1.	Overview of Business and Basis of Presentation

We provide software, hardware and professional services for the video market and the high-performance, real-time market. Our business is comprised of two segments for financial reporting purposes, products and services, which we provide for each of these markets.

Our video solutions consist of software, hardware, and services for intelligently streaming video and collecting and analyzing media data. Our video solutions and services are deployed by video service providers for distribution of video to consumers and collection of media data intelligence to manage their video business and operations.

Our real-time products consist of real-time Linux operating systems, development tools and other system software combined, in most cases, with computer platforms and services. These products are sold to a wide variety of companies seeking high-performance, real-time computer solutions in the military, aerospace, financial and automotive markets around the world.

Our condensed consolidated interim financial statements are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2014.

There have been no changes to our Significant Accounting Policies as disclosed in Note 2 of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2014. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.

Smaller Reporting Company

We meet the Securities and Exchange Commission’s (“SEC’s”) definition of a “Smaller Reporting Company,” and therefore qualify for the SEC’s reduced disclosure requirements for smaller reporting companies.

Immaterial Restatement of Previously Issued Financial Statements

Subsequent to the issuance of our fiscal year 2014 Consolidated Financial Statements, we identified an error in the Consolidated Statement of Cash Flows relating to the presentation of spare parts purchases used to support our obligations under customer contracts. Cash outflows of $444,000 for the nine months ended March 31, 2014 were improperly classified as investing rather than as operating activities in the Consolidated Statements of Cash Flows. We have evaluated the effects of these misstatements for each of these periods and concluded that none of these periods are materially misstated. Notwithstanding, we have corrected the accompanying cash flow presentation for the nine months ended March 31, 2014 and will correct the applicable comparable prior periods in our future filings.

The impact of this error on our previously issued Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 is presented below (in thousands):

	Consolidated Statements of Cash Flows for the nine months ended March 31, 2014
	As Previously Reported			Adjustments			As Restated
Depreciation and amortization	$	1,795		$	(221	)	$	1,574
Inventory provision		33			221			254
Other long-term assets, net		(32	)		(444	)		(476	)
Net cash used in operating activities	$	(638	)	$	(444	)	$	(1,082	)

Additions to property and equipment	$	(1,291	)	$	444		$	(847	)
Net cash used in investing activities	$	(1,291	)	$	444		$	(847	)

Additionally, and in connection with the correction noted above, we have reclassified $913,000 of non-current spare parts from property and equipment, net on our June 30, 2014 balance sheet, to other long-term assets to conform to the March 31, 2015 presentation. Related depreciation is included in cost of sales in our income statement.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes

As of June 30, 2014, we had U.S. federal net operating loss carryforwards of approximately $94.4 million for income tax purposes, of which none expire in fiscal year 2015, and the remainder expire at various dates through 2034. We completed an evaluation of the potential effect of Section 382 of the Internal Revenue Code of 1986 (the “Code”) on our ability to utilize these net operating losses. The study concluded that we have not had an ownership change for the period from July 22, 1993 to June 30, 2014.

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical and future projected operations along with other positive and negative evidence in assessing if sufficient future taxable income will be generated to use the existing deferred tax assets. The following summarizes our conclusions on the need for a valuation allowance in each jurisdiction as of March 31, 2015:

U.S. - As of June 30, 2014, we had realized a three-year cumulative accounting profit in the U.S. adjusted for permanent differences and other non-recurring events, including the 2013 gain on the sale of certain patents, and adjusting for the loss of a long time customer. This three-year period is the standard period by which we initially assess each jurisdiction and is strong objective evidence, whether positive or negative, to be considered in the release or recording of any valuation allowance. In determining whether or not to release valuation allowance for the U.S. jurisdiction we considered positive evidence including the three year cumulative accounting profit, current projections of future profitability, lack of any significant claims or loss contingencies, and positive cash from operations. Negative evidence considered includes significant volatility in our operations, history of NOLs expiring unused, concentration of our customer base including the risk of global consolidation in the cable industry, and the loss of a long-time customer in the current year. Based on our analysis of both positive and negative evidence, we concluded during the fourth quarter of our fiscal year 2014 that it is now more likely than not that we will realize a portion of our U.S. deferred tax asset, as the positive objective evidence, including the three-year cumulative accounting gain, outweighed the negative subjective evidence of customer concentration and volatility in our business. As of March 31, 2015, we have not experienced a material change in our business or significant event that would change the conclusion we reached as of June 30, 2014. Results materially different from our current expectations on an ongoing basis, or significant events such as the acquisition or loss of a major customer, or the change in buying habits of our customers, could result in future additional change in the valuation allowance. We will continue to evaluate our assumptions each quarter regarding the need for a change in our valuation allowance and will make appropriate adjustments as necessary.

U.K. - During our fiscal year 2014, a change in U.K. tax law relative to treatment of research and development expenses allowed us to release $214,000 of valuation allowances against deferred tax assets that we believe are now realizable as a result of the current period tax law change. We believe that in light of this law change, we will now generate sufficient taxable income to fully utilize our net deferred tax assets in the U.K.

Japan - Our subsidiary in Japan has a long history of profitable operations, and we continue to project profitability in Japan for the foreseeable future. Therefore, we continue to believe that we will fully realize the net deferred tax assets in Japan, and no valuation allowance is needed.

Hong Kong - In prior periods, we have demonstrated both the intent and ability to remain permanently reinvested in our foreign subsidiaries. We evaluate and document this assertion each quarter. This has allowed us to utilize the indefinite reversal exception of ASC 740-30-25-18, which provides an exception to the recognition of any outside basis differences in our investment in foreign subsidiaries. The most common example of an outside basis difference is undistributed earnings of foreign subsidiaries. During the second quarter of 2014, we began to reevaluate the long-term sustainability of our Hong Kong subsidiary. While we have not reached any conclusions as of March 31, 2015, we no longer believe that we can positively assert that we will remain permanently reinvested in Hong Kong. As such, we concluded that a full valuation allowance against our Hong Kong subsidiary’s deferred tax assets continues to be warranted. ASC 740-30-25-19 requires that if circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted in the foreseeable future but income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period any income taxes attributable to that remittance. We have reviewed the potential impact of the repatriation of the Hong Kong subsidiary’s earnings to the U.S. Due to significant net operating losses generated over the years by that subsidiary, we do not believe that there will be any material income taxes attributable to any remittance of earnings from the Hong Kong subsidiary.

Other Foreign Jurisdictions - We also evaluated the need for a continued full valuation allowance against our foreign deferred tax assets in other jurisdictions. We concluded that a full valuation allowance against our deferred tax assets for other foreign jurisdictions was warranted due to, among other reasons, (i) the realized cumulative accounting losses, (ii) our long history of taxable losses and (iii) our uncertainty with respect to generating future taxable income in the near term given our recently completed projections and other inherent uncertainties in our business.

Each quarter, we assess the total weight of positive and negative evidence and evaluate whether release of all or any portion of the valuation allowance is appropriate. Should we come to the conclusion that a release of our valuation allowances is required, or that additional valuation allowance is required, there could be a significant increase or decrease in net income and earnings per share in the period of release, or the additional valuation allowance, due to the impact on the tax rate.

We recorded an income tax provision of $679,000 and $733,000 during the three and nine months ended March 31, 2015, respectively. For both the three and nine months ended March 31, 2015, our income tax provision was primarily due to taxable income in the U.S., Japan, and the United Kingdom. Our U.S. tax provision is comprised primarily of non-cash deferred income tax expense; any U.S. tax provision is expected to primarily impact our net operating losses which will offset most cash taxes that would otherwise be owed.

Recently Issued Accounting Pronouncements

Adopted

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Foreign Currency Matters (Topic 830) which provides guidance on a parent company’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance was effective for us beginning July 1, 2014 and did not have a material impact on our financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This amendment requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss or a tax credit carryforward, unless certain conditions exist. This guidance is effective prospectively for annual reporting periods (and the interim periods within) beginning after December 15, 2013. Early adoption and retrospective application are permitted. The guidance was effective for us beginning July 1, 2014 and did not have any impact on our financial statements, as there were no net operating loss carryforwards attributable to any of our uncertain tax positions.

To Be Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for us beginning July 1, 2017 and early adoption is not permitted. We anticipate this standard may have a material impact, and we are currently evaluating the impact this standard will have on our consolidated financial statements.

On August 27, 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern; which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim period and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not expect this guidance to have a material impact on our financial statements or disclosures.