The All-In-One, or AIO, market is the fastest growing segment of the broader market for consumer and business office equipment, which totaled over $49 billion in 2002 according to International Data Corporation, or IDC, a market research firm. The market for AIOs is projected to grow from 19.9 million units shipped in 2003 to 33.3 million units shipped in 2007 according to IDC. Hewlett-Packard Co. and Lexmark have recently announced strong AIO product sales. In January 2004, Lexmark announced that laser and inkjet hardware revenue for the 12 months ended December 31, 2003 had increased 23% over the prior year, reflecting growth in the corporate and consumer markets, particularly in inkjet AIOs. In February 2004, Hewlett-Packard announced that AIO sales increased 84% in the quarter ended January 31, 2004, compared to the same period in the previous year. AIO growth is driven by end-user desire to own AIOs and supplier desire to sell AIOs.

Declining prices and performance equivalent to stand-alone single function products are expanding the addressable market for AIOs among consumers and small businesses. Consumers and small businesses are increasingly requiring printer, photo-printer, copier, scanner, and facsimile machine functionality in small and home offices and are purchasing an AIO rather than separate stand-alone products. In addition, growing usage of digital cameras, which IDC projects to grow from 30.4 million units sold in 2002 to 82.9 million units sold in 2007, is leading many consumers to purchase high-quality photo-printers, including those incorporated into AIOs, that allow them to more fully realize the benefits of their digital cameras. A few years ago, an entry-level, stand- alone inkjet printer cost approximately $200. Today, for a comparable price, consumers can purchase an AIO that is able to connect to a digital camera, print high-quality color photos, send a facsimile, and copy or scan a document, all at performance levels equivalent to current stand-alone products.

The Company’s second ASSP was the DigiColor1, a color AIO system controller, which first went into production in the first quarter of 2000 and was subsequently designed into several inkjet and laser AIOs, including the Compaq C3-1000 and the Lexmark X83 color inkjet AIO. In developing the DigiColor1, the Company reused its core image-processing pipeline from the DigiCopy, integrated additional image-processing features, and embedded a microcontroller into the ASSP. The Company expects to continue to ship a limited quantity of the DigiColor1 through the end of 2004.

The Company’s third ASSP was the DigiColor2, a color AIO system controller, which first went into production in the fourth quarter of 2001 and was subsequently designed into several AIOs, including the Lexmark X5150 and the Dell A940 color inkjet AIOs, and the Canon MFC-5550 monochrome laser AIO. In developing the DigiColor2, the Company reused the core technology of its DigiColor1, increased the power of the microcontroller, and integrated additional image-processing features, USB 1.1 connectivity, and printer controller functionality, which allows its AIO system controller solutions to control inkjet print heads directly. The DigiColor2 is currently in volume production.

The Company’s fourth ASSP is the DigiColor2000, a mixed-signal, color AIO system controller. In developing the DigiColor2000, the Company has reused the core technology of its DigiColor2. The Company has integrated numerous additional analog and digital features, resulting in lower system cost and greater system functionality. Currently, the Company’s marketing and sales team is marketing the DigiColor2000, which is expected to begin volume production in 2004. Several customers are currently testing samples. The Company is simultaneously developing several models within of the DigiColor2000 family.

Gross profit as a percentage of revenue, or gross margin, was 49.4% for the year ended December 31, 2003, compared with 52.4% for the year ended December 31, 2002.

Research and development expenses increased to $5.2 million, or 14.2% of revenues, for the year ended December 31, 2003 from $3.5 million, or 19.2% of revenues, for the year ended December 31, 2002.

Interest income, net for the year ended December 31, 2003 was $44.0 thousand compared with $41.0 thousand for the year ended December 31, 2002.

Net income increased to $5.0 million, or $1.16 and $0.35 per share on a basic and diluted basis, respectively, for the year ended December 31, 2003, from $1.4 million, or $0.34 and $0.10 per share on a basic and diluted basis, respectively, for the year ended December 31, 2002.