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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM 10-Q**

 

 
| **ý** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|
|       |
|       |                                                                                         |
|       | **For  the quarterly period ended June 30, 2001**                                            |
|       |                                                                                         |
|       | **or**                                                                                       |
|       |                                                                                         |
| **o**      | **TRANSITION REPORT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|       |

**For the transition period from __________ to __________**

**Commission File Number 000-31623**

 

**SIMPLETECH,INC.******(Exact name of Registrant as specified inits charter)

 
| **CALIFORNIA**                                                  | **33-0399154**                      |
|-----------------------------------------------------------------|-------------------------------------|
| (State or other  jurisdiction of incorporation or organization) | (I.R.S. EmployerIdentification No.) |
|                                                            |                                |
| **3001 Daimler Street**                                         |                                |
| **Santa Ana, CA**                                               | **92705-5812**                      |
| (Address of principal  executive offices)                       | (Zip Code)                          |

**(949) 476-1180**(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes             ý         No

The number of shares outstanding of theRegistrant’s common stock, par value $0.001, as of June 30, 2001 was38,262,961.

----

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**SIMPLETECH, INC**.**INDEX TOFORM 10-Q FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2001**

 

|                                              |                                                                                                                 |
|---------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
| PART I.   FINANCIAL INFORMATION              |
|                                              |                                                                                                                 |
| Item 1.                                           | Financial  Statements                                                                                                |
|                                              |                                                                                                                 |
|                                              | Consolidated  Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000                                   |
|                                              |                                                                                                                 |
|                                              | Unaudited  Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2001 and June 30, 2000 |
|                                              |                                                                                                                 |
|                                              | Unaudited  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001  and June 30, 2000           |
|                                              |                                                                                                                 |
|                                              | Notes  to Consolidated Financial Statements (unaudited)                                                              |
|                                              |                                                                                                                 |
| Item 2.                                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |
|                                              |                                                                                                                 |
| Item 3.                                           | Quantitative  and Qualitative Disclosure about Market Risk                                                           |
|                                              |                                                                                                                 |
| PART II.   OTHER  INFORMATION AND SIGNATURES |
|                                              |                                                                                                                 |
| Item 1.                                           | Legal  Proceedings                                                                                                   |
|                                              |                                                                                                                 |
| Item  2.                                          | Changes in  Securities and Use of Proceeds                                                                           |
|                                              |                                                                                                                 |
| Item  3.                                          | Defaults Upon Senior  Securities                                                                                     |
|                                              |                                                                                                                 |
| Item 4.                                           | Submission  of Matters to a Vote of Security Holders                                                                 |
|                                              |                                                                                                                 |
| Item 5.                                           | Other  Information                                                                                                   |
|                                              |                                                                                                                 |
| Item 6.                                           | Exhibits and Reports  on Form 8-K                                                                                    |
|                                              |                                                                                                                 |
| Signatures                                        |                                                                                                                 |

 

Except as otherwise noted in this report,“SimpleTech,” the “company,” “we,” “us” and “our” collectively refer toSimpleTech, Inc.

 

**PART I.****  FINANCIALINFORMATION**

**Item 1.****  FinancialStatements**

SimpleTech, Inc.Consolidated Balance Sheets(in thousands, except share amounts)

 

|                                   |                                                                                                                                                                                            |   |                |   |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                   | June 30,   2001                                                                                                                                                                                 |   | December  31,  2000 |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                   | (unaudited)                                                                                                                                                                                     |   |                |   |
| ASSETS:                                |                                                                                                                                                                                            |
| Current Assets:                        |                                                                                                                                                                                            |   |                |   |
|                                   | Cash and cash equivalents                                                                                                                                                                       | $      | 41,091              |   | $ | 33,747 |   |
|                                   | Accounts receivable, net of allowances of $1,183 at June 30,  2001 and $972 at  December 31, 2000                                                                                               | 11,121 |                | 28,103 |   |
|                                   | Inventory, net                                                                                                                                                                                  | 17,281 |                | 31,052 |   |
|                                   | Deferred income taxes                                                                                                                                                                           | 2,060  |                | 2,060  |   |
|                                   | Other current assets                                                                                                                                                                            | 3,507  |                | 1,069  |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                   | Total current assets                                                                                                                                                                            | 75,060 |                | 96,031 |   |
| Furniture, fixtures and equipment, net | 7,508                                                                                                                                                                                           |   | 6,926               |   |
| Deferred income taxes                  | 329                                                                                                                                                                                             |   | 329                 |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                   | Total assets                                                                                                                                                                                    | $      | 82,897              |   | $ | 103,286 |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                   |                                                                                                                                                                                            |   |                |   |
| LIABILITIES  AND SHAREHOLDERS' EQUITY: |                                                                                                                                                                                            |
| Current Liabilities:                   |                                                                                                                                                                                            |   |                |   |
|                                   | Accounts payable                                                                                                                                                                                | $      | 4,541               |   | $ | 25,950 |   |
|                                   | Current maturities of long-term debt                                                                                                                                                            | 794    |                | 761    |   |
|                                   | Current maturities of capital lease obligations                                                                                                                                                 | 562    |                | 801    |   |
|                                   | Accrued and other liabilities                                                                                                                                                                   | 3,115  |                | 4,219  |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                   | Total current liabilities                                                                                                                                                                       | 9,012  |                | 31,731 |   |
|                                   | Long-term debt                                                                                                                                                                                  | 677    |                | 1,083  |   |
|                                   | Capital lease obligations                                                                                                                                                                       | 338    |                | 560    |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                   | Total liabilities                                                                                                                                                                               | 10,027 |                | 33,374 |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
| Shareholders' Equity:                  |                                                                                                                                                                                            |   |                |   |
|                                   | Preferred stock, $0.001 par value, 20,000,000 shares authorized,  no shares issued and outstanding                                                                                              | ---    |                | ---    |   |
|                                   | Common stock, $0.001 par value, 100,000,000 shares authorized,  38,262,961 shares issued and outstanding as of June 30, 2001; 37,572,667  shares issued and outstanding as of December 31, 2000 | 38     |                | 38     |   |
|                                   | Additional paid-in capital                                                                                                                                                                      | 64,820 |                | 63,911 |   |
|                                   | Unearned stock-based compensation                                                                                                                                                               | (38    | )                   | (63    | ) |
|                                   | Retained earnings                                                                                                                                                                               | 8,050  |                | 6,026  |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                   | Total shareholders' equity                                                                                                                                                                      | 72,870 |                | 69,912 |   |
|                                   |                                                                                                                                                                                            |        |                |        |   |
|                                   | Total liabilities and shareholders' equity                                                                                                                                                      | $      | 82,897              |   | $ | 103,286 |   |
|                                   |                                                                                                                                                                                                 |   |                     |   |
|                                        |                                                                                                                                                                                                 |        |                     |        |  |  |  |  |

 

See accompanying notes to unaudited consolidated financialstatements.

 

 

SimpleTech, Inc.Consolidated Statements of Operations(in thousands, except per share amounts)(unaudited)

 

|                                             | Three  Months Ended June 30,                              |   | Six  Months Ended June 30, |     |
|--------------------------------------------------|-----------------------------------------------------------|--------|----------------------------|---------------|
|                                             | 2001                                                      |   | 2000                       |          | 2001 |   | 2000 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
| Net revenues                                     | $                                                         | 36,768 |                       | $             | 74,812 |   | $ | 95,483 |   | $ | 132,647 |   |
| Cost of revenues                                 | 31,149                                                    |   | 58,224                     |          | 74,402 |   | 103,237 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
|                                             | Gross profit                                              | 5,619  |                       | 16,588        |   | 21,081 |   | 29,410 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
| Sales and marketing                              | 4,625                                                     |   | 5,114                      |          | 9,905 |   | 9,461 |   |
| General and administrative                       | 3,377                                                     |   | 3,479                      |          | 6,353 |   | 6,265 |   |
| Research and development                         | 1,206                                                     |   | 994                        |          | 2,263 |   | 1,512 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
|                                             | Total operating expenses                                  | 9,208  |                       | 9,587         |   | 18,521 |   | 17,238 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
|                                             | Income (loss) from operations                             | (3,589 | )                          | 7,001         |   | 2,560 |   | 12,172 |   |
| Interest expense                                 | 54                                                        |   | 520                        |          | 117 |   | 806 |   |
| Interest income                                  | (435                                                      | )      | -                          |          | (914 | ) | (1 | ) |
|                                             |                                                           |   |                            |          |  |   |  |   |
|                                             |                                                      |   |                       |          |   |   |   |   |
|                                             | Income (loss) before provision (benefit) for income taxes | (3,208 | )                          | 6,481         |   | 3,357 |   | 11,367 |   |
| Provision (benefit) for income taxes             | (1,274                                                    | )      | 231                        |          | 1,333 |   | 175 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
|                                             | Net income (loss)                                         | $      | (1,934                     | )             | $ | 6,250 |   | $ | 2,024 |   | $ | 11,192 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
| Pro forma data:                                  |                                                      |   |                       |          |   |   |   |   |
| Income before provision for income taxes         |                                                      |   | $                          | 6,481         |   |   |   | $ | 11,367 |   |
| Provision for income taxes                       |                                                      |   | 2,462                      |          |   |   | 4,319 |   |
|                                             |                                                      |   |                            |          |   |   |  |   |
| Pro forma net income                             |                                                      |   | $                          | 4,019         |   |   |   | $ | 7,048 |   |
|                                             |                                                      |   |                            |          |   |   |  |   |
| Net income (loss) per share (pro forma in 2000): |                                                      |   |                       |          |   |   |   |   |
|                                             |                                                      |   |                       |          |   |   |   |   |
|                                             | Basic                                                     | $      | (0.05                      | )             | $ | 0.13 |   | $ | 0.05 |   | $ | 0.23 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
|                                             | Diluted                                                   | $      | (0.05                      | )             | $ | 0.12 |   | $ | 0.05 |   | $ | 0.21 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |
| Weighted average shares outstanding:             |                                                      |   |                       |          |   |   |   |   |
|                                             | Basic                                                     | 38,241 |                       | 30,601        |   | 37,968 |   | 30,601 |   |
|                                             |                                                      |        |                       |               |   |  |   |  |   |
|                                             | Diluted                                                   | 38,241 |                       | 33,077        |   | 39,377 |   | 33,361 |   |
|                                             |                                                           |   |                            |          |  |   |  |   |

 

See accompanying notes to unaudited consolidated financialstatements.

 

 

SimpleTech, Inc.Consolidated Statements of Cash Flows(in thousands)(unaudited)

|                                             |                                                                               |          |   |    |
|--------------------------------------------------|------------------------------------------------------------------------------------|---------------|--------|---------|
|                                             | Six  Months   Ended June 30,                                                       |     |
|                                             | 2001                                                                               |          | 2000   |    |
|                                             |                                                                                    |          |        |    |
| Cash flow from operating activities:             |                                                                               |          |   |    |
|                                             | Net income                                                                         | $             | 2,024  |    | $ | 11,192 |   |
|                                             | Adjustments to reconcile net income to net cash provided by  operating activities: |          |   |    |   |
|                                             | Depreciation and amortization                                                      | 1,684         |   | 1,361   |   |
|                                             | Loss on sale of furniture, fixtures and equipment                                  | 4             |   | 1       |   |
|                                             | Accounts receivable provisions                                                     | 1,518         |   | 1,249   |   |
|                                             | Inventory excess and obsolescence expense                                          | 918           |   | 365     |   |
|                                             | Deferred income taxes                                                              | -             |   | 171     |   |
|                                             | Compensation related to stock options vesting                                      | 25            |   | 23      |   |
|                                             | Change in operating assets and liabilities:                                        |          |   |    |   |
|                                             | Accounts receivable                                                                | 15,464        |   | (2,122  | ) |
|                                             | Inventory                                                                          | 12,853        |   | (23,211 | ) |
|                                             | Other assets                                                                       | (2,438        | )      | (8      | ) |
|                                             | Accounts payable                                                                   | (21,409       | )      | 4,813   |   |
|                                             | Accrued and other liabilities                                                      | (1,104        | )      | 1,764   |   |
|                                             |                                                                                    |          |        |    |
|                                             | Net cash provided by (used in) operating activities                                | 9,539         |   | (4,402  | ) |
|                                             |                                                                                    |          |        |    |
| Cash flows from investing activities:            |                                                                               |          |   |    |
|                                             |                                                                               |          |   |    |
|                                             | Purchase of furniture, fixtures and equipment                                      | (2,437        | )      | (1,044  | ) |
|                                             | Proceeds from sale of furniture, fixtures and equipment                            | 167           |   | 228     |   |
|                                             |                                                                                    |          |        |    |
|                                             | Net cash used in investing activities                                              | (2,270        | )      | (816    | ) |
|                                             |                                                                                    |          |        |    |
| Cash flows from financing activities:            |                                                                               |          |   |    |
|                                             | Deferred offering costs                                                            | -             |   | (937    | ) |
|                                             | Borrowings under line of credit, net                                               | -             |   | 10,796  |   |
|                                             | Repayment of borrowings from banks                                                 | (373          | )      | (341    | ) |
|                                             | Payment on capital lease obligations                                               | (461          | )      | (456    | ) |
|                                             | Repayment of loans to related parties, net                                         | -             |   | 40      |   |
|                                             | Distributions to shareholders                                                      | -             |   | (7,640  | ) |
|                                             | Proceeds from exercise of stock options                                            | 909           |   | -       |   |
|                                             |                                                                                    |          |        |    |
|                                             | Net cash provided by financing activities                                          | 75            |   | 1,462   |   |
|                                             |                                                                               |               |   |         |   |
|                                             | Net increase (decrease) in cash                                                    | 7,344         |   | (3,756  | ) |
| Cash and cash equivalents at beginning of period | 33,747                                                                             |          | 3,779  |    |
|                                             |                                                                                    |          |        |    |
| Cash and cash equivalents at end of period       | $                                                                                  | 41,091        |   | $       | 23 |   |
|                                             |                                                                                    |          |        |    |
|                                                  |                                                                                    |               |        |         |  |  |  |  |  |  |

 

See accompanying notes to unaudited consolidated financialstatements.

 

**SIMPLETECH, INC****NOTES TOCONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

**Note 1 - Basis of Presentation**

             Theaccompanying interim consolidated financial statements are unaudited and havebeen prepared in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X.  In the opinion ofmanagement, all adjustments (consisting of normal and recurring accruals)considered necessary for a fair presentation of the consolidated financialposition of the Company at June 30, 2001 and the consolidated results ofoperations and cash flows for the three and six months ended June 30, 2001 and2000 have been included.  These interimconsolidated financial statements should be read in conjunction with theconsolidated financial statements and related notes contained in the AnnualReport on Form 10-K filed with the SEC. The December 31, 2000 balances reported herein are derived from theaudited consolidated financial statements included in the Annual Report on Form10-K for the fiscal year ended December 31, 2000.  The results for the interim periods are not necessarilyindicative of results to be expected for the full fiscal year.

             Theconsolidated financial statements of the Company include the accounts of theCompany’s subsidiaries.  All significantintercompany accounts and transactions have been eliminated in consolidation.

**Note 2 - Use of Estimates**

             Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makecertain estimates and assumptions that affect the reported amounts of assetsand liabilities (e.g., bad debt reserves and inventory reserves), disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

**Note 3 - Net Income Per Share**

             Basic earnings per share iscomputed by dividing net income by the weighted average number of sharesoutstanding. In computing diluted earnings per share, the weighted averagenumber of shares outstanding is adjusted to additionally reflect the effect ofpotentially dilutive securities. For the quarter ended June 30, 2000, and thesix months ended June 30, 2001 and 2000, potentially dilutive securitiesconsisted solely of options and resulted in potential common shares of2,475,832, 1,409,006 and 2,759,555, respectively.  No potential common shares were included in the diluted per shareamount for the three months ended  June30, 2001, as the effect would have been anti-dilutive.

             For the three and six months endedJune 30, 2000, pro forma net income was computed using an effective tax rate of38% to reflect the estimated income tax expense of the Company as if it hadbeen subject to C corporation federal and state income taxes during the period,instead of S corporation income taxes.

**Note 4 - Supplemental Balance Sheet Information**

             Inventoryconsists of the following:

 

| (In  thousands)                      | June 30, 2001 |   | December 31, 2000 |   |
|--------------------------------------|---------------|--------|-------------------|--------|
|                                 |               |   |                   |   |
| Raw  materials                       | $             | 15,898 |              | $      | 24,768 |   |
| Work-in-progress                     | 361           |   | 759               |   |
| Finished  goods                      | 5,447         |   | 9,652             |   |
|                                 |               |   |                   |   |
|                                 | 21,706        |   | 35,179            |   |
| Reserve  for excess and obsolescence | (4,425        | )      | (4,127            | )      |
|                                 |               |   |                   |   |
| Inventory,  net                      | $             | 17,281 |              | $      | 31,052 |   |
|                                 |               |   |                   |   |

 

 

Furniture, fixtures and equipment consistof the following:

 

| (In thousands)                          | June  30, 2001 |   | December  31, 2000 |   |
|-----------------------------------------|----------------|--------|--------------------|--------|
|                                    |                |   |                    |   |
| Furniture and fixtures                  | $              | 298    |               | $      | 294 |   |
| Equipment                               | 18,806         |   | 16,769             |   |
|                                    |                |   |                    |   |
|                                    | 19,104         |   | 17,063             |   |
| Accumulated  depreciation               | (11,596        | )      | (10,137            | )      |
|                                    |                |   |                    |   |
| Furniture, fixtures  and equipment, net | $              | 7,508  |               | $      | 6,926 |   |
|                                    |                |   |                    |   |

 

**Note 5 – Dense-Pac Microsystems, Inc. Litigation**

             OnFebruary 7, 2001, the Court ruled on pending summary judgment motions in thelawsuit the Company filed in September 1998 against Dense-Pac Microsystems,Inc.  In this lawsuit filed in FederalCourt in Santa Ana, the Company alleged that Dense-Pac infringed the Company’sIC Tower stacking patent, U.S. Patent No. 5,514,907.  Dense-Pac counterclaimed for infringement of its stacking patent,U.S. Patent No. 4,956,694. The Company sought damages and an injunction againstinfringement of its patent by Dense-Pac. Dense-Pac denied the infringement and asserted a defense of patentinvalidity and a counterclaim against the Company alleging infringement of itsstacking patent.

             Inthe Court's summary judgment rulings, the Court found non-infringement byDense-Pac as to the Company’s patent and non-infringement by the Company as toDense-Pac’s patent.  The Company hasappealed the adverse summary judgment ruling to U.S. Court of Appeals for theFederal Circuit in Washington, D.C. Dense-Pac has not appealed the Court’s ruling that the Company did notinfringe the Dense-Pac patent, and that ruling is now final.

             OnFebruary 21, 2001, the Company filed a new lawsuit against Dense-Pac in FederalCourt in Santa Ana for infringement of its IC Tower stacking patent, U.S.Patent No. Re. 36,916 (a reissue of U.S. Patent No. 5,514,907 referencedabove).  The Company is seeking damages,an injunction against further infringement, and related costs.  Dense-Pac filed its answer on March 13,2001, denying infringement, asserting a defense of patent invalidity, andalleging technology misappropriation by the Company.  Trial has been set for October 22, 2002.

**Note 6 – Segment Information:**

             TheCompany designs, manufactures and markets a comprehensive line of memory,storage and connectivity products used in high performance computing,networking and communications, consumer electronics and industrialapplications.  The Company providestechnology solutions for two reportable operating segments, Industrial(formerly termed Original Equipment Manufacturer or OEM) and Commercial(formerly termed Aftermarket), based on DRAM, SRAM and Flash memorytechnologies.

             Beginningin 1999, after completion of management information system enhancements, theCompany used net sales and gross profit as the basis for evaluating theperformance of its operating segments. The Company does not allocate operating expenses, interest or income taxesto operating segments.  Due to the similarityof products manufactured for customers within each operating segment, theCompany does not maintain separate records to identify assets by operatingsegment.

 

             Summarizedfinancial information regarding the Company’s reportable segments is shown inthe following table:

| **(in thousands)** | **Three  Months Ended  June 30, 2001** | ** ** | **Three  Months Ended  June 30, 2000** |   |
|--------------------|----------------------------------------|------------|----------------------------------------|--------|
|               |                                        |       |                                        |   |
|               | **Industrial**                         |       | **Commercial**                         |   | **Consolidated** |   | **Industrial** |   | **Commercial** |   | **Consolidated** | ** ** |
|               | ****                                   |       | ****                                   |   | **** |   | **** |   | **** |   | **** |   |
| Net revenues       | $                                      | 7,738      |                                   | $      | 29,030 |   | $ | 36,768 |   | $ | 28,662 |   | $ | 46,150 |   | $ | 74,812 |   |
| Cost of revenues   | 5,938                                  |       | 25,211                                 |   | 31,149 |   | 20,594 |   | 37,630 |   | 58,224 |   |
|               |                                        |       |                                        |   |  |   |  |   |  |   |  |   |
| Gross profit       | $                                      | 1,800      |                                   | $      | 3,819 |   | $ | 5,619 |   | $ | 8,068 |   | $ | 8,520 |   | $ | 16,588 |   |
|               |                                        |       |                                        |   |  |   |  |   |  |   |  |   |

 

|             |                                |   |                                   |          |             |   |           |   |           |   |             |       |
|------------------|-------------------------------------|--------|----------------------------------------|---------------|------------------|--------|----------------|--------|----------------|--------|------------------|------------|
|             | **Six  Months Ended June 30, 2001** |   | **Six  Months Ended****June 30, 2000** |     |
|             | ****                                |   |
|             | **Industrial**                      |   | **Commercial**                         |          | **Consolidated** |   | **Industrial** |   | **Commercial** |   | **Consolidated** | ** ** |
|             | ****                                |   | ****                                   |          | ****             |   | ****           |   | ****           |   | ****             |       |
| Net revenues     | $                                   | 32,625 |                                   | $             | 62,858           |   | $              | 95,483 |           | $      | 47,690           |       | $ | 84,957 |   | $ | 132,647 |   |
| Cost of revenues | 21,686                              |   | 52,716                                 |          | 74,402           |   | 34,155         |   | 69,082         |   | 103,237          |       |
|             |                                     |   |                                        |          |                  |   |                |   |                |   |                  |       |
| Gross profit     | $                                   | 10,939 |                                   | $             | 10,142           |   | $              | 21,081 |           | $      | 13,535           |       | $ | 15,875 |   | $ | 29,410 |   |
|             |                                     |   |                                        |          |                  |   |                |   |                |   |                  |       |

 

             Forthe three and six months ended June 30, 2001 and 2000, international salescomprised 17.2%, 16.2%, 16.4% and 16.0% (unaudited), of the Company’s revenues,respectively.  During these periods, nosingle foreign country accounted for more than 10.0% of total revenues.  All international sales during these periodswere shipped domestically to the Company’s foreign customers.

 

**ITEM 2.****  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**CautionaryStatement**

             Certain statements in this report,including statements regarding the Company's strategy, financial performanceand revenue sources, are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995, Section 21E of the SecuritiesExchange Act of 1934, as amended, and Section 27A of the Securities Act of1933, as amended, and are subject to the safe harbors created by thosesections.  These forward-lookingstatements are based on our current expectations, estimates and projectionsabout our industry, management's beliefs, and certain assumptions made by us.Such statements are not guarantees of future performance and are subject tocertain risks, uncertainties and assumptions that are difficult to predict.Therefore, our actual results could differ materially and adversely from thoseexpressed in any forward-looking statements as a result of various factors. Thesection entitled "Risk Factors" set forth in this Form 10-Q andsimilar discussions in filings with the Securities and Exchange Commission madefrom time to time, including other quarterly reports on Form 10-Q, our AnnualReport on Form 10-K, our prospectus on Form S-1 declared effective on September28, 2000 and in our other SEC filings, discuss some of the important riskfactors that may affect our business, results of operations and financialcondition.

             The following discussion should beread in conjunction with the Company's consolidated financial statements andnotes thereto.

**Overview**

             Incorporatedin 1990, SimpleTech designs, manufactures and markets a comprehensive line ofmemory, storage and connectivity products used in high performance computing,networking and communications, consumer electronics and industrialapplications.  Our memory and storageproducts are based on dynamic random access memory, or DRAM, static randomaccess memory, or SRAM, and Flash memory technologies. In addition, we offer aline of high-desity memory products using our three-dimensional IC Towerstacking technology that allows multiple memory chips to be stacked together toincrease the capabilities of memory modules without increasing the productfootprint.

             Asa result of increased demand for consumer electronics and high-desity memoryproducts used in Internet infrastructure and embedded applications, thepercentage of our revenues derived from the sale of Flash memory and IC Towerstacking products increased from 20.8% in 1999 to 40.2% in 2000. For the firstsix months of 2001, our highest profit margin products were our IC Towerstacking products.

             Weprovide technology solutions for two operating segments, Industrial (formerlytermed Original Equipment Manufacturer, or OEM) and commercial (formerly termedAftermarket). We do not allocate operating expenses, interest or income taxesto operating segments.  Due to the similarityof products manufactured for our customers within each operating segment, we donot maintain separate records to identify assets by operating segment.

 

             From 1999 to 2000, combinedIndustrial and Commercial operating segment revenues grew 60.1% primarily dueto increased Flash memory and IC Tower stacking product sales. Industrialcustomer revenues grew 190.7% from 1999 to 2000 due to strong growth in salesof Flash drives and IC Tower stacking products to Industrial customers in thenetworking and communication industries. From 1999 to 2000, Commercial revenuesincreased 14.8% primarily due to expanded sales to retail customers.

             Historically, a relatively smallnumber of customers have accounted for a significant percentage of ourrevenues. Our ten largest customers accounted for an aggregate of 65.6% of ourtotal revenues in the first six months of 2001 and 55.8% of our total revenuesin 2000. Our ten largest Industrial customers accounted for an aggregate of72.6% of our Industrial segment revenues or 24.8% of our total revenues in thefirst six months of 2001 and 81.3% of our Industrial segment revenues or 37.4%of our total revenues in 2000. Our largest Industrial customer in the first sixmonths of 2001, Unisys, accounted for 34.6% of our Industrial revenues or 11.8%of our total revenues.  Our largestIndustrial customer in 2000, Cisco Systems, accounted for 31.8% of ourIndustrial revenues or 14.6% of our total revenues. In early 2001, weexperienced numerous order pushouts and cancellations by our Industrialcustomers in the networking and communications industries due to softeningmacro-economic conditions, declining semiconductor prices and a build up ofcustomer inventory. Our ten largest Commercial customers accounted for anaggregate of 59.1% of our Commercial revenues or 38.9% of our total revenues inthe first six months of 2001 and an aggregate of 50.5% of our Commercialrevenues or 27.3% of our total revenues in 2000. Our largest Commercialcustomer, CDW Computer Centers, accounted for 29.2% of our Commercial revenuesor 19.2% of our total revenues in the first six months of 2001 and 31.2% of ourCommercial revenues or 16.8% of our total revenues in 2000. Other than Unisysin the first six months of 2001, Cisco Systems in 2000 and CDW ComputerCenters, no customer accounted for more than 10.0% of our total revenues in thefirst six months of 2001 or 2000. The composition of our major customer basechanges from quarter to quarter as market conditions fluctuate and we expectthis variability will continue in the future. We expect that sales of ourproducts to a small number of customers will continue to contribute materiallyto our revenues in the foreseeable future and believe that our financialresults will depend in significant part upon the success of our customers'businesses.

             International sales of our productsconstituted 16.2% of our revenues for the first six months of 2001 and 13.4% ofour revenues in 2000. No single foreign country accounted for more than 10.0%of our revenues in the first six months of 2001 or 2000. During the first sixmonths of 2001 and 2000, over 95.0% of our international sales were denominatedin U.S. dollars. Consequently, if the value of the U.S. dollar increasesrelative to a particular foreign currency, our products could become relativelymore expensive, which could result in a reduction of sales in a particularcountry. In addition, we purchase substantially all of the IC devices used inour products from local distributors of Japanese, Korean and Taiwanesesuppliers. Although our purchases of IC devices are currently denominated inU.S. dollars, devaluation of the U.S. dollar relative to the currency of aforeign supplier would likely result in an increase in our cost of IC devices.Our international sales also could be adversely affected by risks includingregulatory risks, tariffs and other trade barriers.

             In the past we have been impactedby seasonal purchasing patterns resulting in higher sales in the third andfourth quarters of each calendar year. Our ability to adjust our short-term operatingexpenses in response to fluctuations in revenues is limited. As a result, ifrevenues are lower than expected in any given period, our results of operationscould be harmed.

             Substantiallyall of our revenues are recognized at the time of shipment. A majority of oursales through Commercial channels include limited rights to return unsoldinventory. In addition, while we may not be contractually obligated to acceptreturned products, we may determine that it is in our best interest to acceptreturns in order to maintain good relations with our customers. Product returnswould increase our inventory and reduce our revenues. We have had to write downinventory in the past for reasons such as obsolescence, excess quantities anddeclines in market value below our costs. These inventory write-downs wereapproximately $918,000 in the first six months of 2001 and $2.9 million in2000.  The majority of our inventorywrite-downs in 2000 occurred in the fourth quarter due to rapidly declining ICdevice component prices.  In addition,we offer some of our Commercial customers limited price protection rights forinventories of our products held by them. If we reduce the list price of ourproducts, these customers may receive credits from us. We incurred price protectioncharges of approximately $931,000 in the first six months of 2001 and $557,000in 2000. Price protection charges increased in the first six months of 2001primarily due to increased component price volatility.

             From formation in March 1990to September 26, 2000, we elected for federal and state income taxpurposes to be treated as an S corporation under Subchapter S of the InternalRevenue Code. Under this election, our shareholders, rather than SimpleTech,were subject to federal income taxes on their respective share of our taxableincome. We also had elected similar treatment for California franchise taxpurposes which, in addition, requires a state income tax at our level of 1.5%.On September 26, 2000, we terminated our Subchapter S election. Subsequentto the termination, we are required to pay federal and state corporate-levelincome taxes.

**Results ofOperations - Comparison of the second quarter of 2001 to the second quarter of2000**

             *NetRevenues.*  Our revenues were$36.8 million in the second quarter of 2001 compared to $74.8 million in thesame period in 2000.  Sales of Flash andIC Tower stacking products accounted for 29.9% of our revenues in the secondquarter of 2001, compared to 35.1% in the same period in 2000.  Revenue declined primarily due to a unitvolume decrease of 10% and a decrease in average sales price from $108 in thesecond quarter of 2000 to $59 in the second quarter of 2001.  The decrease in our average sales priceresulted from significant declines in DRAM and Flash component prices from late2000 through the second quarter of 2001. Unit shipments of our standard memoryproducts increased 9.1%, which partially offset decreases of 4.5% for Flashproducts, 81.0% for IC Tower stacking products and 58.8% for non-DRAM, non-Flashproducts such as SRAM, hard drive upgrade kits and connectivity products. Thedecline in product shipments resulted primarily from a build-up of excessinventory by our Industrial customers prior to the second quarter of 2001.  The mix of products sold varies from quarterto quarter and may vary in the future, affecting our overall average salesprices and gross margins.

             OurIndustrial segment revenues declined 73.2% from $28.7 million in the secondquarter of 2000 to $7.7 million in the second quarter of 2001. The decrease inrevenue resulted from a 63.1% reduction in unit volume and a reduction in salesprice from $174 in the second quarter of 2000 to $128 in the second quarter of2001. Our Commercial segment revenues declined 37.2% from $46.2 million in thesecond quarter of 2000 to $29.0 million in the second quarter of 2001.Commercial revenues declined due to a decrease in average sales price from $87in the second quarter of 2000 to $52 in the second quarter of 2001, offset byan increase in unit volume of 5.8%. This decrease in average sales price forboth our Industrial and Commercial segments resulted from significant declinesin DRAM and Flash component prices from late 2000 through the second quarter of2001.

             Ourcombined backlog was $7.8 million as of June 30, 2001, consisting of $6.9million for the Industrial segment and $900,000 for the Commercialsegment.  Our combined backlog was $22.4million as of December 31, 2000, consisting of $21.4 million for the Industrialsegment and $1.0 million for the Commercial segment.  The decrease in Industrial segment backlog from December 31, 2000to June 30, 2001 was primarily due to the push out and cancellation of ordersby our Industrial customers in the networking and communication industries as aresult of a global economic slowdown and a build-up of their inventorylevels.  Commercial segment backlog istypically nominal since substantially all commercial customer orders are filledon a same–day or next–day basis. We include in our backlog onlythose customer orders for which we have accepted purchase orders and to whichwe have assigned shipment dates within the upcoming six months. Since ordersconstituting our backlog are subject to change due to, among other things,customer cancellations and reschedulings, and our ability to procure necessarycomponents, backlog is not necessarily an indication of future revenues.

             *GrossProfit.*  Our gross profit was$5.6 million in the second quarter of 2001, compared to $16.6 million in thesame period in 2000. Gross profit declined due to the overall decrease inrevenues and an inventory write-down of approximately $900,000 during thequarter.  Gross profit as a percentageof revenues was 15.2% in the second quarter of 2001, compared to 22.2% in thesame period in 2000. Gross profit for our Industrial segment as a percentage ofrevenues was 23.3% in the second quarter of 2001, compared to 28.2% in thesecond quarter of 2000. Gross profit as a percentage of revenues for ourCommercial segment decreased from 18.5% in the second quarter of 2000 to 13.2%in the second quarter of 2001.  Thedecrease in gross profit as a percentage of revenues resulted primarily fromrelatively flat fixed production expenses versus reduced revenues and theinventory write-down recorded during the second quarter of 2001.

             *Sales andMarketing.*  Sales andmarketing expenses are primarily comprised of personnel costs and travelexpenses for our domestic and international sales and marketing employees,commissions paid to internal salespersons and independent manufacturers'representatives, shipping costs and marketing programs. Sales and marketingexpenses were $4.6 million in the second quarter of 2001, compared to $5.1million in the same period in 2000. Sales and marketing expenses decreased overthis period primarily due to a decrease in commission expense.  Sales and marketing expenses as a percentageof revenues were 12.5% in the second quarter of 2001, compared to 6.8% in thesame period in 2000. The increase in sales and marketing expenses as apercentage of revenues resulted primarily from reduced revenues.

             *General andAdministrative.*  General andadministrative expenses are primarily comprised of personnel costs for ourexecutive and administrative employees, professional fees and facilitiesoverhead. General and administrative expenses were $3.4 million in the secondquarter of 2001, compared to $3.5 million in the same period in 2000. Generaland administrative expenses as a percentage of revenues were 9.2% in the secondquarter of 2001, compared to 4.7% in the same period in 2000. The increase ingeneral and administrative expenses as a percentage of revenues resultedprimarily from reduced revenues.

             *Research andDevelopment.*  Research anddevelopment expenses are primarily comprised of personnel costs for ourengineering and design staff and the cost of prototype supplies. Research anddevelopment expenses were $1.2 million in the second quarter of 2001, comparedto $1.0 million in the same period in 2000. Research and development expensesas a percentage of revenues were 3.3% in the second quarter of 2001, comparedto 1.3% in the same period in 2000. The increase in research and developmentexpenses as a percentage of revenues resulted primarily from reduced revenues.

 

             *Interest Expenseand Income.* Interest expense is comprised of interest related to ourline of credit and equipment financing. Interest expense was $54,000 in thesecond quarter of 2001, compared to $520,000 in the same period in 2000. Thedecrease in interest expense in the second quarter of 2001 resulted from thepay down of our line of credit to zero in October 2000.The increase in interestincome was $435,000 in the second quarter of 2001, compared to $0 in the sameperiod in 2000.  The increase ininterest income resulted from the investment of cash received in October 2000from our initial public offering.

             *Pro FormaProvision for Income Taxes.* From formation in March 1990 toSeptember 26, 2000, we elected for federal and state income tax purposes to betreated as an S corporation under Subchapter S of the Internal Revenue Code.Under this election, our shareholders, rather than SimpleTech, were subject tofederal income taxes on their respective share of our taxable income. We alsohad elected similar treatment for California franchise tax purposes which, inaddition, requires a state income tax at our level of 1.5%. On September 26,2000, we terminated our Subchapter S election. Subsequent to the termination,we are required to pay federal and state corporate-level income taxes.

             Netloss was $1.9 million in the second quarter of 2001.  Assuming the termination of our S corporation status, pro formanet income would have been $4.0 million in the second quarter of 2000.

**Results ofOperations - Comparison of the first six months of 2001 to the first six monthsof 2000**

             *NetRevenues.*  Our revenues were$95.5 million in the first six months of 2001, compared to $132.6 million inthe same period in 2000.  Sales of Flashand IC Tower stacking products accounted for 34.7% of our revenues in the firstsix months of 2001, compared to 33.2% in the same period in 2000.  Revenues decreased due to a decline inaverage sales price from $108 in the first six months of 2000 to $74 in the firstsix months of 2001, which was partially offset by a 4% unit volumeincrease.  The decrease in our averagesales price resulted from significant declines in DRAM and Flash componentprices from late 2000 through the second quarter of 2001.  We experienced unit volume increases of12.6% for standard memory products and 9.6% for Flash products, partiallyoffset by decreases of 44.6% for IC Tower stacking products and 25.1% fornon-DRAM, non-Flash products such as SRAM, hard drive upgrade kits andconnectivity products. The mix of products sold varies from period to periodand may vary in the future, affecting our overall average sales prices andgross margins.

             OurIndustrial segment revenues decreased 31.6% from $47.7 million in the first sixmonths of 2000 to $32.6 million in the first six months of 2001. Industrialsegment unit volume decreased 34.7% during the period, and Industrial segmentaverage sales price increased from $169 in the first six months of 2000 to $177in the first six months of 2001. The decline in product shipments resulted primarilyfrom a build-up of excess inventory by our Industrial customers in the secondhalf of 2000. Our Commercial segment revenues declined 26.0% from $85.0 millionin the first six months of 2000 to $62.9 million in the first six months of2001. Commercial revenues declined due to a reduction in average sales pricefrom $90 in the first six months of 2000 to $57 in the first six months of2001, offset by an increase in unit volume of 16.1%. The decrease in averagesales price for our Commercial segment revenues resulted from significantdeclines in DRAM and Flash component prices from late 2000 through the secondquarter of 2001.

 

             *GrossProfit.*  Our gross profit was$21.1 million in the first six months of 2001, compared to $29.4 million in thesame period in 2000. Gross profit as a percentage of revenues was relativelyflat at 22.1% for the first six months of 2001, compared to 22.2% in the sameperiod in 2000. Gross profit for our Industrial segment as a percentage ofrevenues was 33.5% in the first six months of 2001, compared to 28.4% in thesame period in 2000.  This increase ingross profit resulted from a positive product mix shift.  Gross profit as a percentage of revenues forour Commercial segment decreased from 18.7% in the first six months of 2000 to16.1% in the first six months of 2001. The decrease in gross profit as apercentage of revenues resulted primarily from relatively flat fixed productionexpenses versus reduced revenues and an inventory write-down of approximately$900,000 recorded during the period.

             *Sales andMarketing.*  Sales andmarketing expenses are primarily comprised of personnel costs and travelexpenses for our domestic and international sales and marketing employees,commissions paid to internal salespersons and independent manufacturers'representatives, shipping costs and marketing programs. Sales and marketingexpenses were relatively flat during this period at $9.9 million in the firstsix months of 2001, compared to $9.5 million in the same period in 2000. Salesand marketing expenses as a percentage of revenues were 10.4% in the first sixmonths of 2001, compared to 7.2% in the same period in 2000. The increase insales and marketing expenses as a percentage of revenues resulted primarilyfrom reduced revenues.

             *General andAdministrative.*  General andadministrative expenses are primarily comprised of personnel costs for ourexecutive and administrative employees, professional fees and facilitiesoverhead. General and administrative expenses were relatively flat at $6.4million in the first six months of 2001, compared to $6.3 million in the sameperiod in 2000. General and administrative expenses as a percentage of revenueswere 6.7% in the first six months of 2001, compared to 4.8% in the same periodin 2000. The increase in general and administrative expenses as a percentage ofrevenues resulted primarily from reduced revenues.

             *Research andDevelopment.*  Research anddevelopment expenses are primarily comprised of personnel costs for ourengineering and design staff and the cost of prototype supplies. Research anddevelopment expenses were $2.3 million in the first six months of 2001,compared to $1.5 million in the same period in 2000. The increase in researchand development expenses resulted from increased personnel costs related to theexpansion of our engineering staff. Research and development expenses as apercentage of revenues were 2.4% in the first six months of 2001, compared to1.1% in the same period in 2000. The increase in research and development expensesas a percentage of revenues resulted from the expansion of our engineeringstaff and reduced revenues.

             *InterestExpense and Income.*  Interestexpense is comprised of interest related to our line of credit and equipmentfinancing. Interest expense was $117,000 in the first six months of 2001,compared to $806,000 in the same period in 2000. The decrease in interestexpense in the first six months of 2001 resulted from the pay down of our lineof credit to zero in October 2000. Interest income was $914,000 in the first six months of 2001, comparedto $1,000 in the same period in 2000. The increase in interest income resultedfrom the investment of cash received in October 2000 from our initial publicoffering.

             *Pro FormaProvision for Income Taxes.* From formation in March 1990 toSeptember 26, 2000, we elected for federal and state income tax purposes to betreated as an S corporation under Subchapter S of the Internal Revenue Code.Under this election, our shareholders, rather than SimpleTech, were subject tofederal income taxes on their respective share of our taxable income. We alsohad elected similar treatment for California franchise tax purposes which, inaddition, requires a state income tax at our level of 1.5%. On September 26,2000, we terminated our Subchapter S election. Subsequent to the termination,we are required to pay federal and state corporate-level income taxes.

             Netincome was $2.0 million in the first six months of 2001.  Assuming the termination of our Scorporation status, pro forma net income would have been $7.0 million in thefirst six months of 2000.

 

             **Liquidityand Capital Resources**

             As ofJune 30, 2001, we had working capital of $66.0 million including $41.1 millionof cash and cash equivalents. As of December 31, 2000, we had workingcapital of $64.3 million including $33.7 million of cash and cashequivalents.  In addition, we had unusedavailability of $27.5 million at June 30, 2001 and December 31, 2000 under ourline of credit with Comerica Bank.  Wehad no outstanding principal balance under our line of credit at June 30, 2001and December 31, 2000.  There is nounused line fee under our line of credit agreement with Comerica Bank.  As a result of our initial public offeringon September 29, 2000, Comerica Bank has the option to reduce our availableline of credit to a range between $15.0 million to $20.0 million as determinedin their sole and absolute discretion.

             Netcash provided by operating activities was $9.5 million in the first six monthsof 2001. Net cash provided by operating activities in the first six months of2001 resulted primarily from net income of $2.0 million, a decrease in accountsreceivable of $15.5 million and a decrease in inventory of $12.9 million,offset by a decrease in accounts payable of $21.4 million.  Accounts receivable, inventory and accountspayable levels decreased due to reduced revenues.

             Netcash used in investing activities was $2.3 million in the first six months of2001, attributable primarily to purchases of furniture, fixtures andequipment.  We expect to spendapproximately $2.0-4.0 million during the next 12 months, primarily forthe purchase of manufacturing, testing and engineering equipment.

             Netcash provided by financing activities totaled $75,000 in the first six monthsof 2001.  Net cash provided by financingactivities in the first six months of 2001 resulted from the receipt of$909,000 in proceeds from the exercise of stock options, offset by $834,000 inpayments related to equipment loans and capital lease obligations.

             Wehave several capital leases and loans to finance manufacturing and testingequipment, including leases and loans with companies affiliated with ourexecutive officers and directors as described under "Certain Relationshipsand Related Transactions-MDC Land Corporation and MDC Land LLC" in ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2000 filedwith the SEC. Our obligations under capital leases were $900,000 on June 30,2001 and $1.4 million on December 31, 2000, with interest rates ranging from8.1% to 9.6% per annum. Our equipment financing loan balances were $1.5 millionon June 30, 2001 and $1.8 million on December 31, 2000, with interest ratesranging from 8.4% to 9.1% per annum. One of the equipment note payable agreements contains variousnonfinancial covenants that, among other things, limit distributions anddividends to our shareholders without the prior written consent of the lender,and requires the equipment to remain unencumbered by other liens. As of June30, 2001, we were in compliance with all covenants under the equipment notepayable agreements.

             Webelieve that our existing cash, cash equivalents, investments on hand, existingassets, anticipated debt and expected cash flow from operations will besufficient to fund our operations for the next 12 months. Thereafter, we mayrequire additional sources of funds to continue to support our business. Suchfunds, if needed, may not be available or may not be available on termsacceptable to us.

 

**RiskFactors**

***             You should carefully consider thefollowing risks before you decide to buy shares of our common stock.  The risks and uncertainties described beloware not the only ones facing us.  Additionalrisks and uncertainties, including those risks set forth in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”above, may also adversely impact and impair our business.  If any of the following risks actuallyoccur, our business, results of operations or financial condition would likelysuffer.  In such case, the trading priceof our common stock could decline, and you may lose all or part of the moneyyou paid to buy our stock.***

***             This Report containsforward-looking statements based on the current expectations, assumptions,estimates and projections about us and our industry.  These forward-looking statements involve risks anduncertainties.  Our actual results coulddiffer materially from those discussed in these forward-looking statements as aresult of certain factors, as more fully described in this section andelsewhere in this Report.  We do notundertake to update publicly any forward-looking statements for any reason,even if new information becomes available or other events occur in the future.***

**Declines in our average sales prices may result in declinesin our revenues and gross margins.**

             Inthe past nine months, overcapacity in the memory product market has negativelyimpacted our average selling prices.  Weexpect this overcapacity to negatively impact our revenues and profitability ata minimum until the end of 2001. Declines in semiconductor prices could affect the valuation of ourinventory, which could harm our business. Our ability to maintain or increaserevenues will depend upon our ability to increase unit sales volumes of existingproducts and to introduce and sell new products in quantities sufficient tooffset declines in sales prices. Our efforts to reduce costs and develop newproducts to offset the impact of further declines in average sales prices maynot be successful. Declines in average sales prices also would result in morememory being built into products by Industrial customers, which would favor ourlargest competitors and reduce the demand for our commercial memory products.

**We are subject to the cyclical nature of the semiconductorindustry and changes from the current point in the cycle could adversely affectour business.**

             Thesemiconductor industry, including the memory markets in which we compete, ishighly cyclical and is characterized by constant and rapid technologicalchange, rapid product obsolescence and price erosion, evolving standards, shortproduct life cycles and wide fluctuations in product supply and demand. Theindustry has experienced significant downturns, often connected with, or inanticipation of, maturing product cycles of both semiconductor companies' andtheir customers' products and declines in general economic conditions. Thesedownturns have been characterized by diminished product demand, productionovercapacity, high inventory levels and accelerated erosion of average sellingprices. Any future downturns could have a material adverse effect on ourbusiness and operating results. Furthermore, any upturn in the semiconductorindustry could result in increased demand for, and possible shortages of,components we use to manufacture and assemble our ICs. Such shortages couldhave a material adverse effect on our business and operating results.

**Because we depend on a small number of suppliers for ICdevices, any disruption in our supply relationships could harm our ability tofulfill orders.**

             Wehave no long-term DRAM supply contracts and are dependent on a small number ofsuppliers to supply DRAM devices, which represent approximately 95% of thecomponent costs of our DRAM memory products. Our dependence on a small numberof suppliers and our lack of long-term supply contracts expose us to severalrisks, including the inability to obtain an adequate supply of components,price increases, late deliveries and poor component quality. Elpida, HyundaiElectronics, Micron and Samsung Semiconductor currently supply a majority ofthe dynamic random access memory, or DRAM, IC devices used in our DRAM memoryproducts. A disruption in or termination of our supply relationship with any ofthese significant suppliers by natural disaster or otherwise, or our inabilityto develop relationships with new suppliers, if required, would cause delays,disruptions or reductions in product shipments or require product redesignswhich could damage relationships with our customers, and would increase ourcosts and/or prices.

**We may be unable to maintain a steady supply of components.**

             Theelectronics industry has experienced in the past, and may experience in thefuture, shortages in IC devices, including DRAM, static random access memory,or SRAM, and Flash memory. We have experienced and may continue to experiencedelays in component deliveries and quality problems which have caused and couldin the future cause delays in product shipments and have required and could inthe future require the redesign of some of our products. In addition, industrycapacity has, from time to time, become constrained such that some vendorswhich supply components for our products have placed their customers, ourselvesincluded, on allocation. This means that while we may have customer orders, wemay not be able to obtain the materials that we need to fill those orders in atimely manner.

 

**Sales to a small number of customers represent a significantportion of our revenues and the loss of any key customer would materiallyreduce our sales.**

             Ourdependence on a small number of customers means that the loss of a majorcustomer or any reduction in orders by a major customer would materially reduceour sales. Historically, a relatively small number of customers have accountedfor a significant percentage of our revenues. Our ten largest Industrialsegment customers accounted for an aggregate of 75.3% of our Industrialrevenues or 15.8% of our total revenues in the second quarter of 2001 and an aggregateof 72.6% of our Industrial revenues or 24.8% of our total revenues in the firstsix months of 2001.  Our largestIndustrial customer, Unisys, accounted for 37.8% of our Industrial revenues or8.0% of our total revenues in the second quarter of 2001 and 34.6% of ourIndustrial revenues or 11.8% of our total revenues in the first six months of2001. No other Industrial segment customer accounted for more than 10.0% of ourrevenues in the second quarter and first six months of 2001. Our ten largest Commercialsegment customers accounted for an aggregate of 61.1% of our Commercialrevenues or 48.3% of our total revenues in the second quarter of 2001 and anaggregate of 59.1% of our Commercial revenues or 38.9% of our total revenues inthe first six months of 2001. Our largest Commercial customer, CDW ComputerCenters, accounted for 28.6% of our Commercial revenues or 22.6% of our totalrevenues in the second quarter of 2001 and 29.2% of our Commercial revenues or19.2% of our total revenues in the first six months of 2001. No otherCommercial segment customer accounted for more than 10.0% of our revenues inthe second quarter and first six months of 2001. Consolidation in some of ourcustomers' industries may result in increased customer concentration and thepotential loss of customers as a result of acquisitions. In addition, thecomposition of our major customer base changes from quarter to quarter as themarket demand for our customers' products changes and we expect thisvariability will continue in the future. We expect that sales of our productsto a small number of customers will continue to contribute materially to ourrevenues in the foreseeable future and believe that our financial results willdepend in significant part upon the success of our customers' products.

**Three of our beneficial shareholders have substantialinfluence over our operations and can significantly influence matters requiringshareholder approval.**

             ManouchMoshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an executiveofficer and director of SimpleTech, are brothers and beneficially ownapproximately 80.0% of our common stock. As a result, they have the ability tocontrol all matters requiring approval by our shareholders, including theelection and removal of directors, approval of significant corporatetransactions and the ability to control the decision of whether a change incontrol will occur.

**We are involved from time to time in claims and litigationover intellectual property rights, which may adversely affect our ability tomanufacture and sell our products.**

             Thesemiconductor industry is characterized by vigorous protection and pursuit ofintellectual property rights. We believe that it may be necessary, from time totime, to initiate litigation against one or more third parties to preserve ourintellectual property rights. In addition, from time to time, we have received,and may continue to receive in the future, notices that claim we have infringedupon, misappropriated or misused other parties' proprietary rights, whichclaims could result in litigation. Such litigation would likely result insignificant expense to us and divert the efforts of our technical andmanagement personnel. In the event of an adverse result in such litigation, wecould be required to pay substantial damages, cease the manufacture, use andsale of certain products, expend significant resources to developnon-infringing technology, discontinue the use of certain processes or obtainlicenses to use the infringed technology. Such a license may not be availableon commercially reasonable terms, if at all. Our failure to obtain a license orour failure to obtain a license on commercially reasonable terms could cause usto incur substantial costs and suspend manufacturing products using the infringedtechnology. If we obtain a license, we would likely be required to make royaltypayments for sales under the license. Such payments would increase our costs ofrevenues and reduce our gross profit.

             Weare currently a party to two lawsuits regarding intellectual property asfurther described below under “Part II – Other Information – Item I - LegalProceedings.” The outcome of litigation is inherently uncertain and we cannotpredict the outcome of these lawsuits with certainty. These lawsuits havediverted, and are expected to continue to divert, the efforts and attention ofour key management and technical personnel. In addition, we have incurred, andexpect to continue to incur, substantial legal fees and expenses in connectionwith these lawsuits. As a result, our defense of these lawsuits, regardless oftheir eventual outcomes, has been, and will continue to be, costly and timeconsuming. In addition, if our IC Tower stacking patent is found to be invalid,our ability to exclude competitors from making, using or selling the same orsimilar products to our IC Tower stacking products would cease. In addition, ifwe are found to infringe valid patents of others, we may be excluded from usingthe infringed technology without a license, which may not be available oncommercially reasonable terms, if at all.

**If industry sales of products using Flash memory do not grow,our revenues, gross margins and profitability would be harmed.**

             Themarket for consumer electronics incorporating Flash memory is relatively newand emerging. The success of our Flash business will depend largely on thelevel of consumer interest in consumer electronics utilizing Flash memory, suchas digital cameras, MP3 digital audio players and personal digital assistants,or PDAs, many of which have only recently been introduced to the market. Ifsales of products using Flash memory do not increase, we will be unable to growour Flash business. In addition, if we are unable to anticipate and fulfillcustomer demand for our products, we may lose sales to our competitors.

**Demand for our products would decline if the market for Flashmemory does not develop, or if a competing technology displaces Flash memory.**

             Thereis currently an absence of a single Flash memory standard. It is possible thatFlash memory standards other than those to which our products conform willemerge as the industry standard. If we are unable to anticipate and adequatelyallocate our resources in a timely and efficient manner toward the productionand development of industry-standard Flash memory products, we may experiencesignificant delays in releasing new and commercially viable products. Thesedelays would provide a competitor a first-to-market opportunity and allow acompetitor to achieve greater market share. Some of our competitors are in abetter financial and marketing position from which to influence industryacceptance of a particular Flash memory standard or competing technology thanwe are. In particular, a primary source of competition may come from companiesthat offer alternative technologies such as ferroelectric random access memoryproducts. If a competing technology replaces or takes significant market sharefrom the Flash memory market, we would not be able to sell our Flash products.

 

**The execution of our growth strategy depends on our abilityto retain key personnel, including our executive officers, and to attractqualified personnel.**

             Competitionfor employees in our industry is intense. We have had and may continue to havedifficulty hiring the necessary engineering, sales and marketing and managementpersonnel to support our growth. The successful implementation of our businessmodel and growth strategy depends on the continued contributions of our seniormanagement and other key research and development, sales and marketing andoperations personnel, including Manouch Moshayedi, our Chief Executive Officer,Mike Moshayedi, our President, and Mark Moshayedi, our Chief Operating Officer,Chief Technical Officer and Secretary. The loss of any key employee, thefailure of any key employee to perform in his or her current position, or theinability of our officers and key employees to expand, train and manage ouremployee base would prevent us from executing our growth strategy.

**Our proprietary technology and intellectual property may notbe adequately protected, which could harm our competitive position.**

             Ourproprietary technology and other intellectual property are critical to oursuccess. We protect our intellectual property rights through patents,trademarks, copyrights and trade secret laws, confidentiality procedures andemployee disclosure and invention assignment agreements. It is possible thatour efforts to protect our intellectual property rights may not:

|   | • | prevent  the challenge, invalidation or circumvention of our existing patents;                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                            |
|   | • | result  in patents that lead to commercially viable products or provide competitive  advantages for our products;                               |
|   |   |                                                                                                                                            |
|   | • | prevent  our competitors from independently developing similar products, duplicating  our products or designing around the patents owned by us; |
|   |   |                                                                                                                                            |
|   | • | prevent  third-party patents from having an adverse effect on our ability to do  business;                                                      |
|   |   |                                                                                                                                            |
|   | • | result  in patents with claims that are sufficiently broad to preclude competition;                                                             |
|   |   |                                                                                                                                            |
|   | • | provide  adequate protection for our intellectual property rights;                                                                              |
|   |   |                                                                                                                                            |
|   | • | prevent  disputes with third parties regarding ownership of our intellectual property  rights;                                                  |
|   |   |                                                                                                                                            |
|   | • | prevent  disclosure of our trade secrets and know-how to third parties or into the  public domain; and                                          |
|   |   |                                                                                                                                            |
|   | • | result  in patents from any of our pending applications.                                                                                        |

 

             Aspart of our confidentiality procedures, we enter into non-disclosure andinvention assignment agreements with all of our employees and attempt tocontrol access to and distribution of our technology, documentation and otherproprietary information. However, if such agreements are found to beunenforceable, we may be unable to adequately protect our intellectual propertyrights. In addition, despite these procedures, third parties could copy orotherwise obtain and make unauthorized use of our technologies or independentlydevelop similar technologies.

             Wehave not applied and do not expect to apply for patent protection in foreigncountries. In addition, the laws of foreign countries may not adequatelyprotect our intellectual property rights. Many U.S. companies have encounteredsubstantial infringement problems in some foreign countries. Because we sellsome of our products overseas, we have exposure to foreign intellectualproperty risks.

**Our indemnification obligations for the infringement by ourproducts of the intellectual property rights of others could require us to paysubstantial damages.**

             Wecurrently have in effect a number of agreements in which we have agreed todefend, indemnify and hold harmless certain of our customers and suppliers fromdamages and costs which may arise from the infringement by our products ofthird-party patents, trademarks or other proprietary rights. We mayperiodically have to respond to claims and litigate these types ofindemnification obligations. Any such indemnification claims could require usto pay substantial damages. Our insurance does not cover intellectual propertyinfringement.

**Our indemnification obligations to our customers andsuppliers for product defects could require us to pay substantial damages.**

             Anumber of our product sales and product purchase agreements provide that wewill defend, indemnify and hold harmless our customers and suppliers fromdamages and costs which may arise from product warranty claims or claims forinjury or damage resulting from defects in our products. We maintain insuranceto protect against certain claims associated with the use of our products, butour insurance coverage may not be adequate to cover all or any part of theclaims asserted against us. A successful claim brought against us that is inexcess of, or excluded from, our insurance coverage could substantially harmour business, financial condition and results of operations.

**Our limited experience in acquiring other businesses, productlines and technologies may make it difficult for us to overcome problemsencountered in connection with any acquisitions we may undertake.**

             Weintend to pursue selective acquisitions to complement our internal growth. Ifwe make any future acquisitions, we could issue stock that would dilute ourshareholders' percentage ownership, incur substantial debt or assume contingentliabilities. We have limited experience in acquiring other businesses, productlines and technologies. In addition, the attention of our small management teammay be diverted from our core business if we undertake an acquisition.Potential acquisitions also involve numerous risks, including, among others:

|   | • | Problems  assimilating the purchased operations, technologies or products;                    |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   |   |                                                                                          |
|   | • | Costs  associated with the acquisition;                                                       |
|   |   |                                                                                          |
|   | • | Adverse  effects on existing business relationships with suppliers and customers;             |
|   |   |                                                                                          |
|   | • | Risks  associated with entering markets in which we have no or limited prior  experience;     |
|   |   |                                                                                          |
|   | • | Potential  loss of key employees of purchased organizations; and                              |
|   |   |                                                                                          |
|   | • | Potential  litigation arising from the acquired company's operations before the  acquisition. |

             Ourinability to overcome problems encountered in connection with such acquisitionscould divert the attention of management, utilize scarce corporate resourcesand harm our business. In addition, we are unable to predict whether or whenany prospective acquisition candidate will become available or the likelihoodthat any acquisition will be completed.

**Product returns, price protection and order cancellationscould reduce our revenues.**

             Tothe extent we manufacture products in anticipation of future demand that doesnot materialize, or in the event a customer cancels outstanding orders, wecould experience an unanticipated increase in our inventory. A lack of consumerdemand for our products may also cause increased product returns. A majority ofour sales through Commercial segment channels include limited rights to returnunsold inventory. In addition, while we may not be contractually obligated toaccept returned products, we may determine that it is in our best interest toaccept returns in order to maintain good relations with our customers. Productreturns would increase our inventory and reduce our revenues.  We have had to write-down inventory in thepast for reasons such as obsolescence, excess quantities and declines in marketvalue below our costs. The inventory write-down for the first six months of2001 was $918,000.  In addition, weoffer some of our Commercial customers limited price protection rights forinventories of our products held by them. If we reduce the list price of ourproducts, these customers may receive credits from us. We incurred priceprotection charges of approximately $931,000 in the first six months of 2001.

             Weare also subject to repurchase agreements with various financial institutionsin connection with wholesale inventory financing. Under these agreements, wemay be required to repurchase inventory upon customer default with a financinginstitution and then resell the inventory through normal distribution channels.As of June 30, 2001, we have not been required to repurchase inventory inconnection with the customer default agreements noted above. However, it may bepossible that we will be required to repurchase inventory, upon customerdefault, in the future. Sales under such agreements were approximately $792,000in the first six months of 2001.

             Wehave no long-term volume commitments from our customers. Sales of our productsare made through individual purchase orders and, in certain cases, are madeunder master agreements governing the terms and conditions of therelationships. Customers may change, cancel or delay orders with limited or nopenalties. We have experienced cancellations of orders and fluctuations inorder levels from period-to-period and we expect to continue to experiencesimilar cancellations and fluctuations in the future which could result influctuations in our revenues.

**We may not be able to maintain or improve our competitiveposition because of the intense competition in the memory industry.**

             Weconduct business in an industry characterized by intense competition, rapidtechnological change, evolving industry standards, declining average salesprices and rapid product obsolescence. Our competitors include many largedomestic and international companies that have substantially greater financial,technical, marketing, distribution and other resources, broader product lines,lower cost structures, greater brand recognition and longer-standingrelationships with customers and suppliers. As a result, our competitors may beable to respond better to new or emerging technologies or standards and tochanges in customer requirements. Our competitors may also be able to devotegreater resources to the development, promotion and sale of products, and maybe able to deliver competitive products at a lower price.

             Weexpect to face competition from existing competitors and new and emergingcompanies that may enter our existing or future markets that have similar oralternative products which may be less costly or provide additional features.In addition, some of our significant suppliers are also our competitors, many ofwhom have the ability to manufacture competitive products at lower costs as aresult of their higher levels of integration. We also face competition fromcurrent and prospective customers that evaluate our capabilities against themerits of manufacturing products internally. Competition may arise due to thedevelopment of cooperative relationships among our current and potentialcompetitors or third parties to increase the ability of their products toaddress the needs of our prospective customers. Accordingly, it is possiblethat new competitors or alliances among competitors may emerge and rapidlyacquire significant market share.

             Weexpect our competitors will continue to improve the performance of theircurrent products, reduce their prices and introduce new products that may offergreater performance and improved pricing, any of which could cause a decline insales or loss of market acceptance of our products. In addition, ourcompetitors may develop enhancements to or future generations of competitiveproducts that may render our technology or products obsolete or uncompetitive.

**We may lose our competitive position if we fail to developnew and enhanced products and introduce them in a timely manner.**

             Thehigh performance computing, networking and communications, consumer electronicsand industrial markets are subject to rapid technological change, productobsolescence, frequent new product introductions and enhancements, changes inend-user requirements and evolving industry standards. Our ability to competein these markets will depend in significant part upon our ability tosuccessfully develop, introduce and sell new and enhanced products on a timelyand cost-effective basis, and to respond to changing customer requirements.

             Wehave experienced, and may in the future experience, delays in the developmentand introduction of new products. Our product development is inherently riskybecause it is difficult to foresee developments in technology, coordinate ourtechnical personnel, and identify and eliminate design flaws. Defects or errorsfound in our products after commencement of commercial shipments, could resultin delays in market acceptance of these products. Delays in developing,manufacturing or marketing new or enhanced products could give our competitorsan advantage, hurt our reputation and harm our business, financial conditionand results of operations. Such products, even if introduced, may not gainmarket acceptance. In addition, we may not be able to respond effectively tonew technological changes or new product announcements by others.

**We rely on a continuous power supply toconduct our operations, and California’s current energy crisis could disruptour operations and increase our expenses.**

             Allof our manufacturing operations are located in our facility in Santa Ana,California.  California is in the midst of an energy crisis that could disrupt ouroperations and increase our expenses. In the event power reserves for the State of California fall to acritically low level, California has on some occasions implemented, and may inthe future continue to implement, rolling power blackouts throughoutCalifornia.   We currently do not havebackup generators or alternate sources of power in the event of a blackout, andour current insurance does not provide coverage for any damages we may sufferas a result of any interruption in our power supply.  If blackouts interrupt our power supply, we would be temporarilyunable to continue operations.  Any suchinterruption in our ability to continue operations would delay the manufactureand development of our products, disrupt communications with our customers andsuppliers and delay product shipment. Power interruptions could also damage our reputation and could result inlost revenue.  Any loss of power couldhave a material adverse effect on our business, operating results and financialcondition.  Furthermore, shortages inwholesale electricity supplies have caused power prices to increase.  If electricity prices continue to increase,our operating expenses will likely increase which will have a negative effecton our operating results.

**Obtaining additional capital to fund our operations andfinance our growth could impair the value of your investment.**

             Ifwe expand more rapidly than currently anticipated or if our working capitalneeds exceed our current expectations, we may need to raise additional capitalthrough public or private equity offerings or debt financings. Our futurecapital requirements depend on many factors including our research, development,sales and marketing activities. We do not know whether additional financingwill be available when needed, or will be available on terms favorable to us.If we cannot raise needed funds on acceptable terms, we may not be able todevelop or enhance our products, take advantage of future opportunities orrespond to competitive pressures or unanticipated requirements. To the extentwe raise additional capital by issuing equity securities, our shareholders mayexperience substantial dilution and the new equity securities may have greaterrights, preferences or privileges than our existing common stock.

**We face risks associated with doing business in foreigncountries, including foreign currency fluctuations and trade barriers, thatcould lead to a decrease in demand for our products or an increase in the costof the components used in our products.**

             Thevolatility of general economic conditions and fluctuations in currency exchangerates affect the prices of our products and the prices of the components usedin our products. International sales of our products accounted for 17.2% in thesecond quarter of 2001 and 16.2% in the first six months of 2001. No singleforeign country accounted for more than 10.0% of our revenues in the secondquarter or first six months of 2001. For the second quarter and first sixmonths of 2001, over 95.0% of our international sales were denominated in U.S.dollars. However, if there is a significant devaluation of the currency in aspecific country, the prices of our products will increase relative to thatcountry's currency and our products maybe less competitive in that country. Inaddition, we cannot be sure that our international customers will continue tobe willing to place orders denominated in U.S. dollars. If they do not, ourrevenues and results of operations will be subject to foreign exchangefluctuations which could harm our business. We do not hedge against foreigncurrency exchange rate risks.

             Inaddition, we purchase substantially all of the IC devices used in our productsfrom local distributors of foreign suppliers. Although our purchases of ICdevices are currently denominated in U.S. dollars, devaluation of the U.S.dollar relative to the currency of a foreign supplier would likely result in anincrease in our cost of IC devices.

             Ourinternational sales also are subject to certain other risks, includingregulatory risks, tariffs and other trade barriers, timing and availability ofexport licenses, political and economic instability, difficulties in accounts receivablecollections, difficulties in managing distributors, lack of a local salespresence, difficulties in obtaining governmental approvals, compliance with awide variety of complex foreign laws and treaties and potentially adverse taxconsequences. In addition, the United States or foreign countries may implementquotas, duties, taxes or other charges or restrictions upon the importation orexportation of our products, leading to a reduction in sales and profitabilityin that country.

**Disruption of our operations in our Santa Ana, Californiamanufacturing facility would substantially harm our business.**

             Allof our manufacturing operations are located in our facility in Santa Ana,California. Due to this geographic concentration, a disruption of our manufacturingoperations, resulting from sustained process abnormalities, human error,government intervention or natural disasters such as earthquakes, fires orfloods could cause us to cease or limit our manufacturing operations andconsequently harm our business, financial condition and results of operations.

**Compliance with environmental laws and regulations could harmoperating results.**

             Weare subject to a variety of environmental laws and regulations governing, amongother things, air emissions, waste water discharge, waste storage, treatmentand disposal, and remediation of releases of hazardous materials. Our failureto comply with present and future requirements could harm our ability tocontinue manufacturing our products. Such requirements could require us toacquire costly equipment or to incur other significant expenses to comply withenvironmental regulations. The imposition of additional or more stringentenvironmental requirements, the results of future testing at our facilities, ora determination that we are potentially responsible for remediation at othersites where problems are not presently known to us, could result in expenses inexcess of amounts currently estimated to be required for such matters.

**ITEM 3.****  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

             Weare currently exposed to interest rate risk on our existing equipment termloans.  Our variable rate debt consistsof term loan borrowing of $1.5 million. To date we have not utilized our floating rate debt under the revolvingcredit facility.

             Ifinterest rates were to increase or decrease 1%, the result would be an annualincrease or decrease of interest expense of approximately $15,000.  However, due to the uncertainty of theactions that would be taken and their possible effects, this analysis assumesno such action.  Further, this analysisdoes not consider the effect of the change in the level of overall economicactivity that could exist in such an environment.

             Salesto foreign customers are denominated in U.S. dollars and as such we have noforeign currency fluctuation risk.

**PART II**

**OTHER INFORMATION**

**Item 1.****  Legal Proceedings**

             Referenceis made to our Annual Report on Form 10-K for the fiscal year ended December31, 2000 filed with the SEC under the heading "Legal Proceedings" fora discussion of litigation involving the Company relating to patent litigationwith Dense-Pac Microsystems, Inc.

Dense-Pac Microsystems, Inc. — PatentLitigation

             OnFebruary 7, 2001, the Court ruled on pending summary judgment motions in thelawsuit the Company filed in September 1998 against Dense-Pac Microsystems,Inc.  In this lawsuit filed in FederalCourt in Santa Ana, SimpleTech  allegedthat Dense-Pac infringed SimpleTech’s IC Tower stacking patent, U.S. Patent No.5,514,907.  Dense-Pac counterclaimed forinfringement of its stacking patent, U.S. Patent No. 4,956,694.  SimpleTech sought damages and an injunctionagainst infringement of its patent by Dense-Pac.  Dense-Pac denied the infringement and asserted a defense ofpatent invalidity and a counterclaim against SimpleTech alleging infringementof its stacking patent.

             Inthe Court's summary judgement rulings, the Court found non-infringement byDense-Pac as to SimpleTech's patent and non-infringement by SimpleTech as toDense-Pac’s patent.  Simple Tech hasappealed the adverse summary judgement ruling to the U.S. Court of Appeals forthe Federal Circuit in Washington, D.C. Dense-Pac has not appealed the Court’s ruling that SimpleTech did notinfringe the Dense-Pac patent, and that ruling is now final.

             OnFebruary 21, 2001, SimpleTech filed a new lawsuit against Dense-Pac in FederalCourt in Santa Ana for infringement of its IC Tower stacking patent, U.S.Patent No. Re. 36,916 (a reissue of U.S. Patent No. 5,514,907 referenced above).  SimpleTech is seeking damages, an injunctionagainst further infringement, and related costs.  Dense-Pac filed its answer on March 13, 2001, denyinginfringement, asserting a defense of patent invalidity, and alleging technologymisappropriation by SimpleTech. Trial has been set for October 22, 2002.

**Item 2.****  Changesin Securities and Use of Proceeds**

             None.

**Item 3.****  DefaultsUpon Senior Securities**

**            **None.

**Item 4.****  Submission ofMatters to a Vote of Security Holders**

             InApril 2001, holders of the requisite majority of the then outstanding shares ofCommon Stock of the Company approved a resolution by written consent to amendthe Company’s Amended and Restated Articles of Incorporation to change its namefrom “Simple Technology, Inc.” to “SimpleTech, Inc.”

             SimpleTechheld its Annual Meeting of shareholder for 2001 as further discussed below:

| (a)    | SimpleTech’s  Annual Meeting of Shareholders was held on June 26, 2001 in Irvine,  California.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (b)    | Proxies  for the Annual Meeting were solicited pursuant to Regulation 14 under the  Securities Exchange Act of 1934, as amended, there was no solicitation in  opposition to the management's nominees as listed in the proxy statement, and  all of such nominees were elected.                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (c)    | At  the Annual Meeting, Simple Tech's stockholders elected Manouch Moshayedi,  Mike Moshayedi, Mark Moshayedi, Dan Moses, Mark R. Hollinger, F. Michael Ball  and Thomas A. Beaver as directors, and ratified the appointment of  PricewaterhouseCoopers LLP as independent accounts of the Company for the fiscal  year ending December 31, 2001.  Set  forth below are the number of votes cast for, against or withheld, as well as  the number of abstentions as to each matter (there were no broker non-votes). |

 

|   | 1. | Election  of Directors: |
|--------|----|-------------------------|

 

| **Nominee** | **For**            | **Against** | **Withheld** |
|-------------|--------------------|-------------|--------------|
|        | Manouch  Moshayedi | 37,705,106  | 0            | 554,934 |
|        | Mike  Moshayedi    | 37,705,106  | 0            | 554,934 |
|        | Mark  Moshayedi    | 37,705,106  | 0            | 554,934 |
|        | Dan  Moses         | 37,705,106  | 0            | 554,934 |
|        | Mark  R. Hollinger | 37,705,106  | 0            | 554,934 |
|        | F.  Michael Ball   | 37,705,106  | 0            | 554,934 |
|        | Thomas  A. Beaver  | 37,705,106  | 0            | 554,934 |

 

|   | 2. | Ratification  of appointment of PricewaterhouseCoopers LLP as the Company's independent  accountants for the fiscal year ending December 31, 2001: |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | For:     | 37,705,106 |   |
|--------|----------|------------|--------|
|   | Against: | 0          |   |
|   | Abstain: | 554,934    |   |

 

| (d) | Not  applicable. |
|-----|------------------|

 

 

**Item 5.****  OtherInformation**

None.

 

**Item 6.****  Exhibitsand Reports on Form 8-K**

None.

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

|   |                   | SIMPLETECH,  INC.,                                                                 |   |
|--------|------------------------|------------------------------------------------------------------------------------|--------|
|   |                   | a  California corporation                                                          |   |
|   |                   |                                                                               |   |
|   |                   |                                                                               |   |
|   | Date:  August 13, 2001 | /s/  MANOUCH MOSHAYEDI                                                             |   |
|   |                   |                                                                                    |        |   |
|   |                   | Manouch  Moshayedi                                                                 |   |
|   |                   | Chief  Executive Officer and Chairman of the Board of Directors                    |   |
|   |                   |                                                                               |   |
|   |                   |                                                                               |   |
|   | Date:  August 13, 2001 | /s/  DAN MOSES                                                                     |   |
|   |                   |                                                                                    |        |   |
|   |                   | Dan  Moses                                                                         |   |
|   |                   | Chief  Financial Officer (Principal Financial and Accounting Officer) and Director |   |
|        |                        |                                                                                    |        |  |  |  |  |  |