Forward Looking Statements and Projections

This Quarterly Report on Form 10-Q contains forward looking statements. Forward looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. These statements are only predictions. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition. The outcome of the events described in these forward looking statements is subject to risks, uncertainties and other factors described in "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Accordingly, you should not rely upon forward looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward looking statements. The forward looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Overview

We are a leading global provider of text imaging solutions. Our technologies and fonts enable the display and printing of high quality digital text. Our software technologies have been widely deployed across, and embedded in, a range of consumer electronics, or CE, devices, including laser printers, digital copiers, mobile phones, digital televisions, set-top boxes, navigation devices and digital cameras, as well as in numerous software applications and operating systems. In the laser printer market, we have worked together with industry leaders for over 17 years to provide critical components embedded in printing standards. Our scaling, compression, text layout, color and printer driver technologies solve critical text imaging issues for CE device manufacturers by rendering high quality text on low resolution and memory constrained CE devices. We combine these proprietary technologies with access to more than 10,000 typefaces from a library of some of the most widely used designs in the world, including popular names like Helvetica and Times New Roman. We also license our typefaces to creative and business professionals through custom font design services, direct sales and our e-commerce websites fonts.com, itcfonts.com, linotype.com, faces.co.uk and fontexplorerx.com, which attracted more than 25 million visits in 2008 from over 200 countries and territories.

Sources of Revenue

We derive revenue from two principal sources: licensing our text imaging solutions to CE device manufacturers and independent software vendors, which we refer to as our OEM revenue, and licensing our fonts to creative and business professionals, which we refer to as our creative professional revenue. We derive our OEM revenue primarily from CE device manufacturers. We derive our creative professional revenue primarily from multinational corporations, graphic designers, advertisers, printers and

publishers. Historically, we have experienced, and we expect to continue to experience, lower revenue in the first and third quarters of the year due to the timing of some contractual payments of licensing fees from our OEM customers. In prior years, we have experienced, and we may experience in the future, seasonal slowness in the third quarter of the year from our creative professional customers. In 2009, given economic conditions, traditional patterns of seasonality did not materialize. Our overall trends in 2009 were primarily impacted by the broader economic downturn.

                                            Three Months Ended
                                              September 30,
                                     2009                       2008
                              Sales     % of Total       Sales     % of Total
                                    (In thousands, except percentages)
            United States    $  7,249         31.5 %    $  8,735         32.0 %
            Asia                8,015         34.8        10,241         37.5
            United Kingdom      3,366         14.6         3,237         11.8
            Germany             4,402         19.1         5,097         18.7

            Total            $ 23,032        100.0 %    $ 27,310        100.0 %


                                            Nine Months Ended
                                              September 30,
                                     2009                       2008
                              Sales     % of Total       Sales     % of Total
                                    (In thousands, except percentages)
            United States    $ 23,033         33.4 %    $ 26,983         32.3 %
            Asia               26,887         39.1        32,139         38.5
            United Kingdom      7,397         10.7         8,951         10.7
            Germany            11,572         16.8        15,419         18.5

            Total            $ 68,889        100.0 %    $ 83,492        100.0 %

For the three months ended September 30, 2009 and 2008, sales by our subsidiaries located outside North America comprised 68.5% and 68.0%, respectively, of our total revenue. For the nine months ended September 30, 2009 and 2008, sales by our subsidiaries located outside North America comprised 66.6% and 67.7%, respectively, of our total revenue. We expect that sales by our international subsidiaries will continue to represent a substantial portion of our revenue for the foreseeable future. Future international revenue will depend on the continued use and expansion of our text imaging solutions worldwide.

We derive a majority of our revenue from a limited number of customers, in particular manufacturers of laser printers and mobile phones. For the three months ended September 30, 2009 and 2008, our top ten licensees by revenue accounted for approximately 45.2% and 47.8% of our total revenue, respectively. For the nine months ended September 30, 2009 and 2008, our top ten licensees by revenue accounted for approximately 48.1% and 45.7% of our total revenue, respectively. Although no one customer accounted for more than 10% of our total revenue for the three months or nine months ended September 30, 2009 or 2008, if we are unable to maintain relationships with major customers or establish relationships with new customers, our licensing revenue will be adversely affected.

OEM Revenue

Our OEM revenue is derived substantially from per-unit royalties received for printer imaging, display imaging and printer driver, or driver, products. Under our licensing arrangements, we typically receive a royalty for each product unit incorporating our text imaging solutions that is shipped by our OEM customers. We also receive OEM revenue from fixed fee licenses with certain of our OEM customers. Fixed fee licensing arrangements are not based on units the customer ships, but instead, customers pay us on a periodic basis for the right to embed our text imaging solutions. Though significantly less than royalties from per-unit shipments and fixed fees from OEM customers, we also receive revenue from software application and operating systems vendors who include our text imaging solutions in their products, and for font development. Many of our licenses continue so long as our OEM customers ship products that include our technology, unless terminated for breach. Other licenses have terms that range from three to five years and usually provide for automatic or optional renewals. Revenue from per-unit royalties is recognized in the period during which we receive a royalty report from a customer, typically one quarter after royalty-bearing units are shipped. Revenue from fixed fee licenses is generally recognized when it is billed to the customer, so long as the product has been delivered, the license fee is fixed and non-refundable and collection is probable.

Creative Professional Revenue

Our creative professional revenue is derived from font licenses and from custom font design services. We license fonts directly to end-users through our e-commerce websites, via telephone, email and indirectly through third-party resellers. We also license fonts and provide custom font design services to graphic designers, advertising agencies and corporations.

Revenue from font licenses to our e-commerce customers is recognized upon payment by the customer and electronic shipment of the software embodying the font. Revenue from font licenses to other customers is recognized upon shipment of the software embodying the font and when all other revenue recognition criteria have been met. Revenue from resellers is recognized upon notification from the reseller that our font product has been licensed and when all other revenue recognition criteria have been met. We generally recognize custom font design services revenue upon delivery.

Restructuring

On November 10, 2008, the Company implemented a restructuring plan. Under the restructuring plan, the Company reduced headcount in certain areas and redeployed certain other employees within the Company in order to focus on key initiatives across the business. The small headcount reduction was intended to be offset by the hiring of a few key additional employees whose technical expertise is better aligned with our key initiatives. We did not anticipate an overall change in headcount, however, certain planned new hires have been delayed in consideration of economic conditions. This restructuring plan was substantially complete at December 31, 2008, other than making deferred cash payments to certain terminated employees. A second restructuring plan was implemented on October 21, 2009, which includes certain actions that were taken during the three months ended September 30, 2009 in advance of finalizing the plan. Details of this plan are described in Note 17, Subsequent Events. In the three and nine months ended September 30, 2009, we recorded $52 thousand and $0.1 million, respectively, of restructuring costs for severance and termination benefits, which is included in our operating expenses. Future cash expenditures related to the restructuring are expected to be approximately $0.1 million, net of tax savings.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

There has been no material change in our critical accounting policies since December 31, 2008. Information about our critical accounting policies may be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", under the heading "Critical Accounting Policies," of our Annual Report on Form 10-K for the year ended December 31, 2008, as amended.

Results of Operations for the Three Months Ended September 30, 2009 Compared to
Three Months Ended September 30, 2008

The following table sets forth items in the unaudited condensed consolidated
quarterly statement of income as a percentage of sales for the periods
indicated:



                                                           Three Months Ended
                                                             September 30,
                                                          2009           2008
   Revenue:
   OEM                                                      70.9 %         72.4 %
   Creative professional                                    29.1           27.6

   Total revenue                                           100.0          100.0
   Cost of revenue                                           7.8            9.7
   Cost of revenue-amortization of acquired technology       3.7            3.1
   Marketing and selling                                    25.1           20.4
   Research and development                                 14.5           12.5
   General and administrative                               15.5           17.6
   Amortization of other intangible assets                   5.2            6.7

   Total costs and expenses                                 71.8           70.0

   Income from operations                                   28.2           30.0
   Interest expense, net                                     4.4            6.8
   (Gain) loss on foreign exchange                          (3.0 )         10.0
   Loss (gain) on derivatives                                4.6           (9.2 )
   Other expense, net                                        0.1            0.3

   Total other expenses                                      6.1            7.9
   Income before provision for income taxes                 22.1           22.1
   Provision for income taxes                                9.0            6.0

   Net income                                               13.1 %         16.1 %

The following discussion compares the three months ended September 30, 2009 with the three months ended September 30, 2008.

Sales by Segment. We view our operations and manage our business as one segment:
the development, marketing and licensing of technologies and fonts. Factors used to identify our single segment include the financial information available for evaluation by our chief operating decision maker in making decisions about how to allocate resources and assess performance. While our technologies and services are sold to customers in two principal markets (CE device manufacturers and independent software vendors, together OEM, and creative professional), expenses and assets are not formally allocated to these markets, and operating results are assessed on an aggregate basis to make decisions about the allocation of resources.

The following table presents revenue for these two principal markets (in thousands):

                                        Three Months Ended
                                          September 30,
                                         2009         2008     Decrease
              OEM                     $    16,329   $ 19,774   $  (3,445 )
              Creative professional         6,703      7,536        (833 )

              Total revenue           $    23,032   $ 27,310   $  (4,278 )

Revenue

Revenue was $23.0 million and $27.3 million for the three months ended September 30, 2009 and 2008, respectively, a decrease of $4.3 million, or 15.7%. OEM revenue was $16.3 million and $19.8 million for the three months ended September 30, 2009 and 2008, respectively, a decrease of $3.4 million, or 17.4%, mainly the result of decreased royalty revenue. Printer imaging revenue and display imaging revenue declined $3.6 million in the third quarter of 2009, as compared to the same period in 2008, the result of decreased royalties from reduced unit shipments by our OEM customers. We attribute the declines we have experienced in our OEM revenue to the current economic downturn. Driver revenue increased $0.2 million, mainly due to an increase in royalty revenue related to the broader deployment of our driver solutions within the product lines of our existing OEM customer base.

Creative professional revenue was $6.7 million and $7.5 million for the three months ended September 30, 2009 and 2008, respectively, a decrease of $0.8 million, or 11.1%. Web revenue from our corporate and individual customers decreased $0.7 million in the third quarter of 2009, as compared to the same period in 2008, which we attribute to the impact the current economic downturn has had on the publishing and advertising industries. Increased revenue from FontExplorer, our font management software tool, offset by a net decrease in non-web revenue together contributed $0.1 million to the overall decline in creative professional revenue in the third quarter of 2009, as compared to the same period in 2008.

Cost of Revenue

Cost of revenue, excluding amortization of acquired technology, was $1.8 million and $2.6 million for the three months ended September 30, 2009 and 2008, respectively, a decrease of $0.8 million or 32.3%. As a percentage of total revenue, cost of revenue, excluding amortization of acquired technology, was 7.8% and 9.7% in the three months ended September 30, 2009 and 2008, respectively. The decrease in cost of revenue in dollars was the result of a lower sales volume and sales mix. The decrease as a percentage of revenue was mainly due to variations in product mix. In the three months ended September 30, 2009 as compared to the same period in 2008, a higher percentage of revenue was derived from products that carry a lower cost. Within our OEM revenue, display imaging revenue, which typically has a lower associated cost than some of our other OEM revenue, represented a higher percentage of total OEM revenue in the third quarter of 2009, as compared to the same quarter of 2008.

The portion of cost of revenue consisting of amortization of acquired technology remained unchanged at $0.8 million for the three months ended September 30, 2009 and 2008.

Operating Expenses

Marketing and Selling. Marketing and selling expense was $5.8 million and $5.6 million in the three months ended September 30, 2009 and 2008, respectively, an increase of $0.2 million, or 3.8%. Share based compensation expense increased $0.1 million in the three months ended September 30, 2009, as compared to the same period in 2008, the result of additional vesting of options and restricted stock and an increase in the number of stock awards granted. An increase in third party commissions was partially offset by a decrease in outside services, which provided an increase of $0.1 million to the overall marketing and selling expense in the three months ended September 30, 2009, as compared the same period in 2008. Headcount increased 20.2% mainly from our fourth quarter 2008 restructuring actions, where certain employees were redeployed within our sales and marketing areas from development related activities. The associated increase in salaries and related benefits was offset by decreases in variable compensation.

Research and Development. Research and development expense remained constant at $3.4 million in both the three months ended September 30, 2009 and 2008. Share based compensation increased $0.2 million in the three months ended September 30, 2009 as compared to the same period in 2008, partially due to an increase in the variable portion of our share based compensation related to our acquisition of China Type Design, and partially the result of additional vesting of options and restricted stock and an increase in the number of stock awards granted. Other employee and employee related expenses decreased $0.3 million, the result of lower headcount in research and development in the three months ended September 30, 2009, as compared to the same period in 2008. Research and development headcount decreased 11.5% at September 30, 2009, as compared to September 30, 2008, a direct result of our restructuring actions in the fourth quarter of 2008, where certain employees were redeployed to our sales and marketing areas, and attrition since that time.

General and Administrative. General and administrative expense was $3.6 million and $4.8 million in the three months ended September 30, 2009 and 2008, respectively, a decrease of $1.2 million, or 25.9%. Personnel and personnel related costs decreased $0.5 million in the third quarter of 2009, as compared to the same period in 2008, the result of lower headcount and a decrease in variable compensation. Headcount decreased 16.9% mainly as a result of our fourth quarter 2008 restructuring actions. Sarbanes-Oxley related expense decreased $0.4 million in the three months ended September 30, 2009 as compared to the same period in 2008, the result of reduced reliance on external assistance. The remaining $0.3 million decrease resulted from a general decline in discretionary spending.

Amortization of Other Intangible Assets. Amortization of other intangible assets decreased $0.6 million or 34.6%, to $1.2 million for the three months ended September 30, 2009, as compared to $1.8 million for the three months ended September 30, 2008. Certain non-compete agreements entered into in connection with our acquisition from Agfa Corporation in 2004 became fully amortized during the fourth quarter of 2008, and as a result, we expect quarterly amortization of other intangible assets to remain at approximately $1.2 million going forward.

Interest Expense, Net

Interest expense, net of interest income decreased $0.8 million, or 45.3%, to $1.0 million for the three months ended September 30, 2009, as compared to $1.8 million for the three months ended September 30, 2008. The decrease is the result of lower total debt outstanding in the third quarter of 2009 as compared to the same period in 2008, as well as a decreased rate of interest on the outstanding debt. Total debt outstanding, net of unamortized financing costs, at September 30, 2009 was $99.2 million, as compared to $116.1 million at September 30, 2008. At September 30, 2009, the blended interest rate on our Amended and Restated Credit Agreement was 3.0% as compared to a blended rate of 6.5% at September 30, 2008.

(Gain) Loss on Foreign Exchange

(Gain) loss on foreign exchange was a gain of $0.7 million in the three months ended September 30, 2009, as compared to a loss of $2.7 million in the three months ended September 30, 2008. Such gains and losses result primarily from our Euro denominated intercompany note.

Loss (Gain) on Derivatives

Loss (gain) on derivatives was a loss of $1.1 million in the three months ended September 30, 2009, as compared to a gain of $2.5 million in the three months ended September 30, 2008. The loss in the third quarter of 2009 consisted of a $0.9 million loss on our currency swap and a $0.2 million loss on our interest rate swap contract. In the three months ended September 30, 2008, we recorded a gain of $2.6 million on the currency swap instrument. We entered into an interest rate swap contract during the fourth quarter of 2008 to mitigate exposure to interest rate fluctuations on our bank debt obligation. There were no interest rate swap contracts outstanding in the same period in 2008.

Provision for Income Taxes

During the three months ended September 30, 2009 and 2008, our effective tax rate was 40.6% and 27.2%, respectively. During the three months ended September 30, 2009 the effective rate included a 2.4% increase due to permanent non-deductible share based compensation expense. In connection with the preparation of its federal, state and foreign tax returns during the three month ended September 30, 2009, the Company adjusted the foreign tax credit to actual amount paid from a previous estimate, which resulted in a 5.7% increase to our effective tax rate. The actual amount of foreign taxes paid was $300 thousand lower than previously estimated. Other items, including research and development tax credit, favorable changes in state tax rates and change in tax reserves collectively decreased the effective tax rate by 2.4% for the three months ended September 30, 2009, as compared to the same period in 2008.

During the three months ended September 30, 2008, the effective rate includes 0.8% due to permanent non-deductible share based compensation expense, and (9.8%) for a change in the state tax rate utilized in 2008. In connection with the preparation of its quarterly financial statements for the three months ended September 30, 2008, the Company discovered that it had been erroneously providing for state income taxes based on an incorrect apportionment methodology since 2005. The methodology applied resulted in the overstatement of deferred tax liabilities and a corresponding overstatement of its provision for income taxes. In accordance with SEC Staff Accounting Bulletin (SAB) No. 99, Materiality and SAB No. 108 ("SAB 108"), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company assessed the materiality of this error on its financial statements for the year ended December 31, 2007, using both the roll-over method and iron-curtain method as defined in SAB 108. The Company concluded the effect of this error was not material to its financial statements for any prior period and, as such, those financial statements are not materially misstated. The Company also concluded that providing for the correction of the error in 2008 would not have a material effect on its financial statements for the year ending December 31, 2008. Accordingly, the Company recorded a reduction to its provision for income taxes of $662 thousand and a corresponding reduction to its deferred income tax liabilities, in the three months ended September 30, 2008 to correct this error. As a result, during the three months ended September 30, 2008 we revised the effective state tax rate to 3.0% from the 6.2% rate utilized in previous periods.

Results of Operations for the Nine Months Ended September 30, 2009 Compared to
Nine Months Ended September 30, 2008

The following table sets forth items in the unaudited condensed consolidated
year-to-date statement of income as a percentage of sales for the periods
indicated:



                                                           Nine Months Ended
                                                             September 30,
                                                           2009          2008
    Revenue:
    OEM                                                      73.3 %       69.2 %
    Creative professional                                    26.7         30.8

    Total revenue                                           100.0        100.0
    Cost of revenue                                           7.2          8.9
    Cost of revenue-amortization of acquired technology       3.7          3.1
    Marketing and selling                                    25.1         20.6
. . .