UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission File Number: 000-21287

PEERLESS SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)

(310) 536-0908

(Registrant’s telephone number, including area code)

     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

      Indicate by check mark whether the registrant is a shell company (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 9, 2005 was 16,705,582.

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 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 factors and trends affecting Peerless and its business 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) if Kyocera-Mita Corporation and the Company do not enter into definitive agreements relating to the Memorandum of Understanding (“MOU”) between the companies, it may harm the Company’s financial results; (b) under new regulations required by the Sarbanes-Oxley Act of 2002, an adverse opinion on internal controls over financial reporting could be issued by the Company’s independent registered public accounting firm, and this could have a negative impact on the Company’s stock price; (c) recent and proposed regulations related to equity incentives could adversely affect the Company’s ability to attract and retain key personnel; (d) the impact of Microsoft’s Windows Vista^tm operating system could have an adverse impact on the Company’s future licensing revenues; (e) 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; (f) if the Company is unable to achieve its expected level of sales of Peerless Sierra Technologies, the Company’s future revenue and operating results may be harmed; (g) if the marketplace does not accept Peerless’ new Peerless Sierra Technologies, the Company’s future revenue and operating results may be harmed; (h) the Company’s existing capital resources may not be sufficient and if Peerless is unable to raise additional capital, the Company’s business may suffer; (i) Adobe Systems Incorporated and Novell Inc. products may fail to maintain market acceptance and Adobe and Novell may fail to develop additional enhanced and/or new products that achieve market acceptance; (j) Peerless has a history of losses; (k) the future demand for the Company’s current products is uncertain; (l) Peerless relies on relationships with certain customers and any adverse change in those relationships will harm the Company’s business; (m) Peerless relies on relationships with Adobe Systems Incorporated and Novell Inc., and any adverse change in those relationships will harm the Company’s business; (n) the Company, as a sublicensor of third party intellectual property, is subject to audits of the Company’s licensing fee costs; and (o) the Company has negotiated with Adobe Systems Incorporated and Canon Inc. to remedy a contract dispute, which, if not remedied, could result in the loss of the Adobe agreement and harm to the Company’s business. Please see pages 20 through 29 of this Quarterly Report on Form 10-Q for a more in depth discussion of these factors and trends affecting Peerless and its business.

      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.

PEERLESS SYSTEMS CORPORATION

INDEX

TRADEMARKS

      Peerless®, Memory Reduction Technology® (MRT), PeerlessPowered®, PeerlessPrint®, AccelePrint®, SyntheSys®, QuickPrint®, PerfecTone® and VersaPage® are registered trademarks of Peerless Systems Corporation. MagicPrint^tm, PeerlessPage^tm, ImageWorks^tm, PeerlessDriver^tm, PeerlessColor^tm, PeerlessTrapping^tm, and WebWorks^tm 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 registered in Australia, China, France, Hong Kong, Spain, Taiwan, and the United Kingdom, and is the subject of applications for registration pending in the European Union, Italy, and Korea. PeerlessPrint is a trademark of Peerless Systems Corporation that is the subject of an application for registration pending in Japan. PeerlessPrint (in Katakana) is a trademark of Peerless Systems Corporation that is the subject of an application for registration pending in Japan.

PART I — FINANCIAL INFORMATION

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      The accompanying unaudited condensed consolidated financial statements of Peerless Systems Corporation (the “Company” or “Peerless”) 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 included in the Company’s Annual Report on Form 10-K filed with the SEC on May 2, 2005. 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.

      Liquidity: Historically, the Company has incurred losses from operations and has reported negative operating cash flows. As of October 31, 2005, the Company had an accumulated deficit of $40.7 million and cash and short-term investments of $10.8 million. The Company believes that its existing cash and short-term investments, and any cash generated from operations will be sufficient to fund its working capital requirements, capital expenditures and other obligations through at least the next twelve months.

      On March 1, 2005, the Company entered into a binding Memorandum of Understanding (“MOU”) with Kyocera-Mita Corporation (“Kyocera-Mita”) to provide a range of non-exclusive engineering services and product development services (see Note 7). Pursuant to the MOU, Kyocera-Mita has agreed to pay the Company an aggregate of $24.0 million, which will be paid in $2.0 million quarterly payments over the initial three-year term of the MOU. The long term liquidity of the Company is dependent upon this MOU. Should the MOU be terminated and Kyocera-Mita and the Company not enter into definitive agreements, the Company’s cash flow assumptions would be materially affected, and the Company would need to scale its operations to match the decrease in cash flows and may need to raise additional capital. The Company currently does not have a credit facility. The Company did not renew its credit facility with its bank, Silicon Valley Bank, which expired on October 26, 2005, and generally only provided coverage for short-term working capital needs.

      Long term, the Company may face significant risks associated with the successful execution of its business strategy and may need to raise additional capital in order to fund more rapid expansion, to expand its marketing activities, to develop new or enhance existing services or products, and to respond to competitive pressures or to acquire complementary services, businesses, or technologies. If the Company is not successful in generating sufficient cash flow from operations, it may need to raise additional capital through public or private financing, strategic relationships, or other arrangements.

      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.

      Development license revenues from the licensing of source code or software development kits (“SDKs”) for the Company’s standard products are recognized upon delivery to 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 original equipment manufacturers (“OEMs”) to provide a turnkey solution, 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

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

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, 2005 and January 31, 2005, the Company had no significant loss contracts. The Company also provides engineering support based on a time-and-material basis. Revenues from this support are recognized as the services are performed.

      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, of which the Company is a sub-licensor. 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 shipped 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 when evidence of an arrangement exists, 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.

      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. The Company generally establishes VSOE based upon standalone sales of similar products or services. 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.

      The Company has derived revenues from the sale of controllers for multifunction products (“MFP”), which has been discontinued. Peerless sold its controllers to certain OEM dealers for distribution to end users. Because it was a relatively new product, the Company was unable to establish a history regarding returns of the products shipped. Therefore, the Company recognized revenue only upon sales through to end users.

      Deferred revenue consists of prepayments of licensing fees, payments billed to customers in advance of revenue recognized on engineering services or support contracts, and shipments of controllers that have not been sold to end users. Unbilled receivables arise when the revenue recognized on engineering support or block license contracts exceeds billings due to timing differences related to billing milestones as specified in the contract.

      Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

      The Company provides an accrual for estimated product licensing costs owed to third party vendors whose technology is included in the products sold by the Company. The accrual is impacted by estimates of the mix of products shipped under certain of the Company’s block license agreements. The estimates are based on historical data and available information as provided by the Company’s customers concerning projected shipments. Should actual shipments under these agreements vary from these estimates, adjustments to the estimated accruals for product licensing costs may be required. Actual results have historically been consistent with management’s estimates.

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

      The Company grants credit terms in the normal course of business to its customers. The Company continuously monitors collections and payments from its customers and maintains allowances for doubtful accounts for estimated losses resulting from the inability of any customers to make required payments. Estimated losses are based primarily on specifically identified customer collection issues. If the financial condition of any of the Company’s customers, or the economy as a whole, were to deteriorate, resulting in their inability to make payments, additional allowances may be required. Actual results have historically been consistent with management’s estimates.

      The Company’s recurring product licensing revenues are dependent, in part, on the timing and accuracy of product sales reports received from the Company’s OEM customers. These reports are provided only on a calendar quarter basis and, in any event, are subject to delay and potential revision by the OEM. Therefore, the Company is required to estimate all of the recurring product licensing revenues for the last month of each fiscal quarter and to further estimate all of its quarterly revenues from an OEM when the report from such OEM is not received in a timely manner. In the event the Company is unable to estimate such revenues accurately prior to reporting financial results, the Company may be required to adjust revenues in subsequent periods. Fiscal year 2005 revenues subject to such estimates were minimal.

      Employee Stock-Based Compensation: The Company accounts for its stock option plans and employee stock purchase plan under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under APB No. 25, no stock-based compensation is reflected in net income (loss), as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant and the related number of shares granted is fixed at that point in time. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”:

      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 77.2% and 74.5% for the three months and nine months ended October 31, 2005 and 2004, respectively, and risk free interest rates of 3.90% and 3.43% for the three and nine months ended October 31, 2005 and 2004, 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 $0.82 for the three months ended October 31, 2004, and $2.19 and $0.79 for the nine months ended October 31, 2005 and 2004, respectively. There were no options granted in

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

the three months ended October 31, 2005. There were no options granted with exercise prices below market price on the date of grant during any of the periods presented.

      Investments consisted of the following:

      The fair value of available-for-sale securities at October 31, 2005 and January 31, 2005 approximated their carrying value (amortized cost). Unrealized gains or losses on securities were immaterial for all periods presented.

      Inventory consisted of the following:

      Inventory is stated at lower of cost or realizable value.

      During the third quarter of fiscal year 2006, three customers each generated greater than 10% of the revenues of the Company and collectively contributed 71% of such revenues. Block license revenues for the same time period were 47% of the revenues of the Company. During the third quarter of fiscal year 2005, four customers each generated greater than 10% of the revenues of the Company, and collectively contributed 83% of revenues of the Company. Block license revenues for the third quarter of fiscal year 2005 accounted for 63% of the revenues of the Company.

      During the nine months ended October 31, 2005, four customers each generated greater than 10% of the revenues of the Company and collectively contributed 66% of such revenues. Block license revenues for the same time period were 39% of the revenues of the Company. During the nine months ended October 31, 2004, six customers each generated greater than 10% of the revenues of the Company, and collectively contributed 80% of revenues of the Company. Block license revenues for the same time period of fiscal year 2005 accounted for 50% of the revenues of the Company.

6.                Income Taxes:

      For the three and nine months ended October 31, 2005, the provision for income taxes was primarily comprised of alternative minimum taxes on pretax profits for fiscal 2006. The provision for income taxes for

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

the corresponding three and nine month periods in fiscal year 2005 were primarily the result of foreign income taxes paid. On July 1, 2004, a new tax treaty between Japan and the United States went into effect. The new treaty generally eliminates the requirement of the Company’s Japanese customers to withhold income taxes on royalty payments due to Peerless. The impact was to nearly eliminate the Company’s foreign income taxes paid in the period since the treaty went into effect.

      The Company has provided a full valuation allowance on its net deferred tax assets because of the uncertainty with respect to its ability to generate future taxable income to realize its deferred tax assets.

      On March 1, 2005, the Company entered into a binding MOU with Kyocera-Mita to provide a range of non-exclusive engineering services and product development services. Pursuant to the MOU, Kyocera-Mita has agreed to pay the Company an aggregate of $24.0 million, which will be paid in $2.0 million quarterly payments over the initial three-year term of the MOU. The Company is also eligible for certain performance incentives and may be due license fees from Kyocera-Mita for all Peerless and its third-party technologies that are incorporated into Kyocera-Mita products. The MOU, which states that it is binding, is effective as of February 1, 2005, and extends to January 31, 2008. The MOU will automatically renew on an annual basis after January 31, 2008, unless terminated by either party.

      For the three and nine months ended October 31, 2005, the Company recognized revenues of approximately $2.2 million and $6.6 million, respectively, on the MOU, including $0.25 million for incentive bonuses for performance during each of the first three quarters of fiscal year 2006.

      In fiscal years 2006 and 2005, the Company engaged a marketing consulting firm controlled by a consultant who later became an officer of the Company in sales and marketing. There were no expenses related to this consulting firm in the three months ended October 31, 2005; sales and marketing expenses for the three months ended October 31, 2004 included $29,000 for services performed by this consulting firm. Sales and marketing expenses for such services for the nine months ended October 31, 2005 and 2004 included $5,000 and $103,000, respectively. No significant balances were owed to this entity at October 31, 2005 or January 31, 2005.

      On June 30, 2005, the stockholders of the Company approved the adoption of the Peerless Systems Corporation 2005 Incentive Award Plan (“2005 Plan”). The 2005 Plan replaces Peerless Systems Corporation Amended and Restated 1996 Equity Incentive Plan (“Prior Plan”), which terminated upon receipt of stockholder approval of the 2005 Plan.

      The 2005 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, performance awards, dividend equivalents, deferred stock, stock payment awards and stock appreciation rights to eligible individuals. The terms of the awards are subject to the provisions in the award agreement, which are set by the administrator consistent with the terms of the 2005 Plan.

      The exercise price of a stock option shall not be less than the fair market value of the Company’s common stock on the date of grant. No stock option shall be exercisable later than ten (10) years after the date it is granted. The administrator is authorized to grant awards intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended. The 2005 Plan enumerates certain performance criteria that may be used in granting such awards.

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

      The maximum aggregate number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2005 Plan is the sum of: (i) 500,000 shares; plus (ii) any shares of common stock which as of the effective date of the 2005 Plan are available for issuance under the Prior Plan and which following the effective date of the 2005 Plan are not issued upon exercise of outstanding awards made under the Prior Plan. As of June 30, 2005, there were approximately 3,790,589 shares remaining available for issuance under the Prior Plan, including 3,508,635 shares subject to outstanding awards under the Prior Plan, which awards will remain outstanding under the terms of the Prior Plan until exercised or terminated.

      A summary of the primary provisions of the 2005 Plan was included in a Form 8-K, filed on June 30, 2005. The full text of the 2005 Plan was included as Appendix A to the Company’s proxy statement for the 2005 Annual Meeting of Stockholders, filed on May 16, 2005.

      During the quarter ended July 31, 2005, the Company decided that, due to declining demand for its Everest controller, it would discontinue the production of the controllers. As a result, the Company recorded a provision for costs of the disposal of excess inventory and other cancellation charges of $179,000 and $456,000 in the three and nine months ended October 31, 2005. These amounts have been recorded in cost of revenues.

      As of October 31, 2005, the Company had an outstanding commitment of $391,000 on a purchase order entered into during the third quarter for software licenses associated with its hardware product development activities.

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.

Overview

      The Company, together with its wholly-owned subsidiary, Peerless Systems Imaging Products, Inc. (“PSIP”), licenses software-based imaging and networking technology in embedded, attached and stand-alone digital document products and integrates proprietary software into the printers, copiers, and multifunction products (“MFPs”) of original equipment manufacturers (“OEMs”). The Peerless imaging solution is based on a combination of software and imaging application specific integrated circuits (“ASIC”), which together form a cost-effective imaging system that addresses virtually all sectors of the printing market, from low-end small office/home office (“SOHO”) inkjets to high-end laser digital color copiers and printers. The low-cost, high performance printers and MFPs that incorporate the Company’s imaging solutions are increasingly replacing expensive standalone copiers and printers in corporate offices.

      The Company has developed and continues to develop controller products and applications for sale to OEMs and distribution channels. Digital document products include monochrome (black and white) and color printers, copiers, fax machines and scanners, as well as 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 OEMs to develop stand-alone and networked digital printers, copiers, and MFPs quickly and cost effectively. The Peerless family of Network software development kit (“SDK”) products offers OEM device manufacturers a complete connectivity solution for digital imaging peripherals. The SDK products are transitioning to an “unbundled” set of technologies to provide incremental “component-level” sales opportunities for customers that possess some level of existing networking support in their products. Additionally, new SDK offerings in the area of next-generation web services and advanced security platforms should provide multiple new market opportunities outside of the digital imaging arena for Peerless Network technology. The Web Services Framework will support connectivity to Microsoft’s next-generation “Vista^tm” Operating System for printing, scanning, and faxing, as well as network management. The Security Framework SDK will support scalable security solutions across a wide variety of network appliances, with the highest level of functionality designed to address the most stringent Department of Defense and United States Government requirements.

      The Company markets its solutions directly to OEM customers including Canon, Konica Minolta, Kyocera-Mita, Lenovo (formerly Legend), Oki Data, Panasonic, Ricoh, and Seiko Epson. The Company has expanded its solution offerings by incorporating related imaging and networking technologies developed internally or licensed from third parties. The Company has developed more diverse distribution channels for its

products and expanded its target markets to distributors, value added resellers, system integrators, OEM sales operations, and geographically to the People’s Republic of China.

      The Company generates revenue from its OEM customers through the sale of imaging solutions in either turnkey or 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.

      Block licenses are per-unit licenses made in large volume quantities to an OEM for products either in or about to enter into distribution into the marketplace. Payment schedules for block licenses are negotiable and payment terms are often dependent on the size of the block and other terms and conditions of the block license being acquired. Typically, payments are made in either one lump sum or over a period of four or more quarters.

      Revenue received for block licenses is recognized in accordance with Statement of Position 97-2, which requires that revenue be recognized after acceptance by the OEM and the Company has no future obligations, and if fees are fixed and determinable and the collection of fees is probable. For block licenses that have a significant portion of the payments due within twelve months, revenue is recognized at the time the block license is signed if all of the recognition criteria have been met.

      The Company also has engineering services revenues that are derived primarily from adapting the Company’s 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 Company’s maintenance revenues are derived from software maintenance agreements. Maintenance revenues currently constitute a small portion of total revenue.

      As part of the total solution offered to its OEMs, the Company developed a direct distribution channel for its ASIC chips. Under this “fabless” model, Peerless supplies ASIC chips from the foundry directly to the OEMs through third party distributors, which include Arrow Electronics and Marubun Corporation. The Company is responsible for marketing and sales administration, including the billings and collections to and from its OEMs and distributors, and the third party is responsible for the coordination of production with the foundry, maintenance of necessary inventories, and providing just-in-time delivery to OEMs and distributors.

      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 a printing technology and a new open architecture called “Peerless Sierra Technologies.” Peerless believes that products based on its Peerless Sierra Technologies 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 Peerless Sierra Technologies attributes are applicable.

      In addition, as a result of the complexities of the imaging industry, the Company continues to explore opportunities to enhance the value of the Company, including new market opportunities, mergers, acquisitions, and/or the sale of all or a portion of the Company’s assets.

Liquidity and Capital Resources

      Compared to January 31, 2005, total assets at October 31, 2005 increased 41% to $17.9 million and stockholders’ equity increased 53% to $9.9 million, primarily the result of the net income and the issuance of common stock. The Company’s cash and investment portfolio at October 31, 2005 was $10.8 million, an increase of 66% from $6.5 million as of January 31, 2005, and the ratio of current assets to current liabilities was 2.2:1, which is an increase from the 1.8:1 ratio as of January 31, 2005. The increase was primarily the result of the operating profit generated during the nine-month period and increases in trade and unbilled receivables. The Company’s operations provided $3.9 million in cash during the nine months ended

October 31, 2005, compared to $4.8 million in cash used by operations during the quarter ended October 31, 2004.

      During the nine months ended October 31, 2005, $0.5 million in cash was provided 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 nine months ended October 31, 2005 and 2004, the Company invested $0.2 million in property, equipment and leasehold improvements.

      At October 31, 2005, the Company’s principal source of liquidity, cash and cash equivalents and investments was $10.8 million, an increase of $4.3 million from January 31, 2005, compared to a decrease of $5.0 million in the comparable nine-months ended October 31, 2004. Peerless does not have a credit facility. The Company did not renew the credit facility it had with Silicon Valley Bank that allowed for borrowing against outstanding receivables. The credit facility, which expired on October 26, 2005, generally only provided coverage for short-term working capital needs. The Company may require additional long-term capital to finance working capital requirements.

      On March 1, 2005, the Company entered into a binding Memorandum of Understanding (“MOU”) with Kyocera-Mita Corporation (“Kyocera-Mita”) to provide a range of non-exclusive engineering services and product development services. Pursuant to the MOU, Kyocera-Mita has agreed to pay the Company an aggregate of $24.0 million, which will be paid in $2.0 million quarterly payments over the initial three-year term of the MOU. The long term liquidity of the Company is dependent upon this MOU. Should the MOU be terminated and Kyocera-Mita and the Company not enter into definitive agreements, the Company’s cash flow assumptions would be materially affected.

      During the quarter ended July 31, 2005, the Company determined that, due to the declining demand for its Everest controller, it would end the production of the controller. The Company canceled remaining orders for the production of the controller at its contract manufacturer and began to dispose of any excess inventory. For the three and nine months ended October 31, 2005, the Company recorded provisions for loss of $0.2 million and $0.5 million, respectively, for losses on the disposal of excess inventory and other cancellation charges.

      The Company believes that the net cash provided by operating activities, and existing cash and equivalents, will provide the Company with sufficient resources to meet working capital requirements and other cash needs over at least the next twelve months. If the Company does not generate anticipated cash flow from sales, 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, any of which could have a material adverse effect on the Company’s business, results of operations and prospects. Further, if the Company’s expected positive cash flows are not achieved, and is unable to increase revenues or cut costs so that revenues generated from operating activities are sufficient to meet the Company’s obligations, the Company will exhaust its current capital resources, and 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 acceptable 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 income in the third quarter of fiscal year 2006 was 1.0 million, or $0.06 per basic and diluted share, compared to a net loss of $(1.3) million, or $(0.08) per share, in the third quarter of fiscal year 2005.

      Consolidated revenues were $9.6 million for the third quarter of fiscal year 2006, compared to $5.0 million for the third quarter of fiscal year 2005. Licensing revenues increased $1.3 million in the third quarter of fiscal year 2006, as a result of higher block license levels in the current fiscal year. Engineering services and maintenance revenues increased $2.8 million, primarily as a result of engineering efforts under the Company’s binding MOU with Kyocera-Mita. Hardware sales increased $0.5 million as a result of Everest controller sales, which did not begin until the fourth quarter last year, offset by decreased sales of the Company’s ASICs.

      Total cost of revenues was $4.7 million in the third quarter of fiscal year 2006, compared to $2.1 million in the third quarter of fiscal year 2005. Product licensing costs increased $0.7 million in the period as a result of a higher level of licensing revenues. Engineering services and maintenance costs increased $1.3 million in the third quarter of fiscal year 2006, primarily due to the cost of providing services under the Kyocera-Mita MOU. Hardware sales costs were higher in the third quarter of fiscal year 2006, primarily as a result of the costs of the sales of Everest controllers, which included a provision of $0.2 million for costs of the disposition of inventory and other cancellation charges associated with the end of production of the controllers. Those increases were offset by a decrease in ASICs costs.

      The Company’s gross margin decreased to 52% in the third quarter of fiscal year 2006 compared with 58% in the third quarter of fiscal year 2005. The decrease in margin in fiscal year 2006 resulted from lower levels of the Company’s technology in its licensing revenues and the decreased margin in hardware sales due largely to the costs of ending the Everest controller production. These decreases were offset by increased margin associated with its engineering services and maintenance revenues, largely driven by the impact of the Kyocera-Mita MOU.

      Total operating expenses for the third quarter of fiscal year 2006 decreased 7% to $3.9 million, compared with $4.2 million for the same period one year ago.

      The provision for income taxes for the three months ended October 31, 2005 was primarily related to alternative minimum taxes on pretax profits for fiscal year 2006.

      The Company has provided a valuation allowance on its net deferred tax assets because of the uncertainty with respect to its ability to generate future taxable income to realize its deferred tax assets.

     Comparison of Nine Months Ended October 31, 2005 and 2004

      The Company’s net income in the nine months ended October 31, 2005 was $2.6 million, or $0.16 per basic share and $0.14 per diluted share, compared to a net loss of $(6.9) million, or $(0.44) per share, in the comparable nine month period in fiscal year 2005.

      Consolidated revenues were $26.5 million for the nine months ended October 31, 2005, compared to $14.8 million in the comparable nine month period in fiscal year 2005. Licensing revenues increased $3.0 million in the nine months ended October 31, 2005, primarily as a result of a higher level of shipments by the Company’s customers. Engineering services and maintenance revenues increased $7.4 million, primarily as a result of engineering efforts under the Company’s MOU with Kyocera-Mita. Hardware sales increased $1.4 million as a result of sales of its Everest controllers, offset by decreased sales of the Company’s ASICs.

      Total cost of revenues was $12.9 million in the nine months ended October 31, 2005, compared to $6.2 million in the comparable nine month period in fiscal year 2005. Product licensing costs increased $1.7 million in the period as a result of a higher level of licensing revenues. Engineering services and maintenance costs increased $3.4 million in the period, primarily due to the cost of providing services under the Kyocera-Mita MOU. Hardware sales costs increased $1.6 million in the nine months ended October 31, 2005, primarily as a result of the sales of Everest controllers, costs of which included the provision of $0.5 million for costs of the disposition of inventory and other cancellation charges associated with the end of production of the controllers.

      The Company’s gross margin decreased to 51% in the nine months ended October 31, 2005 compared to 58% in the comparable nine month period in fiscal year 2005. Lower levels of the Company’s technology in its licensing revenues and the costs of ending the production of the Everest controllers were primarily responsible for the decrease, offset by increased margins associated with its engineering services and maintenance revenues, largely driven by the Kyocera-Mita MOU.

      Total operating expenses for the nine months ended October 31, 2005 decreased 28% to $11.0 million, compared to $15.4 million for the comparable nine month period in fiscal year 2005.

      The provision for income taxes for the nine months ended October 31, 2005 was primarily related to alternative minimum taxes on pretax profits for fiscal year 2006. The provision for income taxes for the nine months ended October 31, 2004 resulted primarily from foreign income taxes paid. On July 1, 2004, a new tax treaty between Japan and the United States became effective, resulting in the elimination of Peerless’ Japanese customers’ requirements to withhold taxes on royalty payments to the Company.

      The Company has provided a valuation allowance on its net deferred tax assets because of the uncertainty with respect to its ability to generate future taxable income to realize its deferred tax assets.

      The Company is exposed to a variety of risks in its investments, mainly a lowering of interest rates. The primary objective of the Company’s investment activities is to preserve the principal of its investments, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company from time to time maintains its portfolio of cash equivalents, fixed rate debt instruments of the U.S. Government and high-quality corporate issuers and short-term investments in money market funds. Although the Company is subject to interest rate risks, 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.

      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. The Company has experienced no significant foreign exchange gains or losses to date. The Company has not engaged in foreign currency hedging activities to date and has no intention of doing so. The Company’s international business is subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and to a lesser extent foreign exchange rate volatility. Accordingly, the Company’s future results could be materially and adversely affected by changes in these or other factors.

Certain Factors and Trends Affecting Peerless and Its Business

      Peerless and Kyocera-Mita may never come to agreement on the terms of definitive agreements regarding the development of Kyocera-Mita products by Peerless or enter into definitive agreements relating to their relationship described in the MOU. If the parties do not enter into definitive agreements, the Company’s financial results may be harmed. Peerless and Kyocera-Mita have not yet defined the products that will utilize Peerless technologies, and at this point the parties have not negotiated the terms and conditions associated with the licensing of Peerless’ and its third party’s technologies arising out of this development relationship.

      Section 404 of SOX requires that the Company establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of the internal control structure and procedures for financial reporting. The Company’s independent registered public accounting firm is required to attest on management’s assertions on internal controls. Because the Company’s public float was less than $75 million at the end of its fiscal second quarter on July 31, 2005, such attestation will not be required until fiscal year end January 31, 2007. Although no known material weaknesses exist at this time, both a material weakness and significant deficiency were discovered during the preparation of the July 31, 2005 Form 10-Q, both of which have been remediated. It is possible that material weaknesses may be found in the future. If the Company is unable to remediate the weaknesses, the independent registered public accounting firm would be required to issue an adverse opinion on the Company’s internal controls.

      Because opinions on internal controls have not been required in the past, it is uncertain what impact an adverse opinion would have upon the Company’s stock price.

      Since its inception, the Company has used stock options and other long-term equity incentives as a fundamental component of its employee retention packages. The Company believes that stock options and other long-term equity incentives directly motivate its employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with Peerless. The Financial Accounting Standards Board has announced changes that, when implemented in the Company’s first fiscal quarter ending April 30, 2006, will require the Company to record a charge to earnings for employee stock option grants and issuances of stock under employee stock purchase plans. This regulation could negatively impact the Company’s results of operations. In addition, new regulations implemented by the Nasdaq National Market requiring shareholder approval for all stock option plans could make it more difficult for the Company to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant options to employees, the Company may incur increased costs, change its equity incentive strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect the Company’s business.

      Among the changes announced for Microsoft’s Windows Vista^tm operating system are fundamental changes to the printing and networking subsystems within the operating system. Of particular relevance to Peerless is Microsoft’s development of a new page description language (PDL) and peripheral device connectivity methods, the format of which would be licensed by Microsoft on a royalty-free basis to both OEMs and third party technology providers such as Peerless. Should Peerless fail to support these technologies on a timely basis, or should OEMs decide to support these technologies on their own without use of Peerless’ products, it could have an adverse impact on the Company’s potential licensing revenues from these enhanced products. In addition, to the extent that Peerless’ current PDL products are perceived as being gradually rendered obsolete over the long term by these new Microsoft technologies, it could have an adverse impact on Peerless’ ability to generate new sales of its current PDL products.

      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 Peerless Sierra Technologies product line of high performance, high speed, color imaging solutions. Until the Company’s Peerless Sierra Technologies becomes accepted in the marketplace — if such technology does become accepted in the marketplace — the Company’s overall license revenue may stagnate or even decrease. The Company recently decided to end production of its first product based on Peerless Sierra Technologies, the Everest controller, due to poor customer acceptance. 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 the Company’s success of its new Peerless Sierra Technologies. The Company has spent a significant amount of time and capital developing its new Peerless Sierra Technologies. Any delay in licensing its Peerless Sierra Technologies in the future could harm the Company’s financial results.

      Peerless Sierra Technologies 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 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 Peerless Sierra Technologies or if the marketplace takes additional time to accept the Peerless Sierra Technologies than Peerless is expecting, the Company’s future revenues and operating results may be harmed.

      The Company’s principal source of liquidity is the Company’s cash and cash equivalents and investments, which, as of October 31, 2005, were approximately $10.8 million in the aggregate. The current ratio of current assets to current liabilities was 2.2:1. For the nine months ended October 31, 2005, Peerless’ operations provided $3.9 million in cash.

      On March 1, 2005, the Company entered into a binding Memorandum of Understanding (“MOU”) with Kyocera-Mita Corporation (“Kyocera-Mita”) to provide a range of non-exclusive engineering services and product development services. Pursuant to the MOU, Kyocera-Mita has agreed to pay the Company an aggregate of $24.0 million, which will be paid in $2.0 million quarterly payments over the initial three-year term of the MOU. The long term liquidity of the Company is dependent upon this MOU. Should the MOU be terminated and Kyocera-Mita and the Company not enter into definitive agreements, the Company’s cash flow assumptions would be materially affected.

      If Peerless does not generate anticipated cash flow from licensing and services, 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 does not experience positive cash flows as is 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.

      Peerless currently derives substantial licensing revenues from the sublicensing of third party technologies. Peerless expects that revenue from the sublicensing of third party technologies, including the technologies of Adobe and Novell, will continue to account for a substantial portion of revenues during fiscal year 2006 and beyond. The Company’s future success depends in part on the success of Adobe and Novell’s products and their ability to address the rapidly changing needs of the Company’s customers in the marketplace on a timely basis and for a reasonable price. Adobe and Novell’s failure to develop and to successfully introduce product enhancements and/or new products in the Company’s prime markets and the Company’s inability to replace Adobe and Novell’s products with other third party licenses that meet the company’s customer’s needs for a reasonable cost is likely to materially and adversely affect the Company’s business and financial results.

      Although Peerless was profitable in the first three quarters of fiscal year 2006, the Company has been unprofitable in four of the last five fiscal years. There is no assurance that the Company will continue to be profitable.

      Peerless’ monochrome technology and products have been in the marketplace for an average of 31 months as of October 31, 2005. The average age of current technology and products in the marketplace reflects the aging of 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 2006, three customers, Oki Data Corporation, Kyocera-Mita Corporation and Seiko Epson Corporation each generated greater than 10% of the Company’s revenues and collectively contributed 71% of revenues. Block license revenues for the same time period were $4.5 million, or 47% of revenues. During the third quarter of fiscal year 2005, four customers, Konica Minolta Corporation, Kyocera-Mita Corporation, Novell Inc., and Seiko Epson Corporation each generated greater than 10% of the revenues, and collectively contributed 83% of revenues. Block license revenues during the same period were $3.2 million, or 63% of the Company’s revenues. If any of these customers choose to no longer use Peerless’ services or products, the Company’s operating results could decline significantly.

      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 $4.8 million in revenues and an associated $2.1 million in cost of revenues during the third quarter of fiscal year 2006. Should the agreement with any 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.

      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.

      Peerless has negotiated with Canon Inc. regarding the PostScript sublicense agreement between Peerless and Canon executed as of April 1, 2001. 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. To date, Peerless has been unable to amend the Canon sublicense in a manner acceptable to both Canon and Adobe. Furthermore, there is no assurance that Peerless will be able to resolve the issues in a manner acceptable to both Adobe and Canon. Thus, Adobe may exercise its right to terminate its license agreement with Peerless and take other legal action against Peerless, if it so chooses. Termination of the Adobe agreement would have a material adverse effect on Peerless’ future operating results. Approximately 50% of Peerless’ revenue for the nine months ended October 31, 2005 and approximately 60% of Peerless’ revenue for the nine months ended October 31, 2004 were derived from its licensing arrangement with Adobe Systems Incorporated. See “Peerless relies on relationships with Adobe Systems Incorporated and Novell Inc., and any adverse change in those relationships will harm the Company’s business.”

      The Company’s future success 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.

      Peerless currently sublicenses third party technologies to the Company’s OEM customers, which sublicenses account for a significant amount 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 the affected 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. See “The Company has negotiated with Adobe Systems Incorporated and Canon, Inc. to remedy a contract dispute, which, if not remedied, could result in the loss of the Adobe agreement and harm to the Company’s business.”

      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 must 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 digital document printing 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. If 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 $2.9 million as of October 31, 2005, an increase from $2.0 million as of January 31, 2005. Significant collections at the end of fiscal year 2005 contributed to the increase. Although Peerless believes that the Company’s reserves for accounts receivable are adequate for the remainder of fiscal year 2006, there can be no assurance this is the case. If the Company’s reserves for accounts receivable are inadequate, it could have a material adverse effect on the Company’s results of operations.

      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, distribute, 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, distribution, copying, and use. In addition, it may be possible for unauthorized third parties to copy the Company’s products or to reverse engineer the Company’s products in order to obtain and subsequently use and distribute the Company’s proprietary information.

      The Company holds patents issued in the United States, France, Germany, Great Britain, Japan, Taiwan and Hong Kong. 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

devices, filtering techniques for use with output devices and communicating with peripheral devices over a network.

      The Company also has patent applications pending in the United States, the European Patent Office, Japan, Hong Kong, Taiwan, China, Australia, Korea, and India.

      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, or that the Company will have adequate resources to enforce its intellectual property rights against infringers. 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, divert the efforts of the Company’s technical and management personnel from productive tasks, 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.

      Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting in preparation for filing the Company’s Form 10-Q for the quarter ended July 31, 2005. Based on that evaluation, management identified internal control deficiencies that related to (i) the Company’s estimation process for timely recording of accruals of third party product licensing service, which was identified as a material weakness and (ii) the administration of the Company’s Employee Stock Purchase Plan, which was identified as a significant deficiency. These weaknesses affected the Company’s ability to prepare interim and annual consolidated financial statements and accompanying footnote disclosures in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. These weaknesses, if not remediated, create increased risk of misstatement, mistake or omission in the Company’s financial results resulting in the loss of investor confidence in its financial reporting. While the Company’s management believes they have remediated the weaknesses, management’s response to any weaknesses in the Company’s internal control over financial reporting may have been inadequate, ineffective or insufficient to remedy the risk of material misstatements, mistake or omission in the Company’s financial results. In addition, the Company is continuing to review the consequences of the identified deficiencies related to the past administration of the Employee Stock Purchase Plan, and the Company may identify material consequences in the future.

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

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

      The Company’s common stock has experienced price and volume volatility. In the 60-day period ending December 9, 2005, the closing price of the stock ranged from $5.83 per share to $8.51 per share. During the same period, daily volume for the Company’s common stock has ranged from 79,900 shares traded to 838,100 shares traded. Such price and volume volatility may occur in the future. Factors that could affect the trading price and volume of the Company’s common stock include:

      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.

      Since July 30, 2004, the Company’s common stock has been traded on the Nasdaq Capital Market. There can be no assurance, however, that the Company will be able to maintain compliance with the continued listing standards of the Nasdaq Capital Market. For example, if the minimum bid price of the Company’s common stock falls below $1.00, and remains below $1.00 for thirty consecutive business days, the Company will not be in compliance with the Nasdaq Capital Market minimum bid requirements under Marketplace Rule 4310(c)(4).

      If Peerless is not able to maintain compliance, the Company’s common stock may be subject to removal from listing on the Nasdaq Capital Market. Trading in the Company’s common stock after a delisting, if any, would likely be conducted in the over-the-counter markets in the so-called “pink sheets” or the National Association of Securities Dealers’ Electronic Bulletin Board and could also be subject to additional restrictions. As a consequence of a delisting, the Company’s stockholders would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company’s common stock. In addition, a delisting would make the Company’s common stock substantially less attractive as collateral for margin and purpose loans, for investment by financial institutions under their internal policies or state legal investment laws or as consideration in future capital raising transactions.

      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 ASICs 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.

      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.

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

      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. Peerless has re-deployed its engineering staff in support of Kyocera-Mita. Should this requirement 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.

      The Company’s ability to implement the Company’s business plan, develop and offer products and manage expansion in rapidly developing and disparate marketplaces requires comprehensive and effective planning and management. The growth in the complexity of business relationships with current and potential customers and third parties has placed, and will continue to place, a significant strain on management systems and resources. The Company’s failure to continue to improve upon the operational, managerial and financial controls, reporting systems and procedures in its imaging business or the Company’s failure to expand and manage its workforce could have a material adverse effect on the Company’s business and financial results.

      The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Peerless management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized 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 necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

      As required by Rule 13(a)-15(b) under the Securities Exchange Act of 1934, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at ensuring that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported as required in applicable SEC rules and forms.

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

PART II — OTHER INFORMATION

      None.

      None.

      None.

      None.

      On October 18, 2005, the Company entered into Amendment No. 22 to the PostScript Software Development License and Sublicense Agreement between Adobe Systems Incorporated and Peerless Systems Corporation, effective as of October 14, 2005. Amendment 22 is attached hereto as Exhibit 10.95.

      On December 9, 2005, the Company entered into Amendment No. 27 to the PostScript Software Development License and Sublicense Agreement between Adobe Systems Incorporated and Peerless Systems Corporation, effective as of November 1, 2005. Amendment 27 is attached hereto as Exhibit 10.98.

Item 6 — Exhibits.

      Exhibits:

SIGNATURES

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

Date: December 15, 2005

Date: December 15, 2005

EXHIBIT INDEX