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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number: 000-21287

Peerless Systems Corporation

(310) 536-0908

          Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o No þ

          The number of shares of Common Stock outstanding as of December 5, 2003 was 15,710,459.

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

      This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements prompted by, qualified by or made in connection with such words as “may,” “will be,” “continue,” “anticipates,” “estimates,” “expects,” “continuing,” “plans,” “exploring,” “intends,” and “believes” and words of similar substance signal forward-looking statements. Likewise, the use of such words in connection with or related to any discussion of or reference to the Company’s future business operations, opportunities or financial performance sets apart forward-looking statements.

      In particular, statements regarding the Company’s outlook for future business, financial performance and growth, including projected revenue, both quarterly and from specific sources, profit, spending, including spending on research and development efforts, costs, margins, the timing and number of design wins, and the Company’s cash position, as well as statements regarding expectations for the digital imaging market, new product development and offerings, customer demand for the Company’s products and services, market demand for products incorporating the Company’s technology, future prospects of the Company, and the impact on future performance of organizational and operational changes; all constitute forward-looking statements.

      These forward-looking statements are just projections and estimations based upon the information available to the Company at this time. Thus they involve known and unknown risks and uncertainties such that actual results could differ materially from those projected in the forward-looking statements made in this Quarterly Report on Form 10-Q. Risks and uncertainties include, but are not limited to: a) changes in the marketplaces in which the Company offers its products; b) the failure of Peerless’ business to produce the projected financial results or design wins; c) the failure of Peerless to maintain its margins due to changes in its business model in reaction to competitive pressures; d) the delay in or the non-acceptance by the market of new product and technology offerings; e) the failure of Peerless’ markets to achieve anticipated growth rates; f) unfavorable economic conditions resulting in decreased demand for original equipment manufacturers’ (“OEMs”) products using Peerless’ technology, making it difficult for the Company to obtain new licensing agreements; g) OEMs’ determinations not to proceed with development of products using Peerless’ technology due to, among other things, changes in the demand for anticipated OEM products, age of Peerless’ technology, concerns about Peerless’ financial position and Peerless’ competitors offering alternative solutions; h) Peerless’ competitors coming to market with new products or alternative solutions that are superior or available at a lower cost or earlier than anticipated or believed to be possible; i) the costs associated with the development and marketing of products for imaging and networking may be higher than currently forecasted; j) changes in demand for the Company’s products and services based on market conditions and the competitiveness of Peerless’ products from both technological and pricing perspectives; k) the Company’s inability to maintain or further improve operating efficiencies or to further streamline operations; l) the impact on the Company’s financials of any future need to expand the organization to meet customer or market demands; m) incremental costs of operations arising out of the change in the law, including the Sarbanes-Oxley Act of 2002, regarding corporate governance, financial disclosure, auditor independence, corporate fraud and the accounting profession in general; and n) other factors affecting Peerless’ business and the forward-looking statements set forth herein. Those risks and uncertainties include those set forth in pages 16 through 23 of this Quarterly Report on Form 10-Q.

      Current and prospective stockholders are urged not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company is under no obligation, and expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.

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PEERLESS SYSTEMS CORPORATION

INDEX

TRADEMARKS

      Memory Reduction Technology® (MRT), PeerlessPowered®, WinExpress®, PeerlessPrint®, redipS®, AccelePrint®, SyntheSys®, QuickPrint® and PerfecTone® are registered trademarks of Peerless Systems Corporation. Peerless™, MagicPrint™, VersaPage™ and Everest™ are trademarks of Peerless Systems Corporation and are the subjects of applications pending for registration with the United States Patent and Trademark Office. PeerlessPage™, ImageWorks™ and WebWorks™ are trademarks of Peerless Systems Corporation. Peerless Systems, P logo, and Peerless logo are trademarks and service marks of Peerless Systems Corporation registered in Japan. Peerless is a trademark of Peerless Systems Corporation that is the subject of applications for registration pending in Australia, China, the European Community, France, Hong Kong, Italy, Korea, Spain, Taiwan and the United Kingdom. RedipS is a trademark of Peerless Systems Corporation registered in Canada and in the European Community. PeerlessPrint is a trademark of Peerless Systems Corporation that is the subject of an application for registration pending in Japan and the European Community. PeerlessPrint (in Katakana) is a trademark of Peerless Systems Corporation that is the subject of an application for registration pending in Japan. Everest is a trademark of Peerless Systems Corporation that is the subject of an application for registration pending in People’s Republic of China, Japan, Korea and the European Community.

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PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements.

PEERLESS SYSTEMS CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

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PEERLESS SYSTEMS CORPORATION

The accompanying notes are an integral part of these consolidated financial statements.

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PEERLESS SYSTEMS CORPORATION

The accompanying notes are an integral part of these consolidated financial statements.

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PEERLESS SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation:

      The accompanying unaudited consolidated financial statements of Peerless Systems Corporation (the “Company”) have been prepared pursuant to the rules of the Securities and Exchange Commission (the “SEC”) for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements and notes herein are unaudited, but in the opinion of management, include all the adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company. These statements should be read in conjunction with the audited financial statements and notes thereto for the years ended January 31, 2003, 2002 and 2001 included in the Company’s Annual Report on Form 10-K filed with the SEC on May 1, 2003. The results of operations for the interim periods shown herein are not necessarily indicative of the results to be expected for any future interim period or for the entire year.

2.     Summary of Significant Accounting Policies:

      Revenue Recognition: The Company recognizes revenues in accordance with Statement of Position 97-2 “Software Revenue Recognition” as amended by Statement of Position 98-9. In November 2000, the Company adopted Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” and Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.”

      Development license revenues from the licensing of source code or software development kits (“SDKs”) for the Company’s standard products are recognized upon delivery and acceptance by the customer of the software if no significant modification or customization of the software is required and collection of the resulting receivable is probable. If modification or customization is essential to the functionality of the software, the development license revenues are recognized over the course of the modification work.

      The Company also enters into engineering services contracts with certain of its OEMs to provide turnkey solutions, adapting the Company’s software and supporting electronics to specific OEM requirements. Revenues on such contracts are recognized over the course of the engineering work on a percentage-of-completion basis. Progress-to-completion under percentage-of-completion is determined based on direct costs, consisting primarily of labor and materials, expended on the arrangement. The Company provides for any anticipated losses on such contracts in the period in which such losses are first determinable. At October 31, 2003 and January 31, 2003, the Company had no engineering contracts on which it required any loss provisions. Maintenance revenues are recognized ratably over the term of the maintenance contract.

      Recurring licensing revenues are derived from per unit fees paid by the Company’s customers upon manufacturing and subsequent commercial shipment of products incorporating Peerless technology and certain third party technology. These recurring licensing revenues are recognized on a per unit basis as products are shipped commercially. In certain cases, the Company may sell a block license, that is, a specific quantity of licensed units that may be sold in the future, or the Company may require the customer to pay minimum royalty commitments. Associated payments are typically made in one lump sum or extend over a period of four or more quarters. The Company generally recognizes revenues associated with block licenses and minimum royalty commitments on delivery and acceptance of software, when collection of the resulting receivable is probable, when the fee is fixed and determinable, and when the Company has no future obligations. In cases where block licenses or minimum royalty commitments have extended payment terms and the fees are not fixed and determinable, revenue is recognized as payments become due. Further, when earned royalties exceed minimum royalty commitments, revenues are recognized on a per unit basis as products are shipped commercially.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      For fees on multiple element arrangements, values are allocated among the elements based on vendor specific objective evidence of fair value (“VSOE”). If VSOE does not exist, all revenue for the arrangement is deferred until the earlier of the point at which such VSOE does exist or all elements of the arrangement have been delivered. If an arrangement includes software and service elements, a determination is made as to whether the service element can be accounted for separately as services are performed.

      Deferred revenue consists of prepayments of licensing fees and payments billed to customers in advance of revenue recognized on engineering services contracts. Unbilled receivables arise when the revenue recognized on a contract exceeds billings due to timing differences related to billing milestones as specified in the contract.

      On January 29, 2002, the Company divested itself of the Netreon storage management operations. As a result of this divestiture, the Company is solely engaged in Imaging operations. Prior to the divestiture, the Company viewed its operations in two segments, Imaging and Storage operations.

      Certain previously reported financial information has been reclassified to conform to the current fiscal period presentation.

3.     Investments:

      Investments consisted of the following:

      The above available-for-sale securities includes $9.3 million of investments with contractual maturities greater than one year which are classified on the consolidated balance sheets as current investments, based on the Company’s intention to use these investments to fund current operations, if necessary.

      The fair value of available-for-sale securities at October 31, 2003 and January 31, 2003 approximated their carrying value (amortized cost). Unrealized gains or losses on securities were immaterial for all periods presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In the first quarter of fiscal year 2004, the Company recorded a $121 loss for a correction to fiscal year 2002 reported accrued interest.

4.     Stock-based Compensation:

      The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for its stock option plans (“ESOP”) and the employee stock purchase plan (“ESPP”), and therefore does not recognize compensation expense for grants of stock options under the ESOP or shares sold under the ESPP. Under SFAS No. 123, compensation cost would be recognized for the fair value of the employee option rights and shares sold under the ESPP. In determining the fair value, the Company used the Black-Scholes model, assumed no dividends per year, used expected lives ranging from 2 to 10 years, expected volatility of 74.7% and 86.6% for the three and nine months ended October 31, 2003 and 2002, respectively, and risk free interest rates of 2.89% and 1.81% for the three and nine months ended October 31, 2003 and 2002, respectively. The weighted average per share fair values of options granted during the periods presented with exercise prices equal to market price on the date of grant were $2.03 and $0.94 for the three months ended October 31, 2003 and 2002, respectively, and $1.48 and $1.00 for the nine months ended October 31, 2003 and 2002, respectively. There were no options granted with exercise prices below market price on the date of grant during any of the periods presented. Had compensation cost for the Company’s grants under stock-based compensation plans and shares sold under the ESPP been determined consistent with SFAS No. 123, the Company’s net losses and losses per share would have been reduced to the pro forma amounts indicated below:

5.     Concentration of Revenues:

      During the third quarter of fiscal year 2004, four customers each generated greater than 10% of revenues and collectively contributed 77% of revenues. Block license revenues for the same time period were 59% of revenues. During the third quarter of fiscal year 2003, three customers each generated greater than 10% of revenues, and collectively contributed 53% of revenues. Block license revenues for that period accounted for 54% of revenues.

6.     Netreon Sale:

      On February 20, 2003, the Company announced the sale of its remaining interest in Netreon. As a result of the sale, the Company recorded in other income a gain of $971, net of expenses, associated with this transaction in the first quarter of fiscal year 2004.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.     Sublease Termination:

      On February 28, 2003, a sublesee terminated a sublease that involved approximately 9,000 square feet of the Company’s El Segundo, California headquarters. As a result of the termination, the Company received $639 in cash and a forfeited deposit, which is included in other income. In addition, the Company received $299 in net fixed assets returned to the Company, which was classified as operating expenses, the same classification used in a prior period when a loss was recognized for the disposal of these same assets. The assets were recorded at fair market value.

8.     Purchase of Perpetual License:

      On August 26, 2003, the Company’s Board of Directors approved the conversion of a royalty bearing perpetual license to a fully paid up perpetual license to use certain third party color technology to be incorporated into the Company’s high performance color architecture and products. The licensed technology is presently being applied in several of the Company’s research and development projects and will be incorporated into the Company’s new products. The total cost of $1,100 for this license has been capitalized and is being amortized over a two-year period during its use on such projects and products. The final payment of $450 was made in September, 2003.

9.     Contingencies:

      The Company is currently in dispute with one of its licensors regarding certain contractual terms on license fees. The Company is attempting to successfully resolve the matter, however, the ultimate outcome of this uncertainty is unknown. The potential impact of this uncertainty could result in a one time increase in cost of sales.

10.     Recent Accounting Pronouncements:

      The Emerging Issues Task Force “EITF” recently reached a consensus on its tentative conclusions for EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides accounting guidance for the allocation of revenue where delivery or performance of products, services and/or performance may occur at different points in time or over different periods of time. Companies are required to adopt this consensus for fiscal periods beginning after June 15, 2003. The Company believes the adoption of EITF 00-21 does not have a material impact on its financial position or results of operations.

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PEERLESS SYSTEMS CORPORATION

      This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Company’s expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on current expectations, estimates, forecasts and projections about the industry in which Peerless operates, management’s beliefs and assumptions made by management. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Company Overview

      Peerless Systems Corporation, together with its wholly-owned subsidiary, Peerless Systems Imaging Products, Inc. (together, “Peerless” or the “Company”) licenses software-based imaging and networking technology for controllers in embedded, attached and standalone digital document products and integrates proprietary software into the printers, copiers, and multifunction products of original equipment manufacturers (“OEMs”).

      The Company is developing controller products and applications for sale to OEM sales and distribution channels. Digital document products include monochrome (black and white) and color printers, copiers, fax machines and scanners, as well as multifunction products (“MFPs”) that perform a combination of these imaging functions. In order to process digital text and graphics, digital document products rely on a core set of imaging software and supporting electronics, collectively known as a digital imaging system. Network interfaces supply the core technologies to digital document products that enable them to communicate over local and wide area networks and the Internet. The Peerless family of products and engineering services provide fully integrated advanced and proprietary imaging and networking technologies that enable the Company’s OEM customers and third party developers for OEM’s to develop stand-alone and networked digital printers, copiers, and MFPs quickly and cost effectively. The Company markets its solutions directly to OEM customers including Canon, Konica/ Minolta Holdings, Kyocera/ Mita, Legend, Oki Data, Panasonic Communications Company, Ltd., Ricoh, and Seiko Epson. The Company has attempted to expand its solution offerings by incorporating related imaging and networking technologies developed internally or licensed from third parties. The Company is also developing more diverse distribution channels for its products and expanding its target markets to distributors, value added resellers, system integrators, OEM sales operations, and geographically to the People’s Republic of China and Taiwan.

      The Company generates revenue from its OEM customers through the sale of imaging solutions in either turnkey or software development kit (“SDK”) form. The Company’s product licensing revenues are comprised of both recurring per unit and block licensing revenues and development licensing fees for source code or SDKs. Licensing revenues are derived from per unit fees paid periodically by the Company’s OEM customers upon manufacturing and subsequent commercial shipment of products incorporating the Company’s technology. Licensing revenues are also derived from arrangements in which the Company enables third party technology, such as solutions from Adobe or Novell, to be used with Company and/or OEM products.

      The Company also has engineering services revenues that are derived primarily from adapting Company and third party software and supporting electronics to specific OEM requirements. The Company provides its engineering services to OEMs seeking a turnkey imaging solution for their digital document products. The

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      In response to the Company’s belief that the demand for the Company’s core monochrome offerings may grow at lower rates than in past years and that the Company may continue to meet sales resistance from its customers, Peerless has recently developed and commercialized high performance color imaging and printing technologies and a new open architecture named “Sierra.” Peerless believes that products based on its Sierra technology address key growth areas in the imaging market including: increased demand for color imaging, the emergence of MFPs, and continued demand for faster low cost monochrome printing solutions, to which many of the Sierra attributes are applicable.

      During the last fiscal year, Peerless introduced Sierra at trade shows in the United States and demonstrated it in Japan. Peerless expects that Sierra will increase future license revenues once it has been successfully introduced into the marketplace and the Company enters into a sale of this technology. Peerless believes that it may be able see its design win of Sierra technology as early as the fourth quarter of fiscal year 2004 and obtain licensing revenues in late next fiscal year. (See “If the Company is unable to sell the new Sierra technology on a timely basis, the Company’s future revenue and operating results may be harmed” and “If the marketplace does not accept Peerless’ new Sierra technology, the Company’s future revenues and operating results may be harmed” under the Risks and Uncertainties section of this Quarterly Report on Form 10-Q). Peerless believes that its new Sierra technology will contribute an increasing percentage of the Company’s overall revenue in the future.

Quarter Overview

      Revenues decreased sequentially in the third quarter of fiscal year 2004, due primarily to the timing of OEMs needs for new licensing agreements and introduction of new products. The Company expects a sequential increase in revenues during the fourth quarter of fiscal year 2004 as it expects to expand its market through its Sierra-based products, penetrate into new sales channels, and sign new license agreements. Although there have been fewer opportunities for the Company to sell its turnkey services and SDKs, the Company continued to support its current OEM controller customers in the digital printing devices business with its existing technology and has sized the organization to provide the necessary support and maintenance. During the current quarter, the Company has invested in research and development and has developed and integrated new product technologies that the Company will offer to its OEM customers in this and future quarters.

      The Company has addressed the deterioration in the demand for its core monochrome technology solutions by investing in leading edge technologies (including Sierra), by sizing its organization to manage the current business requirements of imaging for digital document products and adapting its pricing model to changing market conditions. The Company has also addressed the deterioration in revenues by expanding its offerings in new distribution channels and geographic regions, including the People’s Republic of China and Taiwan.

      During the third quarter, a limited number of customers continued to provide a substantial portion of the Company’s revenues. Four customers, Oki Data Corporation, Konica Corporation, Seiko Epson Corporation, and Novell Inc., each generated greater than 10% of the Company’s revenue and collectively contributed approximately 77% of the Company’s total revenues. Therefore, the availability and successful closing of new contracts, or modifications and additions to existing contracts with these customers may materially impact the Company’s financial position and results of operations from quarter to quarter. The Company is continuing its efforts to diversify its customers and expand its customer base.

      In order to maximize stockholder value, the Company is exploring opportunities to enhance the value of the Company, including new technology, market opportunities, mergers, acquisitions and/or the sale of all or a portion of Company’s assets. There is no assurance that the Company can or will be successful in the pursuit of these new opportunities that are expected to result in a growth in stockholder value. Failure to realize success in these opportunities could have a material adverse effect on the Company’s operational results and stockholder value.

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Liquidity and Capital Resources

      The Company’s principal source of liquidity is its cash and cash equivalents and investments, which, as of October 31, 2003, were $12.4 million in the aggregate. During the nine months ended October 31, 2003, the Company experienced a negative cash flow, due primarily to the operating loss during the period.

      Total assets at October 31, 2003 were $18.8 million, compared with $24.1 million as of January 31, 2003. Stockholders’ equity was $11.1 million at October 31, 2003, compared with $16.2 million at January 31, 2003. The Company’s cash and investment portfolio at October 31, 2003 was $12.4 million, down from $18.0 million as of January 31, 2003, and the ratio of current assets to current liabilities was 2.3:1 as of October 31, 2003, compared with 2.9:1 as of January 31, 2003. The Company’s operations used $6.8 million in cash during the nine months ended October 31, 2003, compared to $2.0 million in cash provided by operations during the nine months ended October 31, 2002. These decreases were primarily the result of the operating loss during the nine months ended October 31, 2003.

      During the nine months ended October 31, 2003, $6.5 million in cash was used by the Company’s investing activities. It is the Company’s policy to invest the majority of its unused cash in low risk government and commercial debt securities. The Company has not historically purchased, nor does it expect to purchase in the future, derivative instruments or enter into hedging transactions. During the first nine months of fiscal year 2004, the Company invested $0.2 million in property, equipment and leasehold improvements, compared to $0.1 million invested during the first nine months of fiscal year 2003.

      During the third quarter of fiscal year 2004, the Company completed an agreement in which it obtained a fully paid up perpetual license to use certain third party color technology to be incorporated into the Company’s high performance color architecture and products. The Company paid $0.5 million in September, 2003 as a payment on the $1.1 million paid for the perpetual license (see Note 8 to the Consolidated Financial Statements).

      During the first nine months of fiscal year 2004, cash and investments decreased $5.6 million, compared to an increase of $1.7 million in the comparable nine month period ended October 31, 2002.

      The Company does not have a credit facility; however, it may explore opportunities to obtain a line of credit for short-term financing in order to avoid disruptions of its current investment levels.

      If the Company does not generate anticipated cash flow from sales and licensing of its technology or if expenditures are greater than expected, the Company most likely will reduce discretionary spending, which would require the Company to delay, scale back or eliminate some or all of its development efforts, including Sierra, any of which could have a material adverse effect on the Company’s business, results of operations and prospects. Further, if the Company continues to experience negative cash flows, as is anticipated, and is unable to increase revenues or cut costs so that revenues generated from operating activities are sufficient to meet the Company’s obligations as a result of which the Company exhausts current capital resources, the Company will be required to obtain additional capital from other sources. Such sources might include issuance of debt or equity securities, bank financing or other means that might be available to the Company to increase its working capital. Under such circumstances, there is substantial doubt as to whether the Company would be able to obtain additional capital on commercially reasonable terms or at all. The inability to obtain such resources on commercially acceptable terms would have a material adverse effect on the Company, its operations, liquidity and financial condition, its prospects and the scope of strategic alternatives and initiatives available to the Company.

Results of Operations

      The Company’s net loss in the third quarter of fiscal year 2004 was $(2.5) million, or $(0.16) per share, compared with a net income of $0.2 million, or $0.01 per share, in the third quarter of fiscal year 2003. For the nine month period ending October 31, 2003, the net loss was $(5.5) million, or $(0.35) per share, compared to a net loss of $(0.4) million, or $(0.03) per share for the same period in fiscal year 2003.

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      Consolidated revenues for the three and nine months ended October 31, 2003 were $5.8 million and $17.6 million, respectively, compared to $7.8 million and $23.5 million, respectively, for the comparable periods ended October 31, 2002. The decreases were due to lower levels of licensing revenues, resulting in large part from delays in customers’ needs to renew licensing agreements. In addition, the lack of design wins in fiscal year 2004 as compared to fiscal year 2003 contributed to decreases in engineering services revenues. Revenues from the sales of ASICs were $0.6 million higher in the nine month period of fiscal year 2004 than in the same period in fiscal year 2003.

      Total cost of revenues for the three and nine months ended October 31, 2003 were $2.8 million and $8.4 million, respectively, compared to $2.8 million and $9.3 million, respectively, for the comparable periods ended October 31, 2002. Product licensing costs for the three and nine months ended October 31, 2003 were $1.8 million and $5.4 million, respectively, as compared to $1.9 million and $6.6 million, respectively, for the comparable periods ended October 31, 2002. The decreases were primarily the result of lower levels of licensing revenues. For the nine months ended October 31, 2003, this decrease was partially offset by an additional accrual for certain disputed third party licensing costs totaling approximately $0.7 million. The additional accrual represents management’s best estimate of the Company’s exposure related to the licensor’s claim. The dispute arose as a result of an audit performed by an independent accounting firm. The additional accrual is based on licensing costs of approximately $19 million over a three-year period ending July 31, 2003.

      The Company’s gross margins for the three and nine months ended October 31, 2003 were 52% in both periods, compared with 64% and 60% for the three and nine months ended October 31, 2002, respectively. Gross margins decreased primarily due to higher levels of product licensing costs for third party technology associated with certain of the Company’s licensing revenues. In addition, engineering services gross margins in the three and nine months ended October 31, 2002 were higher due to the early completion of a turnkey development effort, driving down cost of sales. The Company is currently in dispute with one of its licensors regarding certain contractual terms on license fees. The Company is attempting to successfully resolve the matter, however the ultimate outcome of this uncertainty is unknown. The potential impact of this uncertainty could result in a one time increase in cost of sales.

      Total operating expenses for the three and nine months ended October 31, 2003 were $5.7 million and $15.8 million, respectively, compared with $4.6 million and $14.6 million, respectively, for the comparable periods ended October 31, 2002.

	•	Research and development expenses in the three and nine months ended October 31, 2003 increased to $3.2 million and $8.6 million, respectively, from $2.3 million and $7.2 million, respectively, in the comparable periods ended October 31, 2002. The increases were due primarily to higher staffing and consulting costs associated with the continued development of the Company’s high performance color technology and products.
	•	Sales and marketing expenses in the three and nine months ended October 31, 2003 increased slightly to $1.2 million and $3.6 million, respectively, from $1.1 million and $3.3 million, respectively, in the comparable periods ended October 31, 2002. The Company continued to focus on the future launch of Sierra and on obtaining new OEM customers, attending industry trade shows, and evaluating other opportunities to promote the Company’s core and new imaging and network solutions.
	•	General and administrative expenses in the three and nine months ended October 31, 2003 were $1.3 million and $3.6 million, respectively, compared to $1.2 million and $4.1 million, respectively, in the comparable periods ended October 31, 2002. During the first quarter of fiscal year 2004, the Company received a $0.2 million insurance refund for costs associated with completed legal proceedings. Included in the nine months ended October 31, 2002 was a write-off of approximately $0.7 million for the reduction in office space located at the Company’s headquarters, offset by a refund of approximately $0.5 million in legal expenses associated with litigation.

      Interest income for the three and nine months ended October 31, 2003 were $0.02 million and $0.1 million, respectively, compared to $0.1 million and $0.3 million, respectively, for the comparable periods

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      Other income for the nine months ended October 31, 2003 includes a gain of $1.0 million, net of expenses, associated with the Company’s sale of its remaining interest in Netreon, Inc., announced on February 20, 2003. In addition, the Company recorded a gain of $0.6 million associated with the termination of a sublease of a portion of its leased office space at its headquarters in El Segundo, California. Additionally, the Company recorded a $121,000 loss for a correction to fiscal year 2002 reported accrued interest. All of these items were recorded in the first quarter of fiscal year 2004.

      For the three and nine months ended October 31, 2003, the Company had a benefit for income taxes of $0.1 million and a provision for income taxes of $0.5 million, respectively. These were the result of foreign income taxes paid, offset by the release of certain long-term tax liabilities. For the three and nine months ended October 31, 2002, the Company had provisions for income taxes of $0.3 million and $0.2 million, respectively. The provision for income taxes in the three month period was the result of foreign income taxes paid. The provision for income taxes for the nine month period was primarily the result of foreign income taxes paid, offset by the results of a change in the tax code that allowed the Company to carry back losses to obtain a tax refund. The Company has provided the valuation allowance on its net deferred tax assets because of the uncertainty with respect to the Company’s ability to generate future taxable income to realize the deferred tax assets.

      As of October 31, 2003, the Company does not hold any positions in equity securities of other publicly traded companies.

      The Company’s exposure to interest rate risk relates primarily to the Company’s non-equity investment portfolio. The primary objectives of the Company’s investment activities are to preserve the principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company from time to time maintains a portfolio of cash equivalents, fixed rate debt instruments of the federal government and high-quality corporate issuers and short-term investments in money market funds. As discussed in Note 3 of the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q, as of October 31, 2003, the Company held approximately $6.8 million in debt securities issued by the federal, state and local governments and $4.2 million in corporate debt securities. Although the Company is subject to interest rate risks in these investments, the Company believes an effective increase or decrease of 10% in interest rate percentages would not have a material adverse effect on its results from operations. Consequently, the Company’s interest rate risk is minimal.

      The Company has not entered into any derivative financial instruments. Currently, all of the Company’s contracts, including those involving foreign entities, are denominated in U.S. dollars and as a result, the Company has experienced no foreign exchange gains and losses to date. The Company has not engaged in foreign currency hedging activities to date, and has no intention of doing so.

      The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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      As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

      There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Risks and Uncertainties

      The Company has traditionally generated its revenue from the licensing and sale of monochrome solutions to OEMs. While the Company is continuing to provide monochrome solutions to OEM customers and continuing to seek out additional distribution channels and customers for its monochrome solutions, the Company is increasing the focus of its research and development and marketing efforts on its Sierra product line of high speed, color imaging solutions. Until the Company’s Sierra technology becomes accepted in the marketplace — if such technology does become accepted in the marketplace — the Company’s overall revenue may stagnate or even decrease. If the Company’s revenue stagnates or decreases, the value of the Company’s securities may be adversely affected.

      The Company’s future operating results will depend to a significant extent on its ability to introduce the new Sierra technology on a timely basis. The Company has spent a significant amount of time and capital developing the new Sierra technology. The Company currently expects to formally launch the Sierra hardware product into channel sales in the first quarter of fiscal year 2005, and obtain a design win with an OEM customer by the end of the fourth quarter of fiscal year 2004, with licensing revenues expected next fiscal year. Any delays in the launch of channel sales or a design win with an OEM customer could harm the Company’s financial results.

      Sierra may not be accepted by the marketplace for many reasons including, among others, incompatibility with existing or forthcoming systems, lack of perceived need by customers, uncertainty regarding whether the benefits exceed the cost, the availability of alternatives and unwillingness to use new or unproven products. If the marketplace does not accept the Sierra architecture or if the marketplace takes additional time to accept the Sierra technology than the Company is expecting, Peerless’ future revenues and operating results may be harmed.

      Traditionally, the Company has generated its revenue from engineering services through engineering turnkey solutions for OEMs or licensing the Company’s SDKs to OEMs. In order to gain market acceptance for its new Sierra technology, as well as to make its current technologies more attractive, the Company may enter into contracts with OEMs wherein the Company may agree to provide initial customization and maintenance services without charge in order to obtain increased license revenues in the future. Under these contracts, the Company would normally recover development expenses through recurring license fees. The OEM would normally be asked to guarantee minimum licensing fees. However, the Company may elect to

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      Peerless incurred operating losses in the first three fiscal quarters of fiscal year 2004, and does not expect to reach sustained profitability until its fourth fiscal quarter of fiscal year 2005. There is no assurance that the Company will be profitable at such time or at any time in the future.

      Future losses may deplete the Company’s capital resources, decrease stockholder value and have a material adverse effect on the Company’s future revenues and/or results of operations.

      Peerless’ monochrome technology and products have been in the marketplace for an average of 25 months as of October 31, 2003. This represents a 4% increase from the average of 24 months that the Company’s products had been in the marketplace as of October 31, 2002. The increase in the average age represents the decline in demand for the Company’s monochrome technology and products. Although Peerless continues to license the Company’s current technology and products to certain OEMs, there can be no assurance that the OEMs will continue to need or utilize the current technology and products the Company offers.

      A limited number of OEM customers continue to provide a substantial portion of Peerless’ revenues. Presently, there are only a small number of OEM customers in the digital document product market to which the Company can market its technology and services. Therefore, the Company’s ability to offset a significant decrease in the revenues from a particular customer or to replace a lost customer is severely constrained.

      During the third quarter of fiscal year 2004, four customers, Oki Data Corporation, Konica/ Minolta Corporation, Seiko Epson Corporation and Novell Inc., each generated greater than 10% of the Company’s revenues and collectively contributed 77% of revenues. Block license revenues for the same time period totaled $3.4 million, or 59% of revenues. During the third quarter of fiscal year 2003, three customers, Oki Data Corporation, Novell Inc., and Konica Corporation, each generated greater than 10% of the revenues, and collectively contributed 53% of revenues. Block license revenues during the same period were $4.2 million, or 54% of revenues. A reduction in business from just one customer providing a significant portion of the Company’s revenues can have a material adverse effect on the Company’s operating results.

      The Company has licensing agreements with Adobe Systems Incorporated and Novell Inc. to bundle and sublicense their licensed products with the Company’s licensed software. These relationships accounted for $3.5 million in revenues and an associated $1.8 million in cost of revenues during the third quarter of fiscal year 2004. Should the agreement with either of these vendors be terminated or canceled, there is no assurance that the Company could replace that source of revenue within a short period of time, if at all. Such an event would have a material adverse effect on the Company’s operating results.

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      The Company’s licensing agreements that include third party intellectual property result in royalties contractually due and payable to the third parties. The rates are subject to interpretation of contract language and intent of the contracting parties, and may result in disputes as to the correct rates. Peerless is subject to audits of the Company’s data serving as the basis for the royalties due. Such audits may result in adjustments to the royalty amounts due.

      The Company is currently in dispute with one of its licensors regarding certain contractual terms on license fees. The Company is attempting to successfully resolve the matter, however the ultimate outcome of this uncertainty is unknown. The potential impact of this uncertainty could result in a one time increase in cost of sales.

      Peerless is in negotiations with Adobe Systems Incorporated and Canon Inc. regarding the sublicense agreement between Peerless and Canon. The sublicense did not include several terms required to be included in all OEM sublicenses by Peerless’ license with Adobe. Although Adobe has indicated to Peerless that it has no current intention to pursue claims for alleged breach of the Adobe Peerless PostScript Sublicensing Agreement, Adobe has not agreed to waive the requirement that the missing terms be included in the Canon sublicense. Adobe had notified Peerless that it expected Peerless to resolve the issues by November 20, 2002. Although the Company is continuing to work with Adobe and Canon, Peerless has been unable to amend the Canon sublicense in a manner acceptable to both Canon and Adobe. Thus, Adobe may exercise its right to terminate its license agreement with Peerless, choose not to enter into further license agreements with Peerless, and take other legal action against Peerless, if it so chooses. Although Peerless believes that it will be able to resolve the issues in manner acceptable to both Adobe and Canon in the long run, there is no assurance that Peerless will be able to do so. Termination of the Adobe agreement would have a material adverse effect on Peerless’ future operating results. Approximately 57% of Peerless’ revenue for the nine months ended October 31, 2003 was derived from its licensing arrangement with Adobe Systems Incorporated. See “Peerless relies on relationships with Adobe Systems Incorporated and Novell Inc., and any change in those relationships will harm the Company’s business.”

      Peerless currently derives substantially all of its revenues from licensing and sale of the Company’s monochrome imaging software and products and the sublicensing of third party technologies. Peerless expects that revenue from imaging products will continue to account for a substantial portion of revenues during the remainder of fiscal year 2004 and beyond. The Company’s future success also depends in part on the Company’s ability to address the rapidly changing needs of potential customers in the marketplace, to introduce high-quality, cost-effective products, product enhancements and services on a timely basis, and to keep pace with technological developments and emerging industry standards. The Company’s failure to achieve its business plan to develop and to successfully introduce new products and product enhancements in the Company’s prime markets is likely to materially and adversely affect the Company’s business and financial results.

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      Peerless currently sublicenses third party technologies to the Company’s OEM customers, which sublicenses account for over 50% of the Company’s gross revenues. Such sublicense agreements are non-exclusive. If Peerless is determined not to be in compliance with the Company’s agreements with its licensors, Peerless may forfeit the Company’s right to sublicense these technologies. Likewise, if such sublicense agreements were canceled, Peerless would lose the Company’s right to sublicense these technologies. Additionally, the licensing of these technologies has become very competitive with competitors possessing substantially greater financial and technical resources and market penetration than Peerless. As competitors are pursuing aggressive strategies to obtain similar rights as held by Peerless to sublicense these third party technologies, there is no assurance that Peerless can remain competitive in the marketplace if one or more competitors are successful.

      The market for imaging systems for digital document products is highly competitive and characterized by continuous pressure to enhance performance, to introduce new features and to accelerate the release of new products. Peerless competes on the basis of technology expertise, product functionality, development time and price. Peerless’ technology and services primarily compete with solutions developed internally by OEMs. Virtually all of the Company’s OEM customers have significant investments in their existing solutions and have the substantial resources necessary to enhance existing products and to develop future products. These OEMs possess or may develop competing imaging systems technologies and may implement these systems into their products, thereby replacing the Company’s current or proposed technologies, eliminating a need for the Company’s services and products and limiting the Company’s future opportunities. Therefore, Peerless is required to persuade these OEMs to outsource the development of their imaging systems to the Company and to provide products and solutions to these OEMs that cost-effectively compete with their internally developed products. Peerless also competes with software and engineering services provided in the digital document product marketplace by other systems suppliers to OEMs.

      As the industry continues to develop, competition and pricing pressures will increase from OEMs, existing competitors and other companies that may enter the Company’s existing or future markets with similar or substitute solutions that may be less costly or provide better performance or functionality. Peerless anticipates increasing competition for the Company’s color products under development, particularly as new competitors develop and enter products in this marketplace. Some of the Company’s existing competitors, many of the Company’s potential competitors, and virtually all of the Company’s OEM customers have substantially greater financial, technical, marketing and sales resources than Peerless. In the event that price competition increases, competitive pressures could require the Company to reduce the amount of royalties received on new licenses and to reduce the cost of the Company’s engineering services in order to maintain existing business and generate additional product licensing revenues. This could reduce profit margins and result in losses and a decrease in market share. No assurance can be given as to the Company’s ability to compete favorably with the internal development capabilities of the Company’s current and prospective OEM customers or with other third party digital imaging system suppliers, and the inability to do so would have a material adverse effect on the Company’s operating results.

      The Company’s net trade accounts receivable was $2.1 million as of October 31, 2003, relatively level with $2.0 million as of January 31, 2003, reflecting the timing of payments received for licensing agreements. Although Peerless believes that the Company’s reserves for accounts receivable are adequate for the remainder of fiscal year 2004, there can be no assurance this is the case. If the Company’s reserves for

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      The Company’s cash and short-term investment portfolio was $12.4 million at October 31, 2003 and the current ratio of assets to current liabilities was 2.3:1. For the nine months ended October 31, 2003, Peerless’ operations used $6.8 million in cash.

      The Company’s principal source of liquidity is the Company’s cash and cash equivalents and investments, which, as of October 31, 2003, were approximately $12.4 million in the aggregate. If Peerless does not generate anticipated cash flow from licensing and services during fiscal year 2005, or if expenditures are greater than expected, Peerless most likely will reduce discretionary spending, which could require a delay, scaling back or elimination of some or all of the Company’s development efforts, any of which could have a material adverse effect on the Company’s business, results of operations and prospects. Furthermore, if Peerless experiences negative cash flows greater than anticipated, and Peerless is unable to increase revenues or cut costs so that revenues generated from operating activities are sufficient to meet the Company’s obligations, Peerless will be required to obtain additional capital from other sources. Such sources might include issuances of debt or equity securities, bank financing or other means that might be available to increase the Company’s working capital. Under such circumstances, there is substantial doubt as to whether Peerless would be able to obtain additional capital on commercially reasonable terms or at all. The inability to obtain such resources on commercially acceptable terms could have a material adverse effect on the Company’s operations, liquidity and financial condition, the Company’s prospects and the scope of strategic alternatives and initiatives available to the Company.

      The Company’s success is heavily dependent upon the Company’s proprietary technology. To protect the Company’s proprietary rights, Peerless relies on a combination of patent, copyright, trade secret and trademark laws as well as the early implementation and enforcement of nondisclosure and other contractual restrictions. As part of the Company’s confidentiality procedures, Peerless’ policies are to enter into written nondisclosure agreements with the Company’s employees, consultants, prospective customers, OEMs and strategic partners and to take affirmative steps to limit access to and distribution of the Company’s software, intellectual property and other proprietary information.

      Despite these efforts, Peerless may be unable to effectively protect the Company’s proprietary rights and the enforcement of the Company’s proprietary rights may be cost prohibitive. Unauthorized parties may attempt to copy or otherwise obtain or use the Company’s products or technology. Monitoring unauthorized use of the Company’s products is difficult. Peerless cannot be certain that the steps it takes to prevent unauthorized use of its technology, particularly in countries where the laws may not protect proprietary rights as fully as in the United States, will be effective.

      The Company’s source code also is protected as a trade secret. However, from time to time, Peerless licenses the Company’s source code to OEMs, which subjects the Company to the risk of unauthorized use or misappropriation despite the contractual terms restricting disclosure and use. In addition, it may be possible for unauthorized third parties to copy the Company’s products or to reverse engineer in order to obtain and subsequently use the Company’s proprietary information.

      The Company holds ten patents issued in the United States, one of which is issued in France, Germany, Great Britain, Japan and Hong Kong, and a second of which is also issued in France, Germany and Great Britain. The issued patents relate to techniques developed by the Company for generating output for continuous synchronous raster output devices, such as laser printers, compressing data for use with output

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      The Company also has seven patent applications pending in the United States, two applications pending in the European Patent Office, four applications pending in Japan, one application pending in Hong Kong, one application pending in China, one application pending in Korea, and one application pending in the Taiwan.

      There can be no assurance that patents Peerless holds will not be challenged or invalidated, that patents will issue from any of the Company’s pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength (or issue in the countries where products incorporating the Company’s technology may be sold) to provide meaningful protection or any commercial advantage to the Company. In any event, effective protection of intellectual property rights may be unavailable or limited in certain countries. The status of United States patent protection in the software industry will evolve as the United States Patent and Trademark Office grants additional patents. Patents have been granted to fundamental technologies in software after the development of an industry around such technologies and patents may be issued to third parties that relate to fundamental technologies related to the Company’s technology.

      As the number of patents, copyrights, trademarks and other intellectual property rights in the Company’s industry increases, products based on the Company’s technologies may become the subjects of infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future. Any such claims, regardless of merit, could be time consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all, which could have a material adverse effect on the Company’s operating results. In addition, Peerless may initiate claims or litigation against third parties for infringement of the Company’s proprietary rights or to establish the validity of the Company’s proprietary rights. Litigation to determine the validity of any claims, whether or not such litigation is determined in the Company’s favor, could result in significant expenses and divert the efforts of the Company’s technical and management personnel from productive tasks. In addition, Peerless may lack sufficient resources to initiate a meritorious claim. In the event of an adverse ruling in any litigation regarding intellectual property, Peerless may be required to pay substantial damages, discontinue the use and sale of infringing products, and expend significant resources to develop non-infringing technology or obtain licenses to infringing or substituted technology. The Company’s failure to develop, or license on acceptable terms, a substitute technology if required could have a material adverse effect on the Company’s operating results.

      Peerless is substantially dependent on the Company’s international business activities. Risks inherent in the Company’s international business activities include:

	•	disruptions by terrorists of normal channels of distribution;
	•	disruptions by terrorists of normal communications lines;
	•	major currency rate fluctuations;
	•	changes in the economic condition of foreign countries;
	•	the imposition of government controls;
	•	tailoring of products to local requirements;
	•	trade restrictions;
	•	changes in tariffs and taxes; and
	•	the burdens of complying with a wide variety of foreign laws and regulations, any of which could have a material adverse effect on the Company’s operating results.

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      If Peerless is unable to adapt to international conditions, its business may be adversely affected.

      Continuing into the third quarter of fiscal year 2004, the Pacific Rim economies have been financially depressed. As a result, companies in the imaging industry have reported negative financial impacts attributable to a decrease in demand from Pacific Rim customers. The Company’s Pacific Rim customers are comprised primarily of companies headquartered in Japan. These Japanese OEMs sell products containing the Company’s technology primarily in the North American, European, and Asian marketplaces. These revenues have declined and there can be no assurance that revenues from Japanese OEMs will not continue to decline in future quarters.

      The Company’s common stock has experienced price volatility. In the 60-day period ending October 31, 2003, the closing price of the stock ranged from $3.00 per share to $3.75 per share. Such price volatility may occur in the future. Factors that could affect the trading price of the Company’s common stock include, among others:

	•	macroeconomic conditions;
	•	actual or anticipated fluctuations in quarterly results of operations;
	•	announcements of new products or significant technological innovations by the Company or the Company’s competitors;
	•	developments or disputes with respect to proprietary rights;
	•	losses or gains of major OEM customers;
	•	general trends in the industry; and
	•	overall market conditions.

      In addition, the stock market historically has experienced extreme price and volume fluctuations, which have particularly affected the market price of securities of many related high technology companies and which at times have been unrelated or disproportionate to the operating performance of such companies.

      Peerless has developed a “fabless” distribution model for the sale of ASICs. Peerless has no direct distribution experience and places reliance on third party distributors to maintain inventories to address OEM needs, manage manufacturing logistics, and distribute the product in a timely manner. There can be no assurance that these distribution agreements will be maintained or will prove adequate to meet the Company’s needs and contractual requirements.

      Currently, Peerless relies on two independent parties, IBM Microelectronics and NEC Microelectronics, each of which provides unique application specific integrated circuits incorporating the Company’s imaging technology for use by the Company’s OEMs. These sole source providers are subject to materials shortages, excess demand, reduction in capacity and/or other factors that may disrupt the flow of goods to the Company’s customers thereby adversely affecting the Company’s customer relationships. Any such disruption could limit or delay production or shipment of the products incorporating the Company’s technology, which could have a material adverse effect on the Company’s operating results.

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      The Company’s recurring licensing revenue model has shifted from per-unit royalties paid upon OEM shipment of its product and guaranteed quarterly minimum royalties to a model that results in revenues associated with the sale of SDKs and block licenses. The reliance on block licenses has occurred due to aging OEM products in the marketplace, OEM demands in negotiating licensing agreements, reductions in the number of OEM products shipping and a design win mix that changed from object code licensing arrangements to SDKs. Revenues may continue to fluctuate significantly from quarter to quarter as the number and value of design wins vary, or if the signing of block licenses are delayed or the licensing opportunities are lost to competitors. Any of these factors could have a material adverse effect on the Company’s operating results. See “The Company’s near term revenue may drop as a result of the timing of licensing revenues and the reduced demand for its existing monochrome technologies” above.

      Peerless has experienced a significant reduction in the financial performance of its engineering services that has been caused by many factors, including:

	•	product development delays;
	•	potential non-recurring engineering reduction for product customization (see “The Company’s near term revenue from engineering services may drop as the Company may change its strategies in how it offers its products in the marketplace” above);
	•	third party delays; and
	•	loss of new engineering services contracts.

      There can be no assurance that these and similar factors will not continue to impact future engineering services results adversely.

      The industry in which Peerless operates has experienced significant downturns, both in the United States and abroad, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. Over the past two years, Peerless has experienced a shift in OEM demand from the historically prevailing requirement for turnkey solutions toward SDKs. Because Peerless has experienced a general decrease in demand for engineering services, engineering services resources have been re-deployed to research and development. Should this trend abruptly change, Peerless may be unable to re-deploy labor effectively and in a timely manner, which inability could have a material adverse effect on the Company’s operational results.

PART II — OTHER INFORMATION

      (a) Exhibits:

	10.65	Amendment No. 5 to Licensed System Addendum No. 4 between Oki Data Corporation and Peerless Systems Imaging Products, Inc. dated February 1, 2002.
	10.66	Amendment No. 8 to the PostScript Software Development License and Sublicense Agreement between Adobe Systems Incorporated and Peerless Systems Corporation, effective as of September 30, 2003.

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	10.67	Amendment No. 9 to the PostScript Software Development License and Sublicense Agreement between Adobe Systems Incorporated and Peerless Systems Corporation, effective as of September 15, 2003.
	10.68	Amendment No. 12 to the PostScript Software Development License and Sublicense Agreement between Adobe Systems Incorporated and Peerless Systems Corporation, effective as of September 22, 2003.

	31.1	Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes Oxley Act of 2002 (the “Act”)

	31.2	Certification of Chief Financial Officer pursuant to section 302 of the Act
	32.1	Principal Executive Officer Certification pursuant to Section 906 of the Act
	32.2	Principal Financial and Accounting Officer Certification pursuant to Section 906 of the Act

      (b) Reports on Form 8-K:

	1.     The Company filed a Form 8-K on December 4, 2003 containing the Company’s press release announcing its earnings for the fiscal quarter ended October 31, 2003.

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SIGNATURES

      Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

	PEERLESS SYSTEMS CORPORATION

	By:	/s/ HOWARD J. NELLOR

	Howard J. Nellor
	President and Chief Executive Officer
	(Principal Executive Officer)

Date:     December 12, 2003

	By:	/s/ WILLIAM R. NEIL

	William R. Neil
	Vice President of Finance and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Date:     December 12, 2003

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