOME TAX MATTERS (CONTINUED)

The Company has net operating loss carryforwards of $500,000 for federal
income tax purposes and $100,000 for state income tax purposes expiring in 2018
and 2003, respectively.

The provision for income tax (credits) charged to operations for 1998
consists of the following:

<TABLE>
<S> <C>
Current tax..................................................................... $ 7,000
Deferred tax benefit............................................................ (77,000)
---------
$ (70,000)
---------
---------
</TABLE>

The historical income tax provisions differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax income for
1998 due to the following:

<TABLE>
<S> <C>
Computed "expected" tax rate.......................................................... 35%
Increase (decrease)
State income taxes, net of federal benefit.......................................... 6
Non deductible purchased in process research and development........................ 8
Non taxable increase in cash surrender value of officers life insurance............. (2)
Deferred tax assets recorded as a result of the S corporation election
termination....................................................................... (2)
S corporation income and income taxes through October 30, 1998 included on
individual shareholders' returns.................................................. (47)
---
(2)%
---
---
</TABLE>

State income taxes in fiscal years 1996 and 1997 differ from the computed
"expected" taxes due to enterprise zone and other tax credits generated.

NOTE 13. MAJOR VENDORS

The Company purchases key components from one vendor. Net purchases from
this vendor in fiscal years 1996, 1997 and 1998 were approximately $3,600,000,
$4,100,000 and $8,500,000, respectively. Accounts payable to this vendor as of
November 30, 1997 and 1998 were approximately $540,000 and $1,201,000,
respectively.

In addition, the Company is also dependent on single source suppliers for a
component used in its impact printing products and for a component used in its
ribbons. If the Company were to lose its component supplier for its impact
printing products, it would be required to identify a new supplier and
substantially reengineer its products for use with an alternative component. If
the Company were to lose its component supplier for ribbons, the Company would
be required to identify a new supplier.

NOTE 14. MAJOR CUSTOMERS AND FOREIGN SALES

In fiscal year 1997 and 1998, the Company had sales to a customer that
individually accounted for 16.6% and 17.1% of the Company total net sales and as
of November 30, 1997 and 1998, respectively, and the trade receivables from this
customer were $326,000 and $710,000, respectively. Sales to this customer in
fiscal year 1996 were less than 10% of the Company's net sales.

F-17
<PAGE>

TROY GROUP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1999 IS
UNAUDITED

NOTE 14. MAJOR CUSTOMERS AND FOREIGN SALES (CONTINUED)

In fiscal years 1996, 1997 and 1998, the Company had shipments to foreign
customers that accounted for 14.3%, 13.7%, and 16.2% of the Company's net sales.
The sales to foreign customers are all denominated in U.S. dollars therefore the
Company has not experienced any foreign currency gains or losses.

NOTE 15. CASH FLOW INFORMATION

Supplemental Disclosure of cash flow information

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, FEBRUARY 28,
------------------------------------ --------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:

Interest....................... $ 345,000 $ 272,000 $ 118,000 $ 39,000 $ 78,000
---------- ---------- ------------ --------- ---------
---------- ---------- ------------ --------- ---------
Income taxes................... $ 65,000 $ 185,000 $ 10,000 $ -- $ --
---------- ---------- ------------ --------- ---------
---------- ---------- ------------ --------- ---------
Supplemental schedule of noncash
investing and financing
activities
Purchase of Troy XCD, Inc.
Total purchase price......... $ -- $ -- $ 3,117,000 $ -- $ --
Less fair value of common
stock and stock warrants
issued in connection with
the acquisition............ -- -- 1,479,000 -- --
---------- ---------- ------------ --------- ---------
Cash purchase price.......... $ -- $ -- $ 1,638,000 $ -- $ --
---------- ---------- ------------ --------- ---------
---------- ---------- ------------ --------- ---------
Dividends payable.............. $ -- $ -- $ 200,000 $ -- $ --
---------- ---------- ------------ --------- ---------
---------- ---------- ------------ --------- ---------
</TABLE>

F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULE

To the Board of Directors
Troy Group, Inc
Santa Ana, California

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental Schedule II
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.

McGLADREY & PULLEN, LLP

Anaheim, California
January 6, 1999

F-19
<PAGE>

TROY GROUP, INC
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNT
FISCAL YEARS ENDED NOVEMBER 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
BALANCE AT PROVISIONS
BEGINNING CHARGED TO BALANCE AT
OF YEAR EXPENSE CHARGE-OFFS END OF YEAR
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:

1996....................................................... $ 107,000 $ 209,000 $(143,000) $ 173,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------

1997....................................................... $ 173,000 $ 65,000 $ (74,000) $ 164,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------

1998....................................................... $ 164,000 $ 134,000 $(158,000) $ 140,000
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
</TABLE>

F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
XCD Incorporated
Irvine, California

We have audited the accompanying consolidated balance sheet of XCD
Incorporated and subsidiary as of September 30, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
nine months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XCD
Incorporated and subsidiary as of September 30, 1998, and the results of their
operations and their cash flows for the nine months then ended in conformity
with generally accepted accounting principles.

McGLADREY & PULLEN, LLP

Anaheim, California
October 20, 1998

F-21
<PAGE>
XCD INCORPORATED

CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 1998

<TABLE>
<S> <C>
ASSETS

Current Assets:
Cash.......................................................................... $ 11,000
Accounts receivable, less allowance for doubtful accounts of $128,000......... 792,000
Income taxes receivable....................................................... 122,000
Inventories................................................................... 878,000
Prepaid expenses.............................................................. 31,000
Deferred income taxes......................................................... 150,000
---------
Total current assets........................................................ 1,984,000

Equipment, net.................................................................. 159,000

Other Assets.................................................................... 12,000
---------
Total assets................................................................ $2,155,000
---------
---------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable, including $27,000 payable to stockholders................... $ 329,000
Accrued liabilities........................................................... 211,000
Notes payable, stockholders................................................... 233,000
---------
Total current liabilities................................................... 773,000
---------
Commitments and Contingencies

Stockholders' Equity
Common stock, no par value; authorized 1,000,000,000 shares; issued 37,900,000
shares...................................................................... 106,000
Retained earnings............................................................. 1,320,000
Note receivable for common stock purchases.................................... (44,000)
---------
Total stockholders' equity.................................................. 1,382,000
---------
Total liabilities and stockholders' equity.................................. $2,155,000
---------
---------
</TABLE>

See Notes to Consolidated Financial Statements.

F-22
<PAGE>
XCD INCORPORATED

CONSOLIDATED STATEMENT OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<S> <C>
Net sales...................................................................... $4,488,000
Cost of goods sold............................................................. 2,679,00
-----------
Gross profit............................................................. 1,809,000
-----------
Operating expenses:
Selling, general and administrative.......................................... 1,212,000
Research and development, including $240,000 to stockholders................. 532,000
-----------
1,744,000
-----------
Operating income......................................................... 65,000

Financial income (expense):
Interest expense, including $22,000 to stockholders.......................... (22,000)
Interest income.............................................................. 5,000
-----------
Income before income tax credit.......................................... 48,000
Income tax credit.............................................................. 49,000
-----------
Net income............................................................... $ 97,000
-----------
-----------
Earnings per share, basic and diluted.......................................... $ --
-----------
-----------
Weighted average number of shares outstanding:
Basic........................................................................ 37,900,000
-----------
-----------
Diluted...................................................................... 37,931,166
-----------
-----------
</TABLE>

See Notes to Consolidated Financial Statements.

F-23
<PAGE>
XCD INCORPORATED

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
COMMON STOCK
------------------------- RETAINED NOTE
SHARES AMOUNT EARNINGS RECEIVABLE TOTAL
------------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998..................... 37,900,000 $ 106,000 $ 1,223,000 $ (53,000) $ 1,276,000
Forgiveness of note receivable............. -- -- -- 9,000 9,000
Net income................................. -- -- 97,000 -- 97,000
------------- ---------- ------------ ----------- -------------
Balance, September 30, 1998.................. 37,900,000 $ 106,000 $ 1,320,000 $ (44,000) $ 1,382,000
------------- ---------- ------------ ----------- -------------
------------- ---------- ------------ ----------- -------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-24
<PAGE>
XCD INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<S> <C>
Cash flows from Operating Activities
Net income................................................................... $ 97,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................... 42,000
Provision for doubtful accounts............................................ 70,000
Deferred income taxes...................................................... (56,000)
Compensation expense for forgiveness of note receivable.................... 9,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable...................................................... (96,000)
Income taxes receivable.................................................. 7,000
Inventories.............................................................. 17,000
Prepaid expenses......................................................... (13,000)
Increase (decrease) in:
Accounts payable......................................................... 26,000
Accrued liabilities...................................................... (11,000)
-----------
Net cash provided by operating activities................................ 92,000
-----------
Cash Flows from Investing Activities
Purchases of equipment....................................................... (60,000)
Increase in other assets..................................................... (5,000)
-----------
Net cash (used in) investing activities.................................. (65,000)
-----------
Cash Flows from Financing Activities, decrease in excess checks outstanding
over bank balance............................................................ (21,000)
-----------
Net increase in cash..................................................... 6,000
Cash, beginning of period...................................................... 5,000
-----------
Cash, end of period............................................................ $ 11,000
-----------
-----------
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest..................................... $ 31,000
-----------
-----------
</TABLE>

See Notes to Consolidated Financial Statements.

F-25
<PAGE>
XCD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS

The consolidated financial statements include the accounts of XCD
Incorporated (incorporated as XCd, Inc.) and its wholly owned subsidiary, XCD
International Incorporated, a foreign sales corporation (collectively, the
Company). The Company's customers are located throughout the United States, Asia
and Europe. The Company is engaged primarily in the design, development,
manufacture and sale of products that allow printers to be shared on local area
networks (LANs).

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles necessarily 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

All significant intercompany transactions and accounts have been eliminated
in the accompanying consolidated financial statements.

INVENTORIES

Inventories are stated at the lower of average cost or market.

EQUIPMENT

Equipment is recorded at cost. Depreciation is provided over the estimated
useful lives of the assets using the straight-line method, which generally
ranges from three to seven years.

REVENUE RECOGNITION

Revenue is recognized when the related products are shipped to customers. No
right of return (other than for defective merchandise) is allowed on sales. All
sales are transacted in U.S. dollars.

CREDIT RISK

The Company sells its products on credit terms that it establishes for
individual customers. The Company also performs ongoing credit evaluations of
its customers, generally does not require collateral and maintains reserves for
potential credit losses.

ESTIMATED WARRANTY CLAIMS

The Company sells its product with a warranty that provides for replacements
of any defective products for a one-year period after the sale. The Company
accrues an estimate of the cost of providing the warranty at the time revenue is
recognized.

RESEARCH AND DEVELOPMENT

The Company expenses research and development costs of new products as
incurred.

F-26
<PAGE>
XCD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS

Costs associated with advertising and promoting products are expensed as
incurred. Advertising and promotion expense was approximately $119,000 during
1998.

INCOME TAXES

Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and notes payable. The
carrying value of these instruments are considered to be representative of their
fair value due to the short nature of maturities of these instruments.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing the net income attributable
to the common stockholders by the weighted average number of common shares
outstanding during the period. There is no adjustment in the net income
attributable to common stockholders. Diluted earnings per share reflects the
potential dilution that could occur from common shares issuable through stock
options (31,166 shares in the period ended September 30, 1998)

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the
intrinsic-value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.

NOTE 2. INVENTORIES

Inventories consist of the following at September 30, 1998:

<TABLE>
<S> <C>
Raw materials..................................................... $ 133,000
Work in process................................................... 320,000
Finished goods.................................................... 425,000
---------
$ 878,000
---------
---------
</TABLE>

F-27
<PAGE>
XCD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. EQUIPMENT

Equipment consist of the following at September 30, 1998:

<TABLE>
<S> <C>
Computer equipment............................................... $ 363,000
Furniture and fixtures........................................... 41,000
---------
404,000
Less accumulated depreciation.................................... (245,000)
---------
$ 159,000
---------
---------
</TABLE>

NOTE 4. NOTE RECEIVABLE

During 1996 an employee exercised 400,000 options at an exercise price of
$0.178 in exchange for a nonrecourse note receivable. The principal and interest
on the note will be forgiven in equal installments over a four-year period in
lieu of payment for services performed. As of September 30, 1998, the balance on
this note receivable is $44,000.

NOTE 5. INCOME TAXES

Income tax credits are summarized below for the nine months ended September
30, 1998:

<TABLE>
<S> <C>
Current tax benefit.............................................. $(105,000)
Deferred tax expense............................................. 56,000
---------
$ (49,000)
---------
---------
</TABLE>

The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the nine months
ended September 30, 1998 due to the following:

<TABLE>
<S> <C>
Computed "expected" tax expense................................................... $ 17,000
State income taxes, net of federal benefit........................................ 2,000
Increase (decrease) in income taxes resulting from:
Research and development credits................................................ (77,000)
Tax interest and penalties...................................................... 7,000
Other........................................................................... 2,000
---------
$ (49,000)
---------
---------
</TABLE>

F-28
<PAGE>
XCD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. INCOME TAXES (CONTINUED)
The major components of the Company's net deferred tax assets at September 30,
1998 are comprised of:

<TABLE>
<S> <C>
Deferred tax assets...............................................
Receivable allowance............................................ $ 51,000
Inventory allowance............................................. 50,000
Inventory capitalization........................................ 52,000
Accrued vacation expense........................................ 2,000
Accrued warranty claims......................................... 16,000
---------
171,000
Deferred tax liabilities, equipment............................... 21,000
---------
Net deferred tax assets....................................... $ 150,000
---------
---------
</TABLE>

These amounts have been classified on the accompanying balance sheet as a
current asset as of September 30, 1998.

NOTE 6. ACCRUED LIABILITIES

Accrued liabilities consist of the following at September 30, 1998:

<TABLE>
<S> <C>
Payroll and related taxes......................................... $ 53,000
Accrued warranties................................................ 40,000
Accrued marketing................................................. 40,000
Accrued interest, stockholders.................................... 19,000
Accrued vacation.................................................. 5,000
Other............................................................. 54,000
---------
$ 211,000
---------
---------
</TABLE>

NOTE 7. SHORT-TERM BORROWINGS

The Company has $233,000 in unsecured subordinated notes payable to
stockholders that are due on demand, with interest-only payments, recalculated
annually at a rate 2% above a bank's prime rate (8.5% at September 30, 1998) due
monthly.

In addition, the Company has a revolving line of credit agreement with a
bank that allows maximum borrowings of $600,000. The credit agreement matures
September 30, 1998, and is collateralized by substantially all of the Company's
assets. The line of credit bears interest at the bank's prime rate (8.5% at
September 30, 1998) plus 0.5%. At September 30, 1998, the Company had no amounts
borrowed under this agreement. Under the agreement, the Company is required,
among other things, to maintain certain minimum net worth and working capital
ratios. At September 30, 1998, the Company had $600,000 in availability under
this agreement.

NOTE 8. STOCK OPTION PLANS

The Company has a 1994 Incentive Stock Option Plan and a Non-Qualified Stock
Option Plan under which it may grant options to purchase common stock. The
Company may grant options for up to 4,000,000

F-29
<PAGE>
XCD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. STOCK OPTION PLANS (CONTINUED)
shares under the Incentive Stock Option Plan to full time employees at prices
that the Compensation Committee determines to be appropriate. Options are
granted at market value on the date of the grant and are generally exercisable
ratably over four years with certain non-qualified options which vest upon a
change in control. Options expire five years after grant date. In addition, the
Company may grant options for up to 4,000,000 shares to employees and
nonemployee directors under the Non-Qualified Stock Option Plan at prices that
the Board of Directors determines to be fair market value.

A summary of the status of the Plans and changes during the period ended
September 30, 1998 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding at beginning of period......................................................... 3,684,500 $ 0.168
Granted.................................................................................... 48,000 0.037
Exercised.................................................................................. -- --
Forfeited.................................................................................. (379,000) 0.163
---------- -----------
Outstanding at end of period............................................................... 3,353,500 $ 0.166
---------- -----------
---------- -----------
Exercisable at end of period............................................................... 2,410,375 $ 0.172
---------- -----------
---------- -----------
Weighted-average minimum value of options granted during the period........................ $ 0.009
-----------
-----------
Remaining options available under the Plans, at end of period.............................. 1,762,500
----------
----------
</TABLE>

A further summary of options outstanding at September 30, 1998 is as
follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- ----------------------------------------------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.130-$0.178........................................ 3,305,500 2.4 years $ 0.168 2,405,375 $ 0.172
$0.037............................................... 48,000 4.8 years 0.037 5,000 0.037
---------- ----------- ----------- ---------- -----------
3,353,500 2.5 years $ 0.166 2,410,375 $ 0.172
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
</TABLE>

As permitted under generally accepted accounting principles, grants under
the above Plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the Incentive Stock Option Plan and the Non-Qualified Stock Option
Plan. Had compensation costs for all of the stock-based compensation plans been
determined using the minimum value method prescribed Statement No. 123, reported
net income would have been reduced to $95,000 from $97,000 with no effect on
basic and diluted earnings per share. The fair value of each option granted
during the nine months ended September 30, 1998 was estimated on date of grant
utilizing the then current fair value of the underlying shares less the exercise
price discounted over the average expected life of the options (five years) with
risk free interest rate of 5.48% and 6.06% and no dividends. The pro forma
effects of applying Statement No. 123 are not indicative of future amounts
since, among

F-30
<PAGE>
XCD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. STOCK OPTION PLANS (CONTINUED)
other reasons, the requirements of the Statement have been applied only to
options granted after December 15, 1995 (see Note 14).

NOTE 9. FOREIGN SALES AND ACCOUNTS RECEIVABLE

During the period ended September 30, 1998, the Company had sales to foreign
customers. Foreign sales for the period ended September 30, 1998 and the related
accounts receivable as of September 30, 1998 are as follows:

<TABLE>
<CAPTION>
ASIA EUROPE CANADA TOTAL
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Sales........................................................ $ 1,308,000 $ 800,000 $ 106,000 $ 2,214,000
Accounts receivable.......................................... $ 106,000 $ 250,000 $ 26,000 $ 382,000
</TABLE>

NOTE 10. MAJOR CUSTOMERS

Net sales for the period ended September 30, 1998 includes sales to the
following major customers (each of which accounted for 10% or more of the total
sales of the Company) together with the receivables due from those customers as
of September 30, 1998:

<TABLE>
<CAPTION>
TRADE
ACCOUNTS
NET SALES RECEIVABLE
------------ ----------
<S> <C> <C>
Customer A.............................................................................. $ 1,178,000 $ 74,000
Customer B.............................................................................. 551,000 244,000
------------ ----------
$ 1,729,000 $ 318,000
------------ ----------
------------ ----------
</TABLE>

NOTE 11. LEASE COMMITMENTS AND RENT EXPENSES

The Company rents its facility under an operating lease that expires in
2003. Future minimum lease payments at September 30, 1998 under all
noncancelable operating leases are as follows: 1999 $119,000; 2000 $124,000;
2001 $129,000; 2002 $134,000; and 2003 $68,000 (total $574,000).

Rent expense was approximately $84,000 for the period ended September 30,
1998.

NOTE 12. PENSION PLAN

The Company sponsors a simplified employee pension contribution plan for
employees who are at least 21 years of age and have performed services for the
Company in at least three of the immediately preceding five years. Total
expenses related to the Plan were approximately $51,000 for the period ended
September 30, 1998.

NOTE 13. RELATED PARTY TRANSACTIONS

For the period ended September 30, 1998, the Company paid $240,000 to two
corporations whose presidents are stockholders of the Company for costs related
to product development and engineering services. As of September 30, 1998, the
Company had accrued $27,000 relating to such expenses, which is included in
accounts payable.

F-31
<PAGE>
XCD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14. BUSINESS COMBINATION

On September 30, 1998, the Company signed a letter of intent to sell all its
outstanding common stock, including any shares issuable relating to stock
options, to Troy Group, Inc. for 171,430 shares of Troy Group, Inc.'s common
stock and $1,550,000 in cash. All outstanding stock options will be extinguished
upon the consummation of this merger.

NOTE 15. SUBSEQUENT EVENT

In October 1998, the Company entered into an agreement to pay certain
officer/stockholders and employees $1,250,000 of compensation for prior
services. No provision for deferred compensation arising from the agreement has
been reflected in the accompanying financial statements as of September 30,
1998.

F-32
<PAGE>
[LOGO]

REMOTE PAYMENT SYSTEM

[SCHEMATIC DIAGRAM SHOWING REMOTE CHECK PRINTING AT AN ON-LINE MERCHANT]

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

, 1999

[TROY GROUP, INC. LOGO]

2,500,000 SHARES OF COMMON STOCK

-------------

PROSPECTUS
-------------

[LOGO]

[JOSEPHTAL & CO. INC. LOGO]

- --------------------------------------------------------------------------------

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Company in connection with the sale of
Common Stock being registered. All of the amounts shown are estimates, except
the SEC registration fee, the NASD filing fees and the Nasdaq listing fee.

<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee....................................................... $ 9,285
NASD fee................................................................... 3,663
Nasdaq listing fee......................................................... 78,875
Blue Sky fees and expenses................................................. 2,000
Legal fees and expenses.................................................... 250,000
Accounting fees and expenses............................................... 300,000
Printing expenses.......................................................... 190,000
Transfer agent fees........................................................ 3,500
Warrants................................................................... 975,000
Miscellaneous.............................................................. 37,677
-----------------
Total...................................................................... $ 1,850,000
-----------------
-----------------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Delaware Law and the Company's Certificate of Incorporation provide that the
Company shall, under certain circumstances and subject to certain limitations,
indemnify any director, officer, employee or agent of the corporation made or
threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met. Any such
person is also entitled, subject to certain limitations, to payment or
reimbursement of reasonable expenses in advance of the final disposition of the
proceeding. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including one
by or in the right of the corporation.

The Company has also entered into indemnification agreements with all of the
directors and executive officers of the Company whereby the Company has agreed
to indemnify and hold harmless the directors and executive officers from and
against any claims, liability, damages or expenses incurred by them in or
arising out of their status, capacities and activities with respect to the
Company to the maximum extent permitted by Delaware law. The Company believes
that these agreements are necessary to attract and retain qualified persons as
directors and executive officers.

The Company also maintains a directors and officers insurance policy
pursuant to which directors and officers of the Company are insured against
liability for certain actions in their capacity as directors and officers.

Reference is also made to Section 6 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities.

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

During the three year period ending February 28, 1998, the Company issued
the following shares of its Common Stock without registration under the
Securities Act:

1. On November 27, 1996, the Company granted options to purchase an
aggregate of 326,957 shares of the Company's Common Stock to two executive
officers of the Company.

2. Effective as of October 1, 1997, the Company issued a warrant to
purchase up to a maximum of 300,000 shares of Common Stock of the Company to
a consultant in exchange for providing certain consulting services to the
Company.

3. In May 1998, the Company issued a warrant to purchase up to a
maximum of 50,000 shares of Common Stock of the Company to an attorney in
exchange for providing legal services to the Company in connection with the
Offering.

4. Effective as of May 31, 1998, the Company issued an aggregate
1,124,772 shares of Common Stock to six existing stockholders in exchange
for the contribution of all of the outstanding capital stock of Troy Systems
to the Company.

5. On October 30, 1998 the Company issued an aggregate of 171,430
shares of Common Stock in connection with the acquisition of XCD
Incorporated. The Company also granted a warrant to purchase 50,000 shares
of Common Stock to a consultant for services in connection with the
acquisition.

6. Concurrently with the consummation of the Offering, the Company
intends to grant options to purchase an aggregate of 530,000 shares of
Common Stock of the Company to certain officers, directors and employees of
the Company.

All of the above sales were made in reliance on Rule 701, Regulation D and
Section 4(2) under the Securities Act. With regard to the reliance by the
Company upon the exemptions set forth in the previous sentence, certain
inquiries were made by the Company to establish that such sales qualified for
such exemptions from the registration requirements. In particular, the Company
confirmed that: (i) all offers of sales and sales were made by personal contact
from officers or directors of the Company or other persons closely associated
with the Company; (ii) each investor made representations that he or she was
sophisticated in relation to this investment (and the Company has no reason to
believe such representations were incorrect); (iii) each purchaser gave
assurance of investment intent and the certificates for the shares bear a legend
accordingly; and (iv) offers and sales within any offering were made to a
limited number of persons.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement**

1.2 Form of Representatives' Warrant*

2.1 Merger Purchase Agreement dated October 28, 1998 between the Company, Troy
Merger Subsidiary, Inc. and XCD Incorporated and its shareholders**

3.1 Certificate of Incorporation of the Company*

3.2 Bylaws of the Company*

3.3 Certificate of Ownership and Merger dated May 18, 1998, between Troy Group
Newco, Inc. and Troy Systems, Inc.*
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.4 Agreement and Plan of Merger dated May 18, 1998 between Troy Group Newco,
Inc. and Troy Systems, Inc.*

4.1 Warrant dated December 30, 1998 issued to Broadland Capital Partners**

4.2 Warrant dated October 30, 1998 issued to Steve Holmes**

4.3 Warrant issued to Raymond F. Schuler**

5.1 Opinion of Oppenheimer Wolff & Donnelly LLP**

10.1 Lease dated March 16, 1995 between the Company and RAGCO*

10.2 Lease dated July 28, 1993 between Dirk Investments, Inc. and the Company*

10.3 Lease Amendment to Lease dated July 28, 1993 between Dirk Investments,
Inc. and the Company*

10.4 Addendum to Lease dated March 16, 1995 between Dirk Investments, Inc. and
the Company*

10.5 Lease Amendment to Lease dated September 1, 1996 between Dirk Investments,
Inc. and the Company*

10.6 Lease dated March 1, 1998 between Sanwa Bank California and XCD, Inc. and
a Consent to Assignment of Lease, Assignment and Acceptance dated
October 23, 1998 between Sanwa Bank California, XCD, Inc. and Troy XCD,
Inc.**

10.7 1996 Stock Option Plan*

10.8 1998 Stock Incentive Plan*

10.9 1998 Employee Stock Purchase Plan*

10.10 Incentive Stock Option Agreement dated November 27, 1996 in favor of
Robert Messina*

10.11 Incentive Stock Option Agreement dated November 27, 1996 in favor of Brian
Dirk*

10.12 Non-Competition Agreement dated November 27, 1996 between Robert Messina
and the Company*

10.13 Consulting Agreement dated October 1, 1997 between the Company and
Broadland Capital Partners*

10.14 Form of Indemnification Agreement for directors and executive officers of
the Company*

10.15 MICR Supplies Agreement dated February 6, 1998 between the Company and IBM
Printing Systems Company(1)*

10.16 Form of Tax Agreement Relating to S Corporation Distributions by and
between the Company and the Dirk Shareholders*

10.17 Loan Agreement and Security Agreement dated October 20, 1998 between the
Company and Comerica Bank-California**

10.18 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica
Bank-California**
</TABLE>

II-3

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.19 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica
Bank-California**

10.20 Guaranty dated October 20, 1998 by the majority shareholders**

10.21 Letter dated October 3, 1997 to RAGCO from the Company*

10.22 Bill of Sale and Assignment and Assumption Agreement dated May 31, 1998
between Troy Group, Inc. and Troy Systems International, Inc.*

10.23 Form of Subscription Agreement*

21.1 Subsidiaries of the Registrant

23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors

23.2 Consent of McGladrey & Pullen, LLP, Independent Auditors

23.3 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)

24.1 Power of Attorney (included on pages II-4 and II-5 hereto)*

27.1 Financial Data Schedule

99.1 Consent of Brian P. Dirk*

99.2 Consent of Norman B. Keider*

99.3 Consent of John B. Zaepfel*

99.4 Consent of William P. O'Reilly*

99.5 Consent of Gene A. Bier*
</TABLE>

- ------------------------

(1) Confidential treatment has been requested with respect to designated
portions contained within such document. Such portions have been omitted and
filed separately with the Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.

* Previously filed.

** To be filed by amendment.

II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.

The following financial statement schedule is included herein and should be
read in conjunction with the financial statements referred to above:

Independent Auditors' Report on Financial Statement Schedule

Schedule II. Valuation and Qualifying Accounts

All other schedules are omitted as the required information is unapplicable
or the information is presented in the financial statements or related notes.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.

(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Santa Ana, California on this 9th day of April, 1999.

<TABLE>
<S> <C> <C>
TROY GROUP, INC.

By: /s/ PATRICK J. DIRK
-----------------------------------------
Patrick J. Dirk
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed by the following persons in
the capacities indicated, on April 9, 1999.

NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------

Chairman of the Board,
/s/ PATRICK J. DIRK President and Chief
- ------------------------------ Executive Officer
Patrick J. Dirk (Principal Executive
Officer)

Chief Financial Officer,
* Treasurer and Secretary
- ------------------------------ (Principal Financial and
Del L. Conrad Accounting Officer)

/s/ PATRICK J. DIRK
- ------------------------------ * Attorney-in-fact
Patrick J. Dirk

II-6
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1.1 Underwriting Agreement**.....................................................................

1.2 Form of Representatives' Warrant*............................................................

2.1 Merger Purchase Agreement dated October 28, 1998 between the Company, Troy Merger Subsidiary,
Inc. and XCD Incorporated and its shareholders**...........................................

3.1 Certificate of Incorporation of the Company*.................................................

3.2 Bylaws of the Company*.......................................................................

3.3 Certificate of Ownership and Merger dated May 18, 1998, between Troy Group Newco, Inc. and
Troy Systems, Inc.*........................................................................

3.4 Agreement and Plan of Merger dated May 18, 1998 between Troy Group Newco, Inc. and Troy
Systems, Inc.*.............................................................................

4.1 Warrant dated December 30, 1998 issued to Broadland Capital Partners**.......................

4.2 Warrant dated October 30, 1998 issued to Steve Holmes**......................................

4.3 Warrant issued to Raymond F. Schuler**.......................................................

5.1 Opinion of Oppenheimer Wolff & Donnelly LLP**................................................

10.1 Lease dated March 16, 1995 between the Company and RAGCO*....................................

10.2 Lease dated July 28, 1993 between Dirk Investments, Inc. and the Company*....................

10.3 Lease Amendment to Lease dated July 28, 1993 between Dirk Investments, Inc. and the
Company*...................................................................................

10.4 Addendum to Lease dated March 16, 1995 between Dirk Investments, Inc. and the Company*.......

10.5 Lease Amendment to Lease dated September 1, 1996 between Dirk Investments, Inc. and the
Company*...................................................................................

10.6 Lease dated March 1, 1998 between Sanwa Bank California and XCD, Inc. and a Consent to
Assignment of Lease, Assignment and Acceptance dated October 23, 1998 between Sanwa Bank
California, XCD, Inc. and Troy XCD, Inc.**.................................................

10.7 1996 Stock Option Plan*......................................................................

10.8 1998 Stock Incentive Plan*...................................................................

10.9 1998 Employee Stock Purchase Plan*...........................................................

10.10 Incentive Stock Option Agreement dated November 27, 1996 in favor of Robert Messina*.........

10.11 Incentive Stock Option Agreement dated November 27, 1996 in favor of Brian Dirk*.............

10.12 Non-Competition Agreement dated November 27, 1996 between Robert Messina and the Company*....

10.13 Consulting Agreement dated October 1, 1997 between the Company and Broadland Capital
Partners*..................................................................................

10.14 Form of Indemnification Agreement for directors and executive officers of the Company*.......

10.15 MICR Supplies Agreement dated February 6, 1998 between the Company and IBM Printing Systems
Company(1)*................................................................................

10.16 Form of Tax Agreement Relating to S Corporation Distributions by and between the Company and
the Dirk Shareholders*.....................................................................
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.17 Loan Agreement and Security Agreement dated October 20, 1998 between the Company and Comerica
Bank-California**..........................................................................

10.18 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica Bank-
California**...............................................................................

10.19 Variable Rate Installment Note dated October 20, 1998 in favor of Comerica Bank-
California**...............................................................................

10.20 Guaranty dated October 20, 1998 by the majority shareholders**...............................

10.21 Letter dated October 3, 1997 to RAGCO from the Company*......................................

10.22 Bill of Sale and Assignment and Assumption Agreement dated May 31, 1998 between Troy Group,
Inc. and Troy Systems International, Inc.*.................................................

10.23 Form of Subscription Agreement*..............................................................

21.1 Subsidiaries of the Registrant...............................................................

23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors.....................................

23.2 Consent of McGladrey & Pullen, LLP, Independent Auditors.....................................

23.3 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)........................

24.1 Power of Attorney (included on pages II-4 and II-5 hereto)*..................................

27.1 Financial Data Schedule......................................................................

99.1 Consent of Brian P. Dirk*....................................................................

99.2 Consent of Norman B. Keider*.................................................................

99.3 Consent of John B. Zaepfel*..................................................................

99.4 Consent of William P. O'Reilly*..............................................................

99.5 Consent of Gene A. Bier*.....................................................................
</TABLE>

- ------------------------

* Previously filed.

** To be filed by amendment.

<PAGE>
Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT:
- ------------------------------

- - Troy Systems International, Inc.

- - Dirk Worldwide, Inc.

- - Troy XCD, Inc.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use in this Amendment No. 4 to the Registration
Statement on Form S-1 (No. 333-51523) of our report, dated January 6, 1999,
relating to the consolidated financial statements of Troy Group, Inc. We also
consent to the reference to our Firm under the caption "Experts" in the
Prospectus.

McGLADREY & PULLEN, LLP

Anaheim, California
April 8, 1999

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use in this Amendment No. 4 to the Registration
Statement on Form S-1 (No. 333-51523) of our report, dated October 20, 1998,
relating to the consolidated financial statements of XCD Incorporated. We also
consent to the reference to our Firm under the caption "Experts" in the
Prospectus.

McGLADREY & PULLEN, LLP

Anaheim, California
April 8, 1999

<PAGE>
<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> NOV-30-1998 FEB-28-1999
<PERIOD-START> DEC-01-1997 DEC-01-1998
<PERIOD-END> NOV-30-1998 FEB-28-1999
<CASH> 308,000 28,000
<SECURITIES> 0 0
<RECEIVABLES> 6,519,000 7,659,000
<ALLOWANCES> 140,000 145,000
<INVENTORY> 5,783,000 5,940,000
<CURRENT-ASSETS> 13,605,000 14,304,000
<PP&E> 7,738,000 7,875,000
<DEPRECIATION> 5,833,000 6,013,000
<TOTAL-ASSETS> 18,918,000 19,586,000
<CURRENT-LIABILITIES> 7,799,000 7,082,000
<BONDS> 2,374,000 2,804,000
0 0
0 0
<COMMON> 77,000 77,000
<OTHER-SE> 8,188,000 9,143,000
<TOTAL-LIABILITY-AND-EQUITY> 18,918,000 19,586,000
<SALES> 35,758,000 11,400,000
<TOTAL-REVENUES> 35,758,000 11,400,000
<CGS> 21,496,000 6,799,000
<TOTAL-COSTS> 21,496,000 6,799,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 134,000 11,000
<INTEREST-EXPENSE> 101,000 78,000
<INCOME-PRETAX> 4,364,000 1,592,000
<INCOME-TAX> (70,000) 637,000
<INCOME-CONTINUING> 4,434,000 955,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,434,000 955,000
<EPS-PRIMARY> .32 .12
<EPS-DILUTED> .31 .12

</TABLE>