**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**ý****   QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2002**

 

**or**

 

**o****   TRANSITION REPORT TO SECTION 13OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to             **

 

**Commission File Number 000-31623**

 

| **SIMPLETECH,  INC.**                                             |
|-------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its charter)           |
|                                                              |
| **CALIFORNIA**                                                    |   | **33-0399154** |
| (State or other  jurisdiction of incorporation or   organization) |   | (I.R.S. Employer  Identification 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)        |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes    ý     No    o

 

The number of shares outstanding of the Registrant’s common stock, parvalue $0.001, as of March 31, 2002 was 38,406,829.

 

 

 

# **SIMPLETECH, INC.**

**INDEX TO FORM 10-Q FOR THE**

**QUARTERLY PERIOD ENDED MARCH 31, 2002**

 
| PART I.   FINANCIAL INFORMATION |
|-------------------------------------------|
|                                      |   |
| Item 1.                                   | Financial Statements |
|                                      |   |
|                                      | Consolidated Balance Sheets  as of March 31, 2002 (unaudited) and December 31, 2001 |
|                                      |   |
|                                      | Consolidated Statements  of Operations for the Three Months Ended March 31, 2002 and March 31,  2001(unaudited) |
|                                      |   |
|                                      | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2002 and March  31, 2001 (unaudited) |
|                                      |   |
|                                      | 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    |
|                                      |   |
| 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.

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

## **Item1.  Financial Statements**

 

**SimpleTech, Inc.**

**Consolidated Balance Sheets**

**(in thousands, except share and per shareamounts)**

 
|                                                                                                                                                                                             |   | **March  31,  2002** |   | **December  31,  2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------------|--------|
|                                                                                                                                                                                             |   | **(unaudited)**      |   |                    |   |
| **ASSETS:**                                                                                                                                                                                      |   |                 |   |                    |   |
| Current Assets:                                                                                                                                                                                  |   |                 |   |                    |   |
| Cash and cash equivalents                                                                                                                                                                        |   | $                    | 44,857 |                    | $      | 51,831 |   |
| Accounts receivable, net of allowances of $1,110 at March 31,  2002 and $1,080 at December 31, 2001                                                                                              |   | 16,704               |   | 12,062                  |   |
| Inventory, net                                                                                                                                                                                   |   | 19,277               |   | 9,843                   |   |
| Deferred income taxes                                                                                                                                                                            |   | 786                  |   | 786                     |   |
| Other current assets                                                                                                                                                                             |   | 2,043                |   | 4,474                   |   |
| Total current  assets                                                                                                                                                                            |   | 83,667               |   | 78,996                  |   |
| Furniture,  fixtures and equipment, net                                                                                                                                                          |   | 10,347               |   | 9,127                   |   |
| Goodwill                                                                                                                                                                                         |   | 835                  |   |                    |   |
| Deferred income  taxes                                                                                                                                                                           |   | 587                  |   | 587                     |   |
| Total assets                                                                                                                                                                                     |   | $                    | 95,436 |                    | $      | 88,710 |   |
|                                                                                                                                                                                             |   |                 |   |                    |   |
|                                                                                                                                                                                             |   |                 |   |                    |   |
| **LIABILITIES AND  SHAREHOLDERS' EQUITY:**                                                                                                                                                       |   |                 |   |                    |   |
| Current  Liabilities:                                                                                                                                                                            |   |                 |   |                    |   |
| Accounts payable                                                                                                                                                                                 |   | $                    | 16,045 |                    | $      | 10,320 |   |
| Current maturities of long-term debt                                                                                                                                                             |   | 580                  |   | 741                     |   |
| Current maturities of capital lease obligations                                                                                                                                                  |   | 429                  |   | 441                     |   |
| Accrued and other liabilities                                                                                                                                                                    |   | 3,690                |   | 2,951                   |   |
| Total current  liabilities                                                                                                                                                                       |   | 20,744               |   | 14,453                  |   |
| Long-term debt                                                                                                                                                                                   |   | 240                  |   | 271                     |   |
| Capital lease obligations                                                                                                                                                                        |   | 18                   |   | 113                     |   |
| Total  liabilities                                                                                                                                                                               |   | 21,002               |   | 14,837                  |   |
|                                                                                                                                                                                             |   |                 |   |                    |   |
| Shareholders'  Equity:                                                                                                                                                                           |   |                 |   |                    |   |
| Preferred stock, par value $0.001, 20,000,000 shares authorized,  no shares outstanding                                                                                                          |   | —               |   | —                  |   |
| Common stock, $0.001 par value, 100,000,000 shares authorized,  38,406,829 shares issued and outstanding as of March 31, 2002; 38,272,050  shares issued and outstanding as of December 31, 2001 |   | 38                   |   | 38                      |   |
| Additional paid-in capital                                                                                                                                                                       |   | 65,723               |   | 65,484                  |   |
| Unearned stock based compensation                                                                                                                                                                |   | (6                   | )      | (15                     | )      |
| Retained earnings                                                                                                                                                                                |   | 8,679                |   | 8,366                   |   |
| Total  shareholders' equity                                                                                                                                                                      |   | 74,434               |   | 73,873                  |   |
| Total  liabilities and shareholders’ equity                                                                                                                                                 |   | $                    | 95,436 |                    | $      | 88,710 |   |

 

3

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**SimpleTech, Inc.**

**Consolidated Statements of Operations**

**(in thousands, except per share amounts)**

**(unaudited)**

 

 
|                                               |   | **Three  Months  Ended March 31,** |   |
|----------------------------------------------------|--------|------------------------------------|--------|
|                                               |   | **2002**                           |   | **2001** |   |
|                                               |   |                               |   |   |   |   |   |
| Net revenues                                       |   | $                                  | 50,952 |   | $ | 58,715 |   |
| Cost of  revenues                                  |   | 39,476                             |   | 43,253 |   |
| Gross profit                                       |   | 11,476                             |   | 15,462 |   |
| Sales and  marketing                               |   | 4,837                              |   | 5,280 |   |
| General and  administrative                        |   | 3,031                              |   | 2,976 |   |
| Research and  development                          |   | 1,938                              |   | 1,057 |   |
| Non-recurring  in-process research and development |   | 1,360                              |   | — |   |
| Total operating  expenses                          |   | 11,166                             |   | 9,313 |   |
| Income from  operations                            |   | 310                                |   | 6,149 |   |
| Interest and  other, net                           |   | (209                               | )      | (416 | ) |
| Income before  provision for income taxes          |   | 519                                |   | 6,565 |   |
| Provision for  income taxes                        |   | 206                                |   | 2,606 |   |
| Net income                                         |   | $                                  | 313    |   | $ | 3,959 |   |
|                                               |   |                               |   |   |   |
| Net income per  share:                             |   |                               |   |   |   |
| Basic                                              |   | $                                  | 0.01   |   | $ | 0.10 |   |
| Diluted                                            |   | $                                  | 0.01   |   | $ | 0.10 |   |
|                                               |   |                               |   |   |   |
| Weighted  average shares outstanding:              |   |                               |   |   |   |
| Basic                                              |   | 38,329                             |   | 38,095 |   |
| Diluted                                            |   | 40,575                             |   | 39,611 |   |

 

See accompanyingnotes to unaudited consolidated financial statements.

 

4

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**SimpleTech, Inc.**

**Consolidated Statements of Cash Flows**

**(in thousands)**

**(unaudited)**

 
|                                                                                         |   | **Three Months  Ended March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                         |   | **2002**                          |   | **2001** |   |
|                                                                                         |   |                              |   |   |   |
| Cash flow from operating activities:                                                         |   |                              |   |   |   |
| Net income                                                                                   |   | $                                 | 313    |   | $ | 3,959 |   |
| Adjustments to reconcile net income to net cash (used in) provided by  operating activities: |   |                              |   |   |   |
| Depreciation and amortization                                                                |   | 836                               |   | 864 |   |
| Loss on sale of furniture, fixtures and equipment                                            |   | 59                                |   | 6 |   |
| Accounts receivable provisions                                                               |   | 331                               |   | 552 |   |
| Inventory excess and obsolescence expense                                                    |   | 355                               |   | — |   |
| In-process research and development                                                          |   | 1,360                             |   | — |   |
| Compensation related to stock options vesting                                                |   | 9                                 |   | 11 |   |
| Change in operating assets and liabilities:                                                  |   |                              |   |   |   |
| Accounts receivable                                                                          |   | (4,973                            | )      | 6,080 |   |
| Inventory                                                                                    |   | (9,789                            | )      | 9,230 |   |
| Other current assets                                                                         |   | 2,431                             |   | 136 |   |
| Accounts payable                                                                             |   | 5,725                             |   | (15,727 | ) |
| Accrued and other liabilities                                                                |   | 739                               |   | 1,733 |   |
| Net cash (used in) provided by operating activities                                          |   | (2,604                            | )      | 6,844 |   |
|                                                                                         |   |                              |   |   |   |
| Cash flows from investing activities:                                                        |   |                              |   |   |   |
| Purchase of furniture, fixtures and equipment                                                |   | (2,206                            | )      | (1,755 | ) |
| Proceeds from sale of furniture, fixtures and equipment                                      |   | 191                               |   | 159 |   |
| Acquisition of business                                                                      |   | (2,295                            | )      | — |   |
| Net cash used in investing activities                                                        |   | (4,310                            | )      | (1,596 | ) |
|                                                                                         |   |                              |   |   |   |
| Cash flows from financing activities:                                                        |   |                              |   |   |   |
| Repayment of borrowings from banks                                                           |   | (192                              | )      | (184 | ) |
| Payment on capital lease obligations                                                         |   | (107                              | )      | (248 | ) |
| Proceeds from issuance of common stock                                                       |   | 239                               |   | 833 |   |
| Net cash (used in) provided by financing activities                                          |   | (60                               | )      | 401 |   |
|                                                                                         |   |                              |   |   |   |
| Net (decrease) increase in cash                                                              |   | (6,974                            | )      | 5,649 |   |
| Cash and cash equivalents at beginning of period                                             |   | 51,831                            |   | 33,747 |   |
| Cash and cash equivalents at end of period                                                   |   | $                                 | 44,857 |   | $ | 39,396 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

5

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**SIMPLETECH, INC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note1 – Basis of Presentation**

 

The accompanying interim consolidated financialstatements of SimpleTech, Inc., a California corporation (the “Company”), areunaudited and have been prepared in accordance with the instructions to Form10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal andrecurring accruals) considered necessary for a fair presentation of theconsolidated financial position of the Company at March 31, 2002 and theconsolidated results of operations and cash flows for the three month periodsended March 31, 2002 and 2001 have been included.  These interim consolidated financial statements should be read inconjunction with the consolidated financial statements and related notescontained in the most recent Annual Report on Form 10-K filed with theSEC.  The December 31, 2001 balancesreported herein are derived from the audited consolidated financial statementsincluded in the Annual Report on Form 10-K for the year ended December 31,2001.  The results for the interimperiods are not necessarily indicative of results to be expected for the fullyear.

 

The consolidated financial statements of the Companyinclude the accounts of the Company’s subsidiaries.  All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

**Note2 – Use of Estimates**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make certain estimates and assumptions that affect thereported amounts of assets and liabilities (e.g., bad debt reserves andinventory reserves), disclosure of contingent assets and liabilities at thedate of the financial statements, and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

**Note3 – Net Income Per Share**

 

Basic earnings per share is computed by dividing netincome by the weighted average number of shares outstanding. In computingdiluted earnings per share, the weighted average number of shares outstandingis adjusted to reflect the potentially dilutive securities. For the quartersended March 31, 2002 and 2001, potentially dilutive securities consisted solelyof options and resulted in potential common shares of 2,246,195 and 1,516,333,respectively.

 

###### **Note4**–Supplemental Balance Sheet Information

 

Inventory consists of the following:

 
|                  |   | **March 31,  2002** |   | **December  31, 2001** |   |
|-----------------------|--------|---------------------|--------|------------------------|--------|
|                  |   | **(in  thousands)** |   |
| Raw materials         |   | $                   | 10,769 |                   | $      | 5,421 |   |
| Work-in-progress      |   | 1,042               |   | 927                    |   |
| Finished goods        |   | 8,758               |   | 4,785                  |   |
|                  |   | 20,569              |   | 11,133                 |   |
| Valuation  allowances |   | (1,292              | )      | (1,290                 | )      |
|                  |   |                |   |                   |   |
| Inventory, net        |   | $                   | 19,277 |                   | $      | 9,843 |   |
|                       |        |                     |        |                        |        |  |  |  |

 

6

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Furniture, fixtures and equipment consist of thefollowing:

 
|                                    |   | **March 31,  2002** |   | **December  31, 2001** |   |
|-----------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                    |   | **(in  thousands)** |   |
| Furniture and  fixtures                 |   | $                   | 318    |                   | $      | 299 |   |
| Equipment                               |   | 22,778              |   | 21,557                 |   |
|                                    |   | 23,096              |   | 21,856                 |   |
| Accumulated  depreciation               |   | (12,749             | )      | (12,729                | )      |
|                                    |   |                |   |                   |   |
| Furniture,  fixtures and equipment, net |   | $                   | 10,347 |                   | $      | 9,127 |   |

 

### **Note 5**– Item 1. Legal Proceedings

 

Reference is made to the Company’s Annual Report onForm 10-K filed with the SEC in March 2002  underthe heading “Legal Proceedings” for a discussion of litigation involving theCompany relating to (i) patent litigation with DPAC Technologies, Inc. and (ii)patent litigation with Lemelson Medical, Education & Research Foundation,LLP.

 

#### **DPACTechnologies, Inc. – Patent Litigation**

 

On September 23, 1998, the Company filed a lawsuitagainst DPAC Technologies, Inc., formerly Dense-Pac Microsystems, Inc.(“DPAC”), in the United States District Court for the Central District of Californiafor infringement of the Company’s IC Tower stacking patent, U.S. Patent No.5,514,907. On March 29, 2001, the court entered final judgement finding DPACdid not infringe the Company’s patent. The appeals court affirmed the finaljudgement on March 7, 2002.

 

On October 17, 2000, the Company received a reissuepatent of the 5,514,907 patent from the U.S. Patent and Trademark Office. Thereissue patent is U.S. Patent No. Re. 36,916.

 

On February 21, 2001, the Company filed a new lawsuitagainst DPAC in the United States District Court for the Central District ofCalifornia for infringement of the Company’s IC Tower stacking reissue patent,U.S. Patent No. Re. 36,916. The Company is seeking damages and an injunctionagainst infringement of the Company’s patent by DPAC. On March 13, 2001, DPACfiled an answer to the Company’s complaint denying the Company’s claim ofinfringement, and asserted a defense of patent invalidity against the Company’sIC Tower stacking reissue patent. In addition, DPAC counterclaimed allegingmisappropriation of unspecified technology and the sale of products by theCompany incorporating such technology alleged to have beenmisappropriated.  No trial date has beenset.

 

**LemelsonMedical, Education & Research Foundation, LLP – Patent Infringement**

 

The Company received notice on November 26, 2001, thatthe Lemelson Medical, Education & Research Foundation, LLP (“LemelsonFoundation”) filed a complaint on November 13, 2001, against the Company andother defendants. The complaint was filed in the District Court of Arizona andalleges that the Company’s manufacturing processes infringe several patentsthat the Lemelson Foundation allegedly owns. The complaint also states thatthese allegedly infringed patents relate to machine vision technology and barcoding technology. On March 7, 2002, the Company was served with the LemelsonFoundation complaint. Thereafter, the case was stayed pending the outcome ofrelated cases against other parties involving the same patents. Because of thepreliminary stage of this case, an estimate of potential damages, if any, wouldbe premature and speculative, and the Company has not made any such estimate atthis time.

 

**Note6 – Segment Information:**

 

The Company designs, manufactures and markets acomprehensive line of memory, storage and connectivity products used in highperformance computing, networking and communications, consumer electronics andindustrial applications.  The Companyprovides both technology solutions for two reportable operating segments,Industrial (formerly termed original equipment manufacturer or OEM) and 

 

7

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Commercial (formerly termed Aftermarket), based on dynamic randomaccess memory (DRAM), static random access memory (SRAM) and Flash memorytechnologies.

 

Beginning in 1999, after completion of managementinformation system enhancements, the Company used net sales and gross profit asthe basis for evaluating the performance of its operating segments.  The Company does not allocate operatingexpenses, interest or income taxes to operating segments.  Due to the similarity of productsmanufactured for customers within each operating segment, the Company does notmaintain separate records to identify assets by operating segment.

 

Summarized financial information regarding theCompany’s reportable segments is shown in the following table:

 
|             |   | **Three  Months Ended  March 31, 2002** |   | **Three  Months Ended  March 31, 2001** |   |
|------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|             |   | **Industrial**                          |   | **Commercial**                          |   | **Consolidated** |   | **Industrial** |   | **Commercial** |   | **Consolidated** |   |
|             |   | **(in  thousands)**                     |   |
| Net revenues     |   | $                                       | 7,327  |                                    | $      | 43,625 |   | $ | 50,952 |   | $ | 24,887 |   | $ | 33,828 |   | $ | 58,715 |   |
| Cost of revenues |   | 5,078                                   |   | 34,398                                  |   | 39,476 |   | 15,748 |   | 27,505 |   | 43,253 |   |
| Gross profit     |   | $                                       | 2,249  |                                    | $      | 9,227 |   | $ | 11,476 |   | $ | 9,139 |   | $ | 6,323 |   | $ | 15,462 |   |

 

For the quarters ended March 31, 2002 and 2001,international sales comprised 12.0% and 15.6%, 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 from the Company’s domestic warehouse to foreign customers.

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**CautionaryStatement**

 

Certain statements in thisreport, including statements regarding the Company’s strategy, financialperformance and revenue sources, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, Section 21E ofthe Securities Exchange Act of 1934, as amended, and Section 27A of theSecurities Act of 1933, as amended, and are subject to the safe harbors createdby those sections.  Theseforward-looking statements are based on our current expectations, estimates andprojections about our industry, management’s beliefs, and certain assumptionsmade by us. Such statements are not guarantees of future performance and aresubject to certain risks, uncertainties and assumptions that are difficult topredict. Therefore, our actual results could differ materially and adverselyfrom those expressed in any forward-looking statements as a result of variousfactors. The section 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 AnnualReports on Form 10-K, and in our other SEC filings, discuss some of theimportant risk factors that may affect our business, results of operations andfinancial condition.

 

The following discussion shouldbe read in conjunction with the Company’s consolidated financial statements andnotes thereto.

 

#### **Overview**

 

SimpleTech, Inc., originallyincorporated in 1990 as Simple Technology, Inc., is a technology solutionsprovider offering products based on DRAM, SRAM and Flash memory technologies.Headquartered in Santa Ana, California, the company is a leader in the design,development, manufacturing and marketing of memory solutions. In addition, weoffer a line of high-density memory products using our three-dimensional ICTower stacking technology that allows multiple memory chips to be stackedtogether to increase the capabilities of memory modules without increasing theproduct footprint.  Our products areused in high-performance computing, networking and communications, consumerelectronics and industrial applications.

 

Asa result of increased demand for consumer electronics and high-density memoryproducts used in Internet infrastructure and embedded applications, thepercentage of our revenues derived from the sales of Flash memory and IC Towerstacking products increased from 13.0% in 1998 to 20.8% in 1999 and

 

8

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40.2%in 2000.  However, due to the softeningmacro-economic conditions and excess inventory levels at our IndustrialDivision customers in 2001 and the first quarter of 2002, the percentage of ourrevenue derived from the sale of Flash memory and IC tower stacking productsdecreased from 40.2% in 2000 to 34.1% in 2001 and 25.4% in the first quarter of 2002. In the firstquarter of 2002, our highest profit margin products were our IC Tower stackingproducts.

 

We sell our products throughour Industrial and Commercial Divisions. Our Industrial Division was created in late 1998 to enhance themarketing of our products to original equipment manufacturers, or OEMs.  Our Commercial Division sells our productsthrough the following five channels: value added reseller, or VAR, mail order, commercial and industrialdistribution, and retail. After experiencing year-over-year total revenuegrowth of 57.5% from 1998 to 1999 and 60.1% from 1999 to 2000, both ourIndustrial and Commercial Division revenues were negatively impacted in 2001due to softening macro-economic conditions and severe declines in the price ofDRAM and Flash components, which resulted in significantly lower averageselling prices.  In addition, ourIndustrial Division revenues in 2001 were further impacted by a build-up ofinventory by our communications and networking customers during 2000.  We do not expect Industrial Divisioncustomer inventory levels to return to normal levels until at least the secondhalf of 2002.  In 2001, our IndustrialDivision revenues declined 66.7% and our Commercial Division revenues declined29.2%.  Our total revenues and earningsbottomed in the third quarter of 2001 with total revenues growing 7.2%sequentially in the fourth quarter of 2001 and 43.2% sequentially in the firstquarter of 2002.  In 2001, ourCommercial Division significantly expanded our retail presence through theaddition of new customers, such as Sam’s Club and Circuit City.  Commercial Division units shipped increased42.7% from 2000 to 2001.  However,Commercial Division units shipped decreased 10.7% from the fourth quarter of 2001to the first quarter of 2002.  Thisreduction in units shipped relates directly to price elasticity that resultedfrom the increase in the average selling price of Commercial Division products.  The increase in average selling priceresulted from higher DRAM component prices. Industrial Division units shipped increased 22.0% from the fourthquarter of 2001 to the first quarter of 2002. The increase in Industrial Division units shipped was primarily due toseveral Industrial Division customers in the networking and telecom industriesplacing orders after several quarters of inactivity and the shipment of firstorders to new Industrial Division customers in the casino gaming, in-flightinformation and entertainment, and defense industries.  In 2000, 2001 and for the first quarter of2002, our highest profit margin division was our Industrial Division.  Although we began tracking revenues andgross margins on a divisional basis in 1999, we have not tracked, and do notintend to track, operating expenses on a divisional basis.

 

Constraint measures enactedby major DRAM manufacturers during the second half of 2001, including theclosing of fab lines and consolidation among these manufacturers, havecontributed to DRAM prices more than tripling from November 2001 to April2002.  We believe that such supplyconstraint measures could translate into firmer DRAM component prices andincreased average selling prices, revenues and gross profit in the second halfof 2002.

 

Historically, a relativelysmall number of customers have accounted for a significant percentage of ourrevenues. Our ten largest customers accounted for an aggregate of 58.1% of ourtotal revenues in the first quarter of 2002 and 57.5% of our total revenues inthe first quarter of 2001.  Our ten largestIndustrial Division customers accounted for an aggregate of 88.5% of ourIndustrial Division revenues or 12.7% of our total revenues in the firstquarter of 2002 and 80.5% of our Industrial Division revenues or 34.1% of ourtotal revenues in the first quarter of 2001. No Industrial Division customer accounted for more than 10.0% of ourtotal revenues in the first quarter of 2002. Our largest Industrial Division customer in the first quarter of 2001,Unisys, accounted for 33.6% of our Industrial Division revenues or 14.6% of ourtotal revenues.

 

Our ten largest CommercialDivision customers accounted for an aggregate of 60.3% of our CommercialDivision revenues or 51.6% of our total revenues in the first quarter of 2002and 57.9% of our Commercial Division revenues or 33.3% of our total revenues inthe first quarter of 2001. Our largest Commercial Division customer in each ofthe first quarters of 2002 and 2001, CDW Computer Centers, accounted for 24.8%of our Commercial Division revenues or 21.2% of our total revenues in the firstquarter of 2002 and 29.7% of our Commercial Division revenues or 17.1% of ourtotal revenues in the first quarter of 2001. Other than Unisys in the firstquarter of 2001 and CDW Computer Centers, no customer accounted for more than10.0% of our total revenues in each of the first quarters of 2002 or 2001. 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

 

9

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of our products to a small number ofcustomers will continue to contribute materially to our revenues in theforeseeable future and believe that our financial results will depend insignificant part upon the success of our customers’ products.

 

International sales of ourproducts constituted 12.0% of our revenues for the first quarter of 2002 and15.6% of our revenues for the first quarter of 2001.  No single foreign country accounted for more than 10.0% of ourrevenues in each of the first quarters of 2002 or 2001. During each of thefirst quarters of 2002 and 2001, over 95.0% of our international sales weredenominated in U.S. dollars. Consequently, if the value of the U.S. dollarincreases relative to a particular foreign currency, our products could becomemore expensive, which could result in a reduction of sales in a particularcountry. In addition, we purchase substantially all of the integrated circuit(“IC”) components used in our products from local distributors of Japanese,Korean and Taiwanese suppliers. Although our purchases of IC components arecurrently denominated in U.S. dollars, devaluation of the U.S. dollar relativeto the currency of a foreign supplier would likely result in an increase in ourcost of IC components. Our international sales also could be adversely affectedby risks including regulatory risks, tariffs and other trade barriers.

 

In the past we have beenimpacted by seasonal purchasing patterns resulting in higher sales in the thirdand fourth quarters of each year. Our ability to adjust our short-termoperating expenses in response to fluctuations in revenues is limited. As aresult, if revenues are lower than expected in any given period, our results ofoperations could be harmed.

 

Revenues are recognized atthe time of shipment. A majority of our sales through commercial channelsinclude limited rights to return unsold inventory.  Such returns are estimated and recorded as a reduction of netrevenues at the time of sale.  Inaddition, while we may not be contractually obligated to accept returnedproducts, we may determine that it is in our best interest to accept returns inorder to maintain good relations with our customers. Product returns wouldincrease 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. We had inventory write-downs ofapproximately $355,000 in the first quarter of 2002.  We did not have any inventory write-downs in the first quarter of2001.  We also have price protectionagreements with a number of our Commercial Division customers in which weretain limited liability for price declines related to unsold inventory. If wereduce the list price of our products, these customers may receive credits fromus.  Such credits are estimated andrecorded as a reduction of net revenues at the time of issuance.  We incurred price protection charges ofapproximately $297,000 in first quarter of 2002 and $295,000 in the firstquarter of 2001.  In addition, we haverebate agreements with a number of our Commercial Division customers in whichwe make payments to our customers’ end-users for a portion of their purchaseprice.  Such rebates payments areestimated and recorded as a reduction of net revenues at the time of sale.  We incurred rebate expenses of approximately$351,000 in the first quarter of 2002. We did not have any rebate expenses in the first quarter of 2001.

 

**Results ofOperations – Comparison of the first quarter of 2002 to the first quarter of2001**

 

*Net Revenues.*  Our revenues were $51.0 millionin the first quarter of 2002, compared to $58.7 million in the same period in2001.  Revenues declined 13.1% due to a36.0% decline in average sales price from $89 in the first quarter of 2001 to$57 in the first quarter of 2002, partially offset by a unit volume increase of34.9% from 662,000 units in the first quarter of 2001 to 893,000 in the firstquarter of 2002.  The decrease in ouraverage sales price resulted from lower DRAM and Flash component prices in thefirst quarter of 2002 compared to the first quarter of 2001.  Stronger demand for our products by both ourIndustrial and Commercial Division customers led to the overall unit volumeincrease, comprising of unit volume increases of 18.0% for standard memoryproducts, 94.9% for Flash products and 5.3% for IC Tower stacking products,partially offset by a unit volume decrease of 31.1% for non-DRAM, non-Flashproducts such as SRAM, hard drive upgrade kits and connectivity products. Themix of products sold varies from quarter to quarter and may vary in the future,affecting our overall average sales prices and gross margins.

 

Our Industrial Division revenuesdeclined 70.7% from $24.9 million in the first quarter of 2001 to $7.3 millionin the first quarter of 2002. Industrial Division unit volume increased 26.4%during this period and Industrial Division average sales price decreased from$200 in the first quarter of 2001 to $47 in the first quarter of 2002.  This decrease in average sales priceresulted primarily from lower DRAM and Flash component prices in the firstquarter of 2002 compared to the first quarter of 2001.  Our Commercial Division revenues increased29.0% from $33.8 million in the first quarter of 2001 to $43.6 million in thefirst quarter of 2002. Commercial Division revenues increased due to anincrease in unit volume of 36.8%, partially offset by

 

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a decrease in average sales price from $63 in thefirst quarter of 2001 to $59 in the first quarter of 2002.  The increase in unit volume for ourCommercial Division resulted from an increase in units shipped to the retailchannel including shipments to new customers such as Sam’s Club and CircuitCity.

 

Our combined backlog was $8.2million as of March 31, 2002, consisting of $7.5 million for the IndustrialDivision and $729,000 for the Commercial Division.  Our combined backlog was $8.0 million as of March 31, 2001,consisting of $7.4 million for the Industrial Division and $600,000 for theCommercial Division.  CommercialDivision backlog is typically nominal since substantially all CommercialDivision customer orders are filled on a same-day or next-day basis. We includein our backlog only those customer orders for which we have accepted purchaseorders and to which we have assigned shipment dates within the upcoming sixmonths. Since orders constituting our backlog are subject to change due to,among other things, customer cancellations and reschedulings, and our abilityto procure necessary components, backlog is not necessarily an indication offuture revenues.

 

*Gross Profit.*  Our gross profit was $11.5million in the first quarter of 2002, compared to $15.5 million in the sameperiod in 2001.  Grossprofit as a percentage of revenues was 22.5% in the first quarter of 2002,compared to 26.3% in the same period in 2001. Gross profit for our IndustrialDivision as a percentage of revenues was 30.7% in the first quarter of 2002,compared to 36.7% in the first quarter of 2001.  This decrease in gross profit as a percentage of revenues for ourIndustrial Division resulted primarily from a negative product mix shift.  Gross profit as a percentage of revenues forour Commercial Division was 21.2% in the first quarter of 2002, compared to18.7% in the first quarter of 2001. This increase in gross profit as a percentage of revenues for ourCommercial Division resulted from a positive shift towards higher marginCommercial Division sales channels.

 

*Sales and Marketing.*  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 $4.8 million in the first quarter of 2002, compared to $5.3million in the same period in 2001. Sales and marketing expenses as apercentage of revenues were 9.4% in the first quarter of 2002, compared to 9.0%in the same period in 2001.

 

*General and Administrative.*  Generaland administrative expenses are primarily comprised of personnel costs for ourexecutive and administrative employees, professional fees and facilitiesoverhead. General and administrative expenses were $3.0 million in each of thefirst quarters of 2002 and 2001. General and administrative expenses as apercentage of revenues were 5.9% in the first quarter of 2002 and 5.1% in thefirst quarter of 2001.

 

*Research and Development.*  Researchand development expenses are primarily comprised of personnel costs for our engineering and design staff and the cost of prototype supplies. Research and developmentexpenses were $1.9 million in the first quarter of 2002, compared to $1.1million in the same period in 2001. Research and development expenses as apercentage of revenues were 3.7% in the first quarter of 2002, compared to 1.9%in the same period in 2001. The increase in research and development expensesresulted from $1.1 million in expenditures related to our Xiran Division,established as a result of our acquisition of the assets of Irvine Networks inJanuary 2002.  The Xiran Division isdeveloping innovative content processing technology for Web-based serverplatforms. As a result of increased research and development expenses for theXiran Division, total research and development expenses are expected toincrease significantly in 2002 to approximately $8 to $9 million.

 

*Non-recurring In-process Research and Development.*  Wedid not have non-recurring in-process research and development expenses in thefirst quarter of 2001.  Non-recurring in-process research and developmentexpenses were $1.4 million in the first quarter of 2002 and related to ouracquisition of Irvine Networks in January 2002.

 

*Interest and Other, Net.*  Interestand other, net was $209,000 in the first quarter of 2002 and $416,000 in thefirst quarter of 2001.  Interest expenseis comprised of interest related to equipment financing. Interest expense was$30,000 in the first quarter of 2002, compared to $63,000 in the same period in2001.  Interest income is comprised ofinterest earned on our cash and cash equivalents.  Interest income was $239,000 in the first quarter of 2002 and$479,000 in the first quarter of 2001. This decrease in interest income resulted from lower interest rates inthe first quarter of 2002 compared to the first quarter of 2001,

 

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partially offset by a higher average cash balancein the first quarter of 2002 compared to the first quarter of 2001.

 

*Provision for Income Taxes.* The provision for income taxes was $206,000 inthe first quarter of 2002 and $2.6 million in the first quarter of 2001.  As a percentage of income before provisionfor income taxes, provision for income taxes was 39.7% in the each of the firstquarters of 2002 and 2001.

 

*Net Income. *Net income was $313,000 in the first quarter of2002 and $4.0 million in the first quarter of 2001.

 

**Liquidity andCapital Resources**

 

As of March 31, 2002, we hadworking capital of $62.9 million including $44.9 million of cash and cashequivalents. As of December 31, 2001, we had working capital of $64.5 millionincluding $51.8 million of cash and cash equivalents.  We had no outstanding principal balance under our $27.5 millionline of credit with Comerica Bank at March 31, 2002 and December 31, 2001.  There is no unused line fee under our lineof credit agreement with Comerica Bank. Comerica Bank has the option to reduce our availability under the lineof credit to an amount between $15.0 million to $20.0 million as determined bytheir sole and absolute discretion.  Todate, availability under our line of credit has remained at $27.5 million.  Current assets were 4.0 times currentliabilities at March 31, 2002, compared to 5.5 times current liabilities atDecember 31, 2001.

 

Net cash used in operatingactivities was $2.6 million in the first quarter of 2002 and resulted primarilyfrom an increase in net accounts receivable of $4.6 million and net inventoryof $9.4 million, partially offset by an increase in accounts payable of $5.7million and a decrease in other assets of $2.4 million.  Accounts receivable, inventory and accountspayable levels increased due to the 43.2% sequential increase in revenues.

 

Net cash used in investingactivities was $4.3 million in the first quarter of 2002, attributableprimarily to $2.2 million in purchases of furniture, fixtures and equipment and$2.3 million related to the acquisition of Irvine Networks in January2002.  We expect to spend approximately$8.0 to $10.0 million on capital expenditures during the next 24 months,primarily for the purchase of manufacturing, testing and engineering equipment.

 

Net cash used in financingactivities was $60,000 in the first quarter of 2002 and resulted from paymentsof $299,000 related to equipment loans and capital lease obligations, partiallyoffset by the receipt of $239,000 in proceeds from the issuance of commonstock.

 

In prior years, we entered into several capital leasesand loans to finance manufacturing and testing equipment. Our obligations undercapital leases were $447,000 on March 31, 2002 and $554,000 on December 31, 2001,with interest rates ranging from 8.1% to 9.6% per annum. Our equipmentfinancing loan balances were $820,000 on March 31, 2002 and $1.0 million onDecember 31, 2001, with interest rates ranging from 7.5% to 9.1% per annum.  One of the equipment note payable agreementscontains various nonfinancial covenants that, among other things, limitdistributions and dividends to our shareholders without the prior writtenconsent of the lender, and requires the equipment to remain unencumbered byother liens. As of March 31, 2002, we were in compliance with all covenantsunder the equipment note payable agreements.

 

We believe that our current assets, including cash andcash equivalents, availability under our line of credit and expected cash flowfrom operations will be sufficient to fund our operations for the next 12months.  Thereafter, we may requireadditional sources of funds to continue to support our business.  Such funds, if needed, may not be availableor may not be available on terms acceptable to us.

 

**Inflation**

 

Inflation was not a materialfactor in either revenue or operating expenses during the first quarter of 2002or the first quarter of 2001.

 

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**Irvine Networks, LLC**

 

In January 2002, we completed a $2.3 millionacquisition of the assets, including intellectual property, of Irvine Networks,LLC, and hired their engineering staff. The on-going operation has become our Xiran Division. For the pasttwo-and-a-half years, Irvine Networks has been developing innovative contentprocessing technology for Web-based server platforms. The effort is in thefinal stages of developing a working prototype. The completed products,incorporating our patented memory stacking technology, will be inserted intoWeb-based servers to enable the faster transmission of files.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amount of revenues and expenses foreach period. The following represents a summary of our critical accountingpolicies, defined as those policies that we believe are: (a) the most importantto the portrayal of our financial condition and results of operations, and (b)that require management’s most difficult, subjective or complex judgments,often as a result of the need to make estimates about the effects of mattersthat are inherently uncertain.

 

•*                     Reserves forinventory excess, obsolescence and lower of market values over costs*—Wegenerally purchase raw materials in quantities that we anticipate will be fullyused in the near term. Changes in operating strategy and customer demand, andthe somewhat unpredictable fluctuations in market values for such materials,however, can limit our ability to effectively utilize all of the raw materialspurchased and sold through resulting finished goods to customers for a profit.We regularly monitor potential inventory excess, obsolescence and lower marketvalues compared to costs and, when necessary, reduce the carrying amount of ourinventory to its market value.

 

*•*                     *Allowances for doubtful accounts, priceprotection and rebates*—We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments. Additionally, we maintain allowances for limited priceprotection rights for inventories of our products held by our customers as aresult of recent sales transactions to them. If we reduce the list price of ourproducts, these customers may receive a credit from us.  We also maintain allowances for rebatesrelated to payments we make to certain of our customers' end-users for aportion of their purchase price.  Weestimate the impact of such pricing changes and rebates on a regular basis andadjust our allowances accordingly.

 

*•*                     *Product returns*—We offer amajority of our customers that purchase products through our commercialchannels limited rights to return unsold inventory. In addition, while we maynot be contractually obligated to accept returned products, we may determinethat it is in our best interest to accept returns in order to maintain goodrelationships with our customers. We provide for estimated future returns ofinventory at the time of sale based on historical experience and actual resultshave been within our expectations.

 

•*                     Income taxes*—Aspart of the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate. The process incorporates an assessment of the current tax exposuretogether with temporary differences resulting from different treatment of transactionsfor tax and financial statement purposes. Such differences result in deferredtax assets and liabilities, which are included within the consolidated balancesheet. The recovery of deferred tax assets from future taxable income must beassessed and, to the extent that recovery is not likely, we establish avaluation allowance. Increases in valuation allowances result in the recordingof additional tax expense. Further, if our ultimate tax liability differs fromthe periodic tax provision reflected in the consolidated statements ofoperations, additional tax expense may be recorded.

 

*•*                     *Litigation and other contingencies*—Managementregularly evaluates our exposure to threatened or pending litigation and otherbusiness contingencies. Because of the uncertainties related to the amount ofloss from litigation and other business contingencies, the recording of lossesrelating to such exposures requires significant judgment about the potentialrange of outcomes. As additional information about current or future litigationor other contingencies becomes available, our management will assess whethersuch information warrants the recording of additional expense 

 

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relating to ourcontingencies. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable. The results of theseestimates form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

 

•                     *Valuation oflong-lived assets*—We assess the potential impairment of long-livedtangible and intangible assets whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Changes in ouroperating strategy can significantly reduce the estimated useful life of suchassets. (See Note 2 to the notes to our consolidated financial statementsregarding recently issued accounting standards).

 

**Risk Factors**

 

***You should carefully consider the followingrisks before you decide to buy shares of our common stock. The risks anduncertainties described below are not the only ones facing us. Additional risksand uncertainties, including those risks set forth in “Management’s Discussionand Analysis of Financial Condition and Results of Operations” above, may alsoadversely impact and impair our business. If any of the following risksactually occur, our business, results of operations or financial conditionwould likely suffer. In such case, the trading price of our common stock coulddecline, and you may lose all or part of the money you paid to buy our stock.***

** **

***This Report contains forward-lookingstatements based on the current expectations, assumptions, estimates andprojections about us and our industry. These forward-looking statements involverisks and uncertainties. Our actual results could differ materially from thosediscussed in these forward-looking statements as a result of certain factors,as more fully described in this section and elsewhere 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 pricesmay result in declines in our revenues and gross margins.**

 

In the fourth quarter of2000 and in the entire year 2001, overcapacity in the memory product marketresulted in significant declines in component prices, which negatively impactedour average selling prices.  Declines insemiconductor prices could also affect the valuation of our inventory, whichcould harm our business. During periods of overcapacity, our ability to maintainor increase revenues will depend upon our ability to increase unit salesvolumes of existing products and to introduce and sell new products inquantities sufficient to offset declines in sales prices. Our efforts to reducecosts and develop new products to offset the impact of further declines inaverage sales prices may not be successful. Declines in average sales pricesalso would result in more memory being built into products by originalequipment manufacturers, which would favor our largest competitors and reducethe demand for our commercial memory products.

 

**Because we depend on a small numberof suppliers for IC devices, any disruption in our supply relationships couldharm our ability to fulfill orders.**

 

We have no long-term ICdevice supply contracts and are dependent on a small number of suppliers tosupply IC devices, which represent approximately 95% of our component costs.Our dependence on a small number of suppliers and our limited number oflong-term supply contracts expose us to several risks, including the inabilityto obtain an adequate supply of components, price increases, late deliveriesand poor component quality. Hitachi Semiconductor supplies substantially all ofthe IC devices used in our Flash memory products. In addition, Elpida Memory,Micron Semiconductor Electronics and Samsung Semiconductor currently supply amajority of the DRAM IC devices used in our DRAM memory products. A disruptionin or termination of our supply relationship with any of these significantsuppliers by natural disaster or otherwise, or our inability to developrelationships with new suppliers, if required, would cause delays, disruptionsor reductions in product shipments or require product redesigns which coulddamage relationships with our customers, and would increase our costs and/orprices. In particular, if our supply relationship with Hitachi Semiconductor isdisrupted or terminated, our ability to manufacture and sell our Flash productswould be limited and our Flash business would be adversely affected.

 

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**We are subject to the cyclical natureof the semiconductor industry and changes from the current point in the cyclecould adversely affect our business.**

 

The semiconductor industry,including the memory markets in which we compete, is highly cyclical and ischaracterized by constant and rapid technological change, rapid productobsolescence and price erosion, evolving standards, short product life cyclesand wide fluctuations in product supply and demand. The industry hasexperienced significant downturns, often connected with, or in anticipation of,maturing product cycles of both semiconductor companies’ and their customers’products and declines in general economic conditions. These downturns have beencharacterized by diminished product demand, production overcapacity, highinventory levels and accelerated erosion of average selling prices. Any futuredownturns could have a material adverse effect on our business and operatingresults. In the fourth quarter of 2000 and in 2001, a semiconductor downturnnegatively impacted our average selling prices, revenues and earnings.  Constraint measures enacted by major DRAMmanufacturers during the second half of 2001, including the closing of fablines and consolidation among these manufacturers, have contributed to DRAMcomponent prices more than tripling from November 2001 to April 2002.  The increase in DRAM component prices had apositive impact on our revenues from the fourth quarter of 2001 to the firstquarter of 2002.  Furthermore, any upturnin the semiconductor industry could result in increased demand for, andpossible shortages of, components we use to manufacture and assemble ourICs.  Such shortages could have amaterial adverse effect on our business and operating results.

 

**We may be unable to maintain a steadysupply of components.**

 

The electronics industry hasexperienced in the past, and may experience in the future, shortages in ICdevices, including DRAM, SRAM and Flash memory. We have experienced and maycontinue to experience delays in component deliveries and quality problemswhich have caused and could in the future cause delays in product shipments. Inaddition, we have required and could in the future require the redesign of someof our products. In addition, industry capacity has, from time to time, becomeconstrained such that some vendors which supply components for our productshave placed their customers, ourselves included, on allocation. This means thatwhile we may have customer orders, we may not be able to obtain the materialsthat we need to fill those orders in a timely manner.

 

**Sales to a small number of customersrepresent a significant portion of our revenues and the loss of any keycustomer would materially reduce our sales.**

 

Our dependence on a smallnumber of customers means that the loss of a major customer or any reduction inorders by a major customer would materially reduce our revenues.  Historically, a relatively small number ofcustomers have accounted for a significant percentage of our revenues.  Our ten largest Industrial Divisioncustomers accounted for an aggregate of 71.0% of our Industrial Divisionrevenues or 20.8% of our total revenues in 2001 and 90.3% of our IndustrialDivision revenues or 12.7% of our total revenues in the first quarter of 2002.In 2001, Unisys accounted for 37.6% of our Industrial Division revenues or11.0% of our total revenues.  NoIndustrial Division customer accounted for more than 10.0% of our totalrevenues in the first quarter of 2002.

 

Our ten largest Commercial Division customers accounted for an aggregateof 61.6% of our Commercial Division revenues or 43.6% of our total revenues in2001 and 60.1% of our Commercial Division revenues or 51.6% of our total revenues in thefirst quarter of 2002.  CDW ComputerCenters was our largest Commercial Division customer in 2001 and inthe first quarter of 2002. CDW Computer Centers accounted for 27.9% of our Commercial Division revenues or19.7% of our total revenues in 2001 and 24.7% of our Commercial Division revenues or 21.2% of ourtotal revenues in the first quarter of 2002.  No otherCommercial Division customer accounted for more than 10.0% of our totalrevenues in 2001 or in the first quarter of 2002.

 

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’ business.

 

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**Three of our beneficial shareholdershave substantial influence over our operations and can significantly influencematters requiring shareholder approval.**

 

Manouch Moshayedi, MikeMoshayedi and Mark Moshayedi, each of whom is an executive officer and directorof SimpleTech, are brothers and beneficially own approximately 79.8% of ourcommon stock. As a result, they have the ability to control all mattersrequiring approval by our shareholders, including the election and removal ofdirectors, approval of significant corporate transactions and the ability tocontrol the decision of whether a change in control will occur.

 

**We are involved from time to time inclaims and litigation over intellectual property rights, which may adverselyaffect our ability to manufacture and sell our products.**

 

The semiconductor industryis characterized by vigorous protection and pursuit of intellectual propertyrights. We believe that it may be necessary, from time to time, to initiatelitigation against one or more third parties to preserve our intellectualproperty rights. In addition, from time to time, we have received, and maycontinue to receive in the future, notices that claim we have infringed upon,misappropriated or misused other parties’ proprietary rights, which claimscould result in litigation. Such litigation would likely result in significantexpense to us and divert the efforts of our technical and management personnel.In the event of an adverse result in such litigation, we could be required topay substantial damages, cease the manufacture, use and sale of certainproducts, expend significant resources to develop non-infringing technology,discontinue the use of certain processes or obtain licenses to use theinfringed technology. Such a license may not be available on commerciallyreasonable terms, if at all. Our failure to obtain a license or our failure toobtain a license on commercially reasonable terms could cause us to incursubstantial 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.

 

We are currently a party to two lawsuits regardingintellectual property as further described under “Legal Proceedings.” Theoutcome of litigation is inherently uncertain and we cannot predict the outcomeof these lawsuits with certainty. These lawsuits have diverted, and areexpected to continue to divert, the efforts and attention of our key managementand technical personnel. In addition, we have incurred, and expect to continueto incur, substantial legal fees and expenses in connection with theselawsuits. As a result, our defense of these lawsuits, regardless of theireventual 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 usingFlash memory do not grow, our revenues, gross margins and profitability wouldbe harmed.**

 

The market for consumerelectronics incorporating Flash memory is relatively new and emerging. Thesuccess of our Flash business will depend largely on the level of consumerinterest in consumer electronics utilizing Flash memory, such as digitalcameras, MP3 digital audio players and personal digital assistants, or PDAs,many of which have only recently been introduced to the market. If sales ofproducts using Flash memory do not increase, we will be unable to grow ourFlash 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 declineif the market for Flash memory does not develop, or if a competing technologydisplaces Flash memory.**

 

There is currently anabsence of a single Flash memory standard. It is possible that Flash memorystandards other than those to which our products conform will emerge as theindustry standard. If we are unable to anticipate and adequately allocate ourresources in a timely and efficient manner toward the production anddevelopment 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 a competitorto achieve greater market share. Some of our competitors are in a betterfinancial and marketing position from which to influence industry acceptance ofa particular Flash memory standard or competing technology than we are. Inparticular, a primary source of 

 

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competition may come from companies thatoffer 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 strategydepends on our ability to retain key personnel, including our executiveofficers, and to attract qualified personnel.**

 

Competition for employees inour industry is intense. We have had and may continue to have difficulty hiringthe necessary engineering, sales and marketing and management personnel tosupport our growth. The successful implementation of our business model andgrowth strategy depends on the continued contributions of our senior managementand other key research and development, sales and marketing and operationspersonnel, including Manouch Moshayedi, our Chief Executive Officer, MikeMoshayedi, 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.

 

**Ourproprietary technology and intellectual property may not be adequatelyprotected, which could harm our competitive position.**

 

Our proprietary technology and other intellectualproperty are critical to our success. We protect our intellectual propertyrights through patents, trademarks, copyrights and trade secret laws,confidentiality procedures and employee disclosure and invention assignmentagreements. It is possible that our efforts to protect our intellectualproperty rights may not:

 

•  prevent the challenge, invalidation orcircumvention of our existing patents;

 

•  result in patents that lead to commerciallyviable products or provide competitive advantages for our products;

 

•  prevent our competitors from independentlydeveloping similar products, duplicating our products or designing around thepatents owned by us;

 

•  prevent third-party patents from having anadverse effect on our ability to do business;

 

•  provide adequate protection for ourintellectual property rights;

 

•  prevent disputes with third partiesregarding ownership of our intellectual property rights;

 

•  prevent disclosure of our trade secrets andknow-how to third parties or into the public domain; and

 

•  result in patents from any of our pendingapplications.

 

As part of our confidentiality procedures, we enterinto non-disclosure and invention assignment agreements with all of ouremployees and attempt to control access to and distribution of our technology,documentation and other proprietary information. However, if such agreementsare found to be unenforceable, we may be unable to adequately protect ourintellectual property rights. In addition, despite these procedures, thirdparties could copy or otherwise obtain and make unauthorized use of ourtechnologies or independently develop similar technologies.

 

We have not applied and do not expect to apply forpatent protection in foreign countries. In addition, the laws of foreigncountries may not adequately protect our intellectual property rights. ManyU.S. companies have encountered substantial infringement problems in someforeign countries. Because we sell some of our products overseas, we haveexposure to foreign intellectual property risks.

 

**Ourindemnification obligations for the infringement by our products of theintellectual property rights of others could require us to pay substantialdamages.**

 

We currently have in effect a number of agreements inwhich we have agreed to defend, indemnify and hold harmless certain of ourcustomers and suppliers from damages and costs which may

 

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arise from the infringement by our products of third-party patents,trademarks or other proprietary rights. We may periodically have to respond toclaims and litigate these types of indemnification obligations. Any suchindemnification claims could require us to pay substantial damages. Ourinsurance does not cover intellectual property infringement.

 

**Ourindemnification obligations to our customers and suppliers for product defectscould require us to pay substantial damages.**

 

A number of our product sales and product purchaseagreements provide that we will defend, indemnify and hold harmless ourcustomers and suppliers from damages and costs which may arise from productwarranty claims or claims for injury or damage resulting from defects in ourproducts. We maintain insurance to protect against certain claims associatedwith the use of our products, but our insurance coverage may not be adequate tocover all or any part of the claims asserted against us. A successful claimbrought against us that is in excess of, or excluded from, our insurancecoverage could substantially harm our business, financial condition and resultsof operations.

 

**Ourlimited experience in acquiring other businesses, product lines andtechnologies may make it difficult for us to overcome problems encountered inconnection with any acquisitions we may undertake.**

 

We intend to pursue selective acquisitions tocomplement our internal growth. If we make any future acquisitions, we couldissue stock that would dilute our shareholders’ percentage ownership, incursubstantial debt, reduce our cash reserves or assume contingent liabilities. Although we completed the acquisition of assets of IrvineNetworks, LLC, a leading-edge engineering company, in January 2002, our experience in acquiring other businesses, product linesand technologies is limited. In addition, the attention of our small managementteam may be diverted from our core business if we undertake an acquisition.Potential acquisitions also involve numerous risks, including, among others:

 

•  Problems assimilating the purchasedoperations, technologies or products;

 

•  Costs associated with the acquisition;

 

•  Adverse effects on existing businessrelationships with suppliers and customers;

 

•  Risks associated with entering markets inwhich we have no or limited prior experience;

 

•  Potential loss of key employees of purchasedorganizations; and

 

•  Potential litigation arising from theacquired company’s operations before the acquisition.

 

Our inability to overcome problems encountered inconnection with such acquisitions could divert the attention of management,utilize scarce corporate resources and harm our business. In addition, we areunable to predict whether or when any prospective acquisition candidate willbecome available or the likelihood that any acquisition will be completed.

 

**Product returns, price protection andorder cancellations could reduce our revenues.**

 

To the extent we manufactureproducts in anticipation of future demand that does not materialize, or in theevent a customer cancels outstanding orders, we could experience anunanticipated increase in our inventory. A lack of consumer demand for ourproducts may also cause increased product returns. A majority of our salesthrough commercial channels include limited rights to return unsold inventory.In addition, while we may not be contractually obligated to accept returnedproducts, we may determine that it is in our best interest to accept returns inorder to maintain good relations with our customers. Product returns wouldincrease our inventory and reduce our revenues.  We have had to write-down inventory in the past for reasons suchas obsolescence, excess quantities and declines in market value below ourcosts. These inventory write-downs were approximately $355,000 in the firstquarter of 2002. In addition, we offer some of our Commercial Division customerslimited price protection rights for inventories of our products held by them.If we reduce the list price of our products, these customers may receivecredits from us. We incurred price protection charges of approximately $297,000in the first quarter of 2002.  Inaddition, we have rebate agreements with a number of our Commercial Divisioncustomers in which we

 

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make payments to our customers’ end-users fora portion of their purchase price.  Weincurred rebate expenses of approximately $351,000 in the first quarter of2002.

 

We are also subject torepurchase agreements with various financial institutions in connection withwholesale inventory financing. Under these agreements, we may be required torepurchase inventory upon customer default with a financing institution andthen resell the inventory through normal distribution channels. As of March 31,2002, we have not been required to repurchase inventory in connection with thecustomer default agreements noted above. However, it may be possible that wewill be required to repurchase inventory, upon customer default, in the future.Sales under such agreements were approximately $189,000 in the first quarter of2002.

 

We have no long-term volumecommitments from our customers. Sales of our products are made throughindividual purchase orders and, in certain cases, are made under masteragreements governing the terms and conditions of the relationships. Customersmay change, cancel or delay orders with limited or no penalties. We haveexperienced cancellations of orders and fluctuations in order levels fromperiod-to-period and we expect to continue to experience similar cancellationsand fluctuations in the future which could result in fluctuations in our revenues.

 

**We may not be able to maintain orimprove our competitive position because of the intense competition in thememory industry.**

 

We conduct business in anindustry characterized by intense competition, rapid technological change,evolving industry standards, declining average sales prices and rapid productobsolescence. Our competitors include many large domestic and internationalcompanies that have substantially greater financial, technical, marketing,distribution and other resources, broader product lines, lower cost structures,greater brand recognition and longer-standing relationships with customers andsuppliers. As a result, our competitors may be able to respond better to new oremerging technologies or standards and to changes in customer requirements. Ourcompetitors may also be able to devote greater resources to the development,promotion and sale of products, and may be able to deliver competitive productsat a lower price.

 

We expect to facecompetition from existing competitors and new and emerging companies that mayenter our existing or future markets with similar or alternative products whichmay be less costly or provide additional features. In addition, some of oursignificant suppliers are also our competitors, many of whom have the abilityto manufacture competitive products at lower costs as a result of their higherlevels of integration. We also face competition from current and prospectivecustomers that evaluate our capabilities against the merits of manufacturingproducts internally. Competition may arise due to the development ofcooperative relationships among our current and potential competitors or thirdparties to increase the ability of their products to address the needs of ourprospective customers. Accordingly, it is possible that new competitors oralliances among competitors may emerge and rapidly acquire significant marketshare.

 

We expect our competitorswill continue to improve the performance of their current products, reducetheir prices and introduce new products that may offer greater performance andimproved pricing, any of which could cause a decline in sales or loss of marketacceptance of our products. In addition, our competitors may developenhancements to or future generations of competitive products that may renderour technology or products obsolete or uncompetitive.

 

**Recent terrorist activities and thecontinued threat of terrorism could adversely affect our business.**

 

Recent terrorist attacks inthe United States, as well as continued threats of terrorism within the UnitedStates and abroad and current and future military responses to them, haveresulted in delayed and canceled orders and created many economic and politicaluncertainties that make it extremely difficult for us, our customers and oursuppliers to accurately forecast and plan future business activities. This reduced predictability challenges our ability to grow our business. In particular, it is difficult to develop and implement strategies, efficientoperations, and effectively manage capacity and supply-chainrelationships.  In addition, the continued threats of terrorism and theheightened security measures in response to such threats have and may continueto cause significant disruption to commerce throughout the world.  Disruptionin air transportation in response to these threats or future attacks may resultin transportation and supply-chain disruptions, increase our costs for bothreceipt of inventory and shipment of products to our

 

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customers, and cause customers to defer theirpurchasing decisions.  Disruptions in commerce could also cause consumerconfidence and spending to decrease or result in increased volatility in theUnited States and worldwide financial markets and economy.  They couldalso result in economic recession in the United States or abroad.  Any ofthese occurrences could have a significant impact on our operating results,revenues and costs and may result in the volatility of the market price of ourcommon stock and on the future price of our common stock.

 

**We may lose our competitive positionif we fail to develop new and enhanced products and introduce them in a timelymanner.**

 

The high-performancecomputing, networking and communications, consumer electronics and industrialmarkets are subject to rapid technological change, product obsolescence,frequent new product introductions and enhancements, changes in end-userrequirements and evolving industry standards. Our ability to compete in thesemarkets will depend in significant part upon our ability to successfullydevelop, introduce and sell new and enhanced products on a timely andcost-effective basis, and to respond to changing customer requirements.

 

We have experienced, and mayin the future experience, delays in the development and introduction of newproducts. Our product development is inherently risky because it is difficultto foresee developments in technology, coordinate our technical personnel, andidentify and eliminate design flaws. Defects or errors found in our productsafter commencement of commercial shipments could result in delays in marketacceptance of these products. Delays in developing, manufacturing or marketingnew or enhanced products could give our competitors an advantage, hurt our reputationand harm our business, financial condition and results of operations. Suchproducts, even if introduced, may not gain market acceptance. In addition, wemay not be able to respond effectively to new technological changes or newproduct announcements by others.

 

**Obtaining additional capital to fundour operations and finance our growth could impair the value of yourinvestment.**

 

If we expand more rapidlythan currently anticipated or if our working capital needs exceed our currentexpectations, we may need to raise additional capital through public or privateequity offerings or debt financings. Our future capital requirements depend onmany factors including our research, development, sales and marketingactivities. We do not know whether additional financing will be available ifneeded, or will be available on terms favorable to us. If we cannot raiseneeded funds on acceptable terms, we may not be able to develop or enhance ourproducts, take advantage of future opportunities or respond to competitivepressures or unanticipated requirements. To the extent we raise additionalcapital by issuing equity securities, our shareholders may experiencesubstantial dilution and the new equity securities may have greater rights,preferences or privileges than our existing common stock.

 

**We face risks associated with doingbusiness in foreign countries, including foreign currency fluctuations andtrade barriers, that could lead to a decrease in demand for our products or anincrease in the cost of the components used in our products.**

 

The volatility of generaleconomic conditions and fluctuations in currency exchange rates affect theprices of our products and the prices of the components used in our products.International sales of our products accounted for 12.0% of our revenues in thefirst quarter of 2002.  No singleforeign country accounted for more than 10.0% of our revenues in the firstquarter of 2002.  For the first quarterof 2002, more than 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.

 

In addition, we purchasesubstantially all of the IC devices used in our products from localdistributors of foreign suppliers. Although our purchases of IC devices arecurrently denominated in U.S. dollars, devaluation of the U.S. dollar relativeto the currency of a foreign supplier would likely result in an increase in ourcost of IC devices.

 

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Our international sales alsoare subject to certain other risks, including regulatory risks, tariffs andother trade barriers, timing and availability of export licenses, political andeconomic instability, difficulties in accounts receivable collections,difficulties in managing distributors, lack of a local sales presence,difficulties in obtaining governmental approvals, compliance with a widevariety 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 ourSanta Ana, California, manufacturing facility would substantially harm ourbusiness.**

 

All of our manufacturingoperations are located in our facility in Santa Ana, California. Due to thisgeographic concentration, a disruption of our manufacturing operations,resulting from sustained process abnormalities, human error, governmentintervention or natural disasters such as earthquakes, fires or floods couldcause us to cease or limit our manufacturing operations and consequently harmour business, financial condition and results of operations.

 

**Compliance with environmental lawsand regulations could harm operating results.**

 

We are subject to a varietyof environmental laws and regulations governing, among other things, airemissions, waste water discharge, waste storage, treatment and disposal, andremediation of releases of hazardous materials. Our failure to comply withpresent and future requirements could harm our ability to continuemanufacturing our products. Such requirements could require us to acquirecostly 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.

 

**Our stock price is likely to bevolatile and could drop unexpectedly.**

 

Our common stock has beenpublicly traded only since September 29, 2000. The market price of our commonstock has been subject to significant fluctuations since the date of ourinitial public offering.  The stockmarket has from time to time experienced significant price and volumefluctuations that have affected the market prices of securities, particularlysecurities of technology companies. As a result, the market price of our commonstock may materially decline, regardless of our operating performance. In thepast, following periods of volatility in the market price of a particularcompany’s securities, securities class action litigation has often been broughtagainst that company. We may become involved in this type of litigation in thefuture. Litigation of this type is often expensive and diverts management’sattention and resources.

 

**Our revenues mayfluctuate and our results of operations could be harmed due to the seasonalityof our business.**

 

Sales of our products in the consumer electronicsmarket are subject to seasonality. As a result, sales of these products areimpacted by seasonal purchasing patterns with higher sales generally occurringin the first, third and fourth quarters of each year and lower sales occurringin the second quarter of each year.  Salesof our products are typically positively impacted by increased purchasing ofmemory upgrades related to computing and consumer electronic products purchasedduring the Christmas season in the first quarter, back-to-school seasoncomputing and consumer electronics purchases during the third quarter andChristmas season computing and consumer electronics purchases during the fourthquarter.  Our ability to adjust ourshort-term operating expenses in response to fluctuations in seasonal revenuesis limited. As a result, if seasonal revenues are lower than expected in anygiven period, our results of operations could be harmed.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

At any time, fluctuations ininterest rates could affect interest earnings on our cash and cash equivalentsand interest expense on our existing variable rate debt.  We believe thatthe effect, if any, of reasonably possible near term changes in interest rateson our financial position, results of operations, and cash flows would not bematerial.  Currently, we do not hedgethese interest rate exposures.  The primary objective of our investmentactivities is to preserve capital. We have not used derivative financialinstruments in our investment portfolio.

 

At March 31, 2002, our cashand cash equivalents were $44.9 million and our variable rate debt, consistingof term loan borrowing, was $820,000.  We have not utilized our floatingrate debt under the revolving credit facility since October 2000.  At March 31, 2002, our cash and cashequivalents included $39.1 million invested in money market and other interestbearing accounts and $5.8 million invested in marketable securities, whichrepresents investments in United States treasury notes and treasury bonds.

 

At March 31, 2002, ourinvestment in marketable securities had a weighted-average time to maturity ofapproximately 21.4 days. Marketable securities represent United States treasurynotes and treasury bonds with a maturity of greater than three months. Thesesecurities are classified as held to maturity because we have the intention andability to hold the securities to maturity. Gross unrealized gains and losseson held-to-maturity marketable securities have historically not been material.Maturities on held-to-maturity marketable debt securities range from threemonths to two years.

 

If interest rates were todecrease 1%, the result would be an annual decrease in our interest incomerelated to our cash and cash equivalents of approximately $449,000. Conversely, if interest rates were to increase 1%, the result would be anannual increase in our interest expense related to our variable rate debt ofapproximately $8,200.  However, due to the uncertainty of the actions thatwould be taken and their possible effects, this analysis assumes no suchaction.  Further, this analysis does not consider the effect of the changein the level of overall economic activity that could exist in such anenvironment.

 

More than 95.0% of ourinternational sales are denominated in U.S. dollars.  Consequently, if the value of the U.S. dollar increases relativeto a particular foreign currency, our products could become relatively moreexpensive.  In addition, we purchasesubstantially all of our IC devices from local distributors of Japanese, Koreanand Taiwanese suppliers.  Fluctuationsin the currencies of Japan, Korea or Taiwan could have an adverse impact on thecost of our raw materials.  To date, wehave not entered any derivative instruments to manage risks related to interestrate or foreign currency exchange rates.

 

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**PART II**

**OTHER INFORMATION**

 

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

 

Reference is made to our Annual Report on Form 10-Kfiled with the SEC on March 20, 2002  underthe heading “Legal Proceedings” for a discussion of litigation involving usrelating to (i) patent litigation with DPAC Technologies, Inc. and (ii) patentlitigation with Lemelson Medical, Education & Research Foundation, LLP.

 

#### **DPAC Technologies, Inc. – Patent Litigation**

 

On September 23, 1998, we filed a lawsuit against DPACTechnologies, Inc., formerly Dense-Pac Microsystems, Inc. (“DPAC”), in theUnited States District Court for the Central District of California forinfringement of our IC Tower stacking patent, U.S. Patent No. 5,514,907. Wesought damages, including prejudgment interest, an injunction against furtherinfringement of our patent by DPAC, treble damages and attorneys’ fees. DPACfiled an answer to our complaint denying our claim of infringement, asserted adefense of patent invalidity against our IC Tower stacking patent and asserteda counterclaim against us alleging infringement of its stacking patent, U.S.Patent No. 4,956,694. On March 29, 2001, the court entered final judgementfinding DPAC did not infringe our patent and that we did not infringe DPAC’spatent. We appealed the ruling against us, and that ruling was affirmed March7, 2002. We anticipate that the affirmance will have no material impact on ouron-going business. DPAC did not appeal the ruling in our favor, and that rulingis now final.

 

On October 17, 2000, we received a reissue patent ofthe ‘907 patent from the U.S. Patent and Trademark Office. The reissue patentis U.S. Patent No. Re. 36,916.

 

On February 21, 2001, we filed a new lawsuit againstDPAC in the United States District Court for the Central District of Californiafor infringement of our IC Tower stacking reissue patent, U.S. Patent No. Re.36,916. We are seeking damages and an injunction against infringement of ourpatent by DPAC. On March 13, 2001, DPAC filed an answer to our complaintdenying our claim of infringement, and asserted a defense of patent invalidityagainst our IC Tower stacking reissue patent. In addition, DPAC counterclaimedalleging misappropriation of unspecified technology and the sale of products byus incorporating such technology alleged to have been misappropriated. No trialdate has been set.

 

**LemelsonMedical, Education & Research Foundation, LLP – Patent Infringement**

 

We received notice on November 26, 2001, that theLemelson Medical, Education & Research Foundation, LLP (“LemelsonFoundation”) filed a complaint on November 13, 2001, against us and otherdefendants. The complaint was filed in the District Court of Arizona andalleges that our manufacturing processes infringe several patents that theLemelson Foundation allegedly owns. The complaint also states that theseallegedly infringed patents relate to machine vision technology and bar codingtechnology. On March 7, 2002, we were served with the Lemelson Foundationcomplaint. Thereafter, the case was stayed pending the outcome of related casesagainst other parties involving the same patents. Because of the preliminarystage of this case, an estimate of potential damages, if any, would bepremature and speculative, and we have not made any such estimate at this time.

 

**Item2.  Changes in Securities and Use ofProceeds**

 

None.

 

**Item 3.  Defaults UponSenior Securities**

 

None.

 

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

 

None.

 

**Item5.  Other Information**

 

None.

 

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**Item6.  Exhibits and Reports on Form 8-K**

 

(a)  Exhibits.

 

None.

 

(b)  Reports onForm 8-K.

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   | SIMPLETECH, INC.,                                                                   |
|--------|-------------------------------------------------------------------------------------|
|   | a California corporation                                                            |
|   |                                                                                |
|   |                                                                                |
| Date:  | May 2, 2002                                                                         |   | /s/ MANOUCH MOSHAYEDI |   |
|   | Manouch Moshayedi                                                                   |
|   | Chief Executive Officer and Chairman of the  Board of Directors                     |
|   |                                                                                |
| Date:  | May 2, 2002                                                                         |   | /s/ DAN MOSES |   |
|   | Dan Moses                                                                           |
|   | Chief Financial Officer (Principal  Financial and Accounting Officer) and  Director |
|   |

 

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