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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number: 000-21287

Peerless Systems Corporation

(310) 536-0908

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

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

          The number of shares of Common Stock outstanding as of September 8, 2004 was 15,994,147.

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

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

      In particular, statements regarding the Company’s outlook for future business, financial performance and growth, including projected revenue, both quarterly and from specific sources, profit, spending, including spending on research and development efforts, costs, margins 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 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. Factors and trends affecting Peerless and its business include, but are not limited to, the following factors and trends as well as other factors and trends described from time to time in our reports filed with the Securities and Exchange Commission: (a) 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; (b) if the Company is unable to introduce its Peerless Sierra Technologies on a timely basis, the Company’s future revenue and operating results may be harmed; (c) if the marketplace does not accept our new Peerless Sierra Technologies, the Company’s future revenue and operating results may be harmed; (d) the Company’s forecasts for our Peerless Sierra Technologies may not be realized, and losses for the disposition of excess inventories may result; (e) the Company’s existing capital resources may not be sufficient, and if the Company is unable to raise additional capital its business may suffer; (f) the Company’s near term revenue from engineering services may drop as it may change its strategies in how it offers its products in the marketplace; (g) Peerless has a history of losses and anticipates continued losses; (h) the future demand for the Company’s current products is uncertain; (i) Peerless relies on relationships with certain customers and any adverse change in those relationships will harm the Company’s business; (j) Peerless relies on relationships with Adobe Systems Incorporated and Novell Inc., and any adverse change in those relationships will harm the Company’s business; (k) the Company, as a sublicensor of third party intellectual property, is subject to audits of the Company’s licensing fee costs; (l) 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; (m) Peerless may be unable to develop additional new and enhanced products that achieve market acceptance; (n) if Peerless is not in compliance with the Company’s licensing agreements, Peerless may lose the Company’s rights to sublicense technology, and the Company’s competitors are aggressively pursuing the sale of licensed third party technology; (o) the industry for imaging systems for digital products involves intense competition and rapid technological changes, and the Company’s business may suffer if its competitors develop superior technology; (p) the Company’s reserves for accounts receivable may not be adequate; (q) if Peerless fails to adequately protect the Company’s intellectual property or faces a claim of intellectual property infringement by a third party, Peerless could lose the Company’s intellectual property rights or be liable for damages; (r) the Company’s international activities may expose it to risks associated with international business; (s) demand from Pacific Rim customers has continued to and may continue to decline; (t) the Company’s stock price may experience extreme price and volume fluctuations; (u) the Company’s common stock was moved to the Nasdaq SmallCap Market and may not provide adequate liquidity; (v) the Company’s business may suffer if the Company’s third party distributors are unable to distribute the Company’s products and address customer needs effectively; (w) Peerless relies on certain third party providers for applications to develop the

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

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PEERLESS SYSTEMS CORPORATION

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TRADEMARKS

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

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PART I — FINANCIAL INFORMATION

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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PEERLESS SYSTEMS CORPORATION

1.     Basis of Presentation:

      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 April 30, 2004. The results of operations for the interim periods shown herein are not necessarily indicative of the results to be expected for any future interim period or for the entire year.

2.     Significant Accounting Policies:

      Business: The Company has incurred losses from operations and has reported negative operating cash flows. As of July 31, 2004, the Company had an accumulated deficit of $43.0 million and cash and short-term investments of $5.5 million. The Company has no material financial commitments other than those under operating lease agreements and inventory purchase orders. 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 the next 12 months. 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. The Company is currently working with a bank to establish a credit facility that would allow for short-term borrowing against outstanding receivables. The credit facility would generally only provide coverage for short-term working capital needs and the Company may require additional long-term capital to finance working capital requirements.

      Revenue Recognition: The Company recognizes revenues in accordance with Statement of Position 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9. In December 2003, the Company adopted Staff Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements.” The adoption did not impact the Company’s revenue recognition policy.

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

      The Company also enters into engineering services contracts with certain of its original equipment manufacturers (“OEMs”) to provide turnkey solutions, adapting the Company’s software and supporting electronics to specific OEM requirements. Revenues on such contracts are recognized over the course of the engineering work on a percentage-of-completion basis. Progress-to-completion under percentage-of-completion is determined based on direct costs, consisting primarily of labor and materials, expended on the arrangement. The Company provides for any anticipated losses on such contracts in the period in which such losses are first determinable. At July 31, 2004 and January 31, 2004, the Company had no engineering contracts on which it required any loss provisions. The Company also provides engineering support on a time-

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and-material basis. Revenues from this support are recognized as the services are performed. Maintenance revenues are recognized ratably over the term of the maintenance contract.

      Recurring licensing revenues are derived from per unit fees paid by the Company’s customers upon manufacturing and subsequent commercial shipment of products incorporating Peerless technology and certain third party technology, 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 on delivery and acceptance of software, when collection of the resulting receivable is probable, when the fee is fixed or determinable, and when the Company has no future obligations. In cases where block lice