**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-K**

 

**FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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**(MarkOne)**

** **

| **ý**                             |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|----------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                   |   |                                                                                          |
|                                   |   | **FOR THE FISCAL YEAR  ENDED: DECEMBER 31, 2002**                                             |
|                                   |   |                                                                                          |
| **OR**                                 |
|                                   |   |                                                                                          |
| **o**                                  |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                   |   |                                                                                          |
| **COMMISSION FILE NUMBER:  000-31081** |

 

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**TRIPATH TECHNOLOGY INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                                                                                |   | **77-0407364**                           |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                                             |   | (I.R.S. Employer  Identification Number) |
|                                                                                                                        |   |                                     |
| **2560 Orchard Parkway  San Jose, CA 95131  (408) 750-3000**                                                                |
| (Address, including zip code,  or registrant’s principal executive offices  and telephone number, including area code) |
|                                                                                                                        |   |                                     |
| **3900 Freedom Circle  Santa Clara, California 95054**                                                                      |
| (Former name, former address and former fiscal year if changed since  last report)                                          |
|                                                                                                                        |   |                                     |
| Securities registered pursuant  to Section 12(b) of the Act:**None**                                                        |
|                                                                                                                        |
| Securities registered pursuant  to Section 12(g) of the Act:                                                                |
| **Common Stock, $0.001 par value per share**                                                                                |
| (Title of Class)                                                                                                            |

 

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 Actof 1934 during the preceding 12 months (or for such shorter period thatthe Registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes ý   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes o   No ý

 

State the aggregate market valueof the voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold, or the averagebid and asked price of such common equity, as of the last business day of theRegistrant’s most recently completed second fiscal quarter:  $43,393,098 .

 

There were 41,353,812 shares of Tripath Technology Inc. common stockoutstanding on March 15, 2003.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Certain Portions of the Registrant’s Proxy Statement for its 2003Annual Meeting of Stockholders, to be filed with the Securities and ExchangeCommission pursuant to Regulation  14Anot later than April 30, 2003, are incorporated herein by reference to Parts IIand III of this Annual Report on Form 10-K.

 

 

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**TRIPATHTECHNOLOGY INC.**

**INDEXTO ANNUAL REPORT ON FORM 10-K**

**FORTHE YEAR ENDED DECEMBER 31, 2002**

 
| **PART I**     |
|----------------|
| ITEM 1.        | Business |
| ITEM 2.        | Properties |
| ITEM 3.        | Legal Proceedings |
| ITEM 4.        | Submission of Matters to a Vote of Security  Holders |
|           |
| **PART II**    |
| ITEM 5.        | Market for Registrant’s Common Equity and  Related Stockholder Matters |
| ITEM 6.        | Selected Consolidated Financial Data |
| ITEM 7.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
| ITEM 7A.       | Quantitative and Qualitative Disclosures  About Market Risks |
| ITEM 8.        | Consolidated Financial Statements and  Supplementary Data |
| ITEM 9.        | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure |
|           |
| **PART  III**  |
| ITEM 10.       | Directors and Officers of the Registrant |
| ITEM 11.       | Executive Compensation |
| ITEM 12.       | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |
| ITEM 13.       | Certain Relationships and Related  Transactions |
| ITEM 14.       | Controls and Procedures |
|           |
| **PART IV**    |
| ITEM  15.      | Exhibits,  Financial Statements, Schedules and Reports on Form 8-K |
| SIGNATURES     |
| CERTIFICATIONS |
| EXHIBIT  INDEX |

 

1

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**PART I**

 

*The following discussion and analysiscontains forward-looking statements. These statements are based on our current expectations, assumptions,estimates and projections about our business and our industry, and involveknown and unknown risks, uncertainties and other factors that may cause our orour industry’s results, levels of activity, performance or achievements to bematerially different from any future results, levels of activity, performanceor achievements expressed or implied in, or contemplated by, theforward-looking statements.  Words suchas “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,”“should,” “estimate,” “predict,” “potential,” “continue” or the negative ofsuch terms or other similar expressions, identify forward-lookingstatements.  In addition, any statementsthat refer to expectations, projections or other characterizations of futureevents or circumstances are forward-looking statements. Our actual resultscould differ materially from those anticipated in such forward-lookingstatements as a result of several factors more fully described under thecaption “Risk Factors” as well as those discussed elsewhere in thisdocument.  These and many other factorscould affect our future financial and operating results.  Tripath undertakes no obligation to update any forward-looking statement toreflect events after the date of this report.*

 

**ITEM 1. BUSINESS**

 

We design andsell digital amplifiers based on our proprietary technology, called DigitalPower Processing®, which enables us to provide significant performance, powerefficiency, size and weight advantages over traditional amplifiertechnology.  Our digital amplifiers arebranded “Class-T”and combine a switching mode approach thatgenerates high fidelity sound with low distortion and considerably lower heatdissipation than Class-AB amplifiers. We target and provide digital amplifiersfor three primary markets where signal fidelity and power efficiency areimportant: Consumer Electronics, Digital Subscriber Line (“DSL”) andWireless.  Within the ConsumerElectronics market, we target multiple market segments, which include consumeraudio applications such as 5.1 channel home theater systems, flat paneltelevisions, personal computers, mini/micro component stereo systems, cableset-top boxes and gaming consoles, automotive audio applications such asin-dash head units and trunk amplifiers and professional audio applicationssuch as Digital Video Disc (“DVD”) and audio/ video (“A/V”) receivers andpro-audio amplifiers. We are currently offering digital amplifiers in the formof line drivers for use in DSL equipment. We also have a research and development program aimed at developingamplifiers for digital wireless handsets and base stations to increase talktime and battery life and improve overall power efficiency.

 

We wereincorporated in California in July 1995, and reincorporated in Delaware inJuly 2000.

 

**Markets and Products**

 

We have beendeveloping and supplying digital amplifiers for three primary markets: ConsumerElectronics, DSL and Wireless.  Withinthe Consumer Electronics market, we have been targeting the consumer audio, automotiveaudio and professional audio market segments. Within the DSL market, we have recently begun offering single and dualchannel line driver products.  Withinthe Wireless market, we have a research and development program aimed atdeveloping a family of amplifier products for use in wireless handsets, alsoknown as Radio Frequency (“RF”) Power Amplifiers.

* *

*Consumer Electronics- Consumer Audio Amplifiers*

 

We provide abroad range of digital audio amplifiers based on our Digital Power Processingtechnology. Manufacturers are incorporating our digital audio amplifiers in adiverse set of applications, including 5.1 channel home theater systems, flatpanel televisions, professional amplifiers, DVD and A/V receivers, personalcomputers, mini/micro component stereo systems, cable set-top boxes and gamingconsoles.

 

The keyfactors that differentiate our products are the broad range of power levels,the input format to the amplifier and the level of integration included in ourproducts. We augment our products with applications support that includesreference designs, evaluation kits and consulting services. All of our productsshare similar characteristics in terms of high efficiencies and excellent soundquality as measured by total harmonic distortion (“THD”).

 

2

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We offer threecategories of digital audio amplifier products, specifically: fully integratedaudio amplifiers, amplifier drivers and chipsets. In our integrated products,the actual power output transistors are included in the single integratedcircuit package. These products currently support power levels of up to twochannels of 100 watts per channel. This 100 watt power level isapproximately three times greater than that which has been achieved to date inthe industry in a single integrated circuit package. At levels greater than 100watts per channel, we offer driver products that include our proprietary signalprocessing integrated circuit and a high voltage integrated circuit that drivesa range of external power transistors. The use of external power transistors isrequired at these power levels due to the heat dissipation limitations of asingle integrated circuit package. We offer driver products with powercapability that ranges from 100 watts to 2000 watts and chipset productswith power capability that ranges from 50 watts to 350 watts. We use a four ohmload for reference when we specify power.

 

Our productssupport analog inputs to be compatible with existing analog amplifier systems.The digital nature of our amplifier architecture will enable us to supportfuture systems that are all digital and eliminate the need for the conversionof the digital audio content on source material such as compact discs (“CDs”),DVDs and Moving Picture Experts Group Layer –3 (“MP3”) files to an analogsignal. Eliminating this conversion will lower costs by eliminating componentsand improve sound quality introduced in the conversion process. In these all-digitalsystems, the digital content and quality will be preserved all the way from thesource material to the output of the amplifier.

 

The digitalinput format that we plan to support across the product line in the table belowis referred to as I2S. In this interface, the digital content isencoded in a format that is specified by the I2S standard.

 

##### *Consumer Electronics - AutomotiveAudio Amplifiers*

 

Because oftheir ability to decrease the size and weight of audio systems, our productscan be used in applications in automotive audio systems where these issues arecritical.  Our proprietary technologyallows products to generate high fidelity sound with significantly lower heatdissipation making it ideal for compact design applications. We currently offerproducts specifically targeted for automotive applications such as in-dash headunits and trunk amplifiers.

 

##### *Consumer Electronics - Professional AudioAmplifiers*

 

Because of thebroad range of product offering we have in our digital amplifiers, we havecreated specific products to appeal to high-powered applications such as DVDand A/V receivers as well as pro-audio amplifiers.  Our proprietary technology helps realize clear sound, almost halfthe energy consumption of conventional professional amplifiers and natural heatdissipation without a cooling fan.

 

The table below summarizes ouraudio products that we are currently selling.

 
|                  |              | **Product** |   | **Output  (watts/channel)** |   | **Operating  Efficiency** |   | **Total  Harmonic** |   | **Applications**                                                                                                                                                                                                                                          |
|-----------------------|-------------------|-------------|--------|-----------------------------|--------|---------------------------|--------|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  | **Distortion(1)** |
| Integrated Amplifiers |              |        |   |                        |   |                      |   |                |   |                                                                                                                                                                                                                                                      |
|                  |              | TA2024      |   | 15W                         |   | >80%                   |   | 0.03% THD           |   | •   Flat  Panel TVs (Liquid Crystal Display (“LCD”) and Plasma)

•   Personal  Computers

•   Multimedia  Speaker Systems

•   Gaming  Consoles                                     |
|                  |              |        |   |                        |   |                      |   |                |   |                                                                                                                                                                                                                                                      |
|                  |              | TA2020      |   | 20W                         |   | >80%                   |   | 0.03% THD           |   | •    DVD  and A/V Receivers

•    Flat  Panel TVs (LCD and Plasma)

•    Personal  Computers

•    Multimedia  Speaker Systems

•    Gaming  Consoles |
|                  |              |        |   |                        |   |                      |   |                |   |                                                                                                                                                                                                                                                      |
|                  |              | TA2021      |   | 20W                         |   | >80%                   |   | 0.04% THD           |   | •   DVD  and A/V Receivers

•    Flat  Panel TVs (LCD and Plasma)

•    Personal  Computers

•    Multimedia  Speaker Systems

•    Gaming  Consoles       |
|                  |              |        |   |                        |   |                      |   |                |   |                                                                                                                                                                                                                                                      |
|                  |              | TA2041      |   | 70W                         |   | >80%                   |   | 0.02% THD           |   | •    Automotive  Head Units

•    5.1  Channel Home Theater Systems

•    DVD  and A/V Receivers

•    Multimedia  Speaker Systems                                        |

 

3

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|              |   | TA2022  |   | 100W   |   | >90% |   | 0.02% THD |   | •    5.1  Channel Home Theater Systems

•    DVD  and A/V Receivers

•    Mini  / Micro Component Systems

•    Automotive  Audio

•    Cable  Set-Top Boxes |
|-------------------|--------|---------|--------|--------|--------|---------|--------|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
| Amplifier Drivers |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
|              |   | TA3020  |   | 350W   |   | >90% |   | 0.05% THD |   | •    DVD  and A/V Receivers

•    Pro-Audio  Amplifiers

•    Automotive  Audio

•    Subwoofer  Amplifiers                                                                      |
|              |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
|              |   | TA0105A |   | 500W   |   | >90% |   | 0.05% THD |   | •    Pro-Audio  Amplifiers

•    Automotive  Audio

•    Subwoofer  Amplifiers

•    High  Power Stereo Amplifiers                                                               |
|              |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
| Chipsets          |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
|              |   | TK2050  |   | 50W    |   | >90% |   | 0.05% THD |   | •    5.1  Channel Home Theater Systems

•    DVD  and A/V Receivers

•    Mini  / Micro Component Systems

•    Automotive  Audio

•    Cable  Set-Top Boxes |
|              |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
|              |   | TK2051  |   | 50W    |   | >90% |   | 0.07% THD |   | •    5.1  Channel Home Theater Systems

•    DVD  and A/V Receivers

•    Mini  / Micro Component Systems

•    Automotive  Audio

•    Cable  Set-Top Boxes |
|              |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
|              |   | TK2150  |   | 200W   |   | >90% |   | 0.01% THD |   | •    5.1  Channel Home Theater Systems

•    DVD  and A/V Receivers

•    Automotive  Audio

•    Subwoofer  Amplifiers                                                          |
|              |   |    |   |   |   |    |   |      |   |                                                                                                                                                                                                                                                             |
|              |   | TK2350  |   | 350W   |   | >90% |   | 0.03% THD |   | •   Pro-Audio  Amplifiers

•    DVD  and A/V Receivers

•    Automotive  Audio

•    Subwoofer  Amplifiers                                                                            |

 

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(1) Total Harmonic Distortion,or THD, measures the change in a signal as it is amplified, expressed as apercentage of a pure input signal.  Themore accurate an amplifier is, the lower its THD will be.

 

*DSL Line DriverAmplifiers*

 

Our DigitalPower Processing technology allows us to produce highly linear amplifiers forline cards that use power more efficiently than traditional amplifiers withconventional architectures. DSL amplifiers are often called line drivers.Because our line drivers are more power efficient, they eliminate the heat sinkand other electronic components used with traditional line drivers. As aresult, our line drivers can be smaller than traditional analog-based linedrivers. In addition, their efficiency makes them a more attractive solutionfor DSL service providers because the power budgeted for the equipment in thetelephone companies’ central office is fixed.

 

4

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Our initialproduct is a line driver for use in the Asymmetric DSL (“ADSL”) market. ADSL, apopular form of DSL technology, is designed to allow greater data rates fromthe central office to the subscriber than from the subscriber to the centraloffice. This means that typical users will be able to download data faster thanthey can send data, which is suitable for most residential users. InFebruary 2001, we announced our entry into the ADSL chipset market with anew family of central office ADSL line drivers. These new products offer fullreach and data rate capability and can reduce heat dissipation by more than50 percent versus conventional line drivers. Our line driverconfigurations feature:

 

•                  powerconsumption that ranges from 620mW to 880mW per channel

•                  support for fullrate and G. LITE data rates

•                  low distortionspecifications

•                  low power mode

•                  digitallyprogrammable gain

•                  small footprintpackage

 

Our DSL linedrivers offer DSL service providers the following benefits:

 

•                  *Higher PortDensity.*  Our line driversenable our customers to increase the number of subscriber lines given fixedpower and space constraints. This allows DSL service providers to achievehigher port density.

 

•                  *IncreasedSignal Reach and Connection Speed.*  The distance a signal can travel with an effective usefulness is knownas signal reach, and the speed at which data can be transferred is known asconnection speed. Intermodulation Distortion (“IMD”), is a measure of linearityand indicates how well an amplifier can reduce the impact of undesirablefrequencies which are produced in the transmission process. Our line drivers,due to their linearity, can more accurately reproduce the signal inputs,allowing for improvements in output signal reach and connection speed to theconsumer.

 

The followingtable provides additional information concerning the specifications of ourcurrent and future generation of DSL line drivers.

 
| **Product**                  |   | **Power  Consumption  (milliwatts/channel)** |   | **Application**                 |
|------------------------------|--------|----------------------------------------------|--------|---------------------------------|
| TA4012 Single channel family |   | 660-880mW                                    |   | Central office ADSL line driver |
| TA4021 Dual channel family   |   | ‹450mW                                  |   | Central office ADSL line driver |

 

The TA4012 DSL line driver is in volume production now and we currentlyexpect to commence the sampling phase of our dual channel line driver in thefirst half of 2003.

 

*RF/Wireless PowerAmplifiers*

 

Our expertisein the development of highly linear and energy efficient circuits has allowedus to develop an amplifier architecture which we believe is well-suited for usein digital handsets, base stations and other wireless products. The initialtargeted market is for cellular phones that utilize a digital transmissionmethod known as Code Division Multiple Access (“CDMA”). Linearity is importantto this technology because CDMA uses a complex signal transmission method thatrequires more accurate reception and reproduction. Additionally, we believe ourDigital Power Processing technology could provide significant improvements tothe design of cellular phones in terms of talk-time, data connection time andbattery size, which are all dependent on the efficiency of the RF PowerAmplifier.

 

5

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**Core Technology**

 

We believethat one of our key competitive advantages is our broad base of patented coretechnologies, which are comprised of innovative adaptive and predictive signalprocessing techniques. These processing techniques are derived from algorithmsused in communications theories. These unique techniques are derived from aconfluence of four primary disciplines in mixed signal circuit design, digitalsignal processing (“DSP”), algorithm development, power semiconductor circuitdesign and packaging design. We intend to continue to build and improve onthese four primary technology foundations as our company expands its productreach into other markets and industries.

 

We haveimplemented unique processing algorithms in a silicon-based processorwhich we call a Mixed Signal Processor. The execution speed of these complexalgorithms by our Mixed Signal Processor allows us to achieve the requiredlinearity and efficiency in our products. The Mixed Signal Processorfunctionality is a vital component in the architecture of the products wedesign.

 

Our four keyareas of competency are highlighted below:

 

*Mixed Signal CircuitDesign Expertise*

 

We are aninnovator in advanced mixed signal circuit design with a particular focus onaudio amplifiers, DSL line driver amplifiers and RF Power Amplifiers. We havedeveloped significant intellectual property in our mixed signal circuitdesigns, which are applicable across multiple market segments. As such, we havedemonstrated significant improvements in power efficiency and linearity foraudio amplifiers and central office line driver integrated circuits. We arealso applying this same core technology to the development of highly linear andhighly efficient RF Power Amplifier integrated circuits for incorporationin cellular telephones.

* *

*DSP AlgorithmExpertise*

 

We haveexpertise in developing system applications using our Digital Power Processingtechnology. This includes industry standard designs as well as customerspecific systems in the DSL and Consumer Electronics markets. The highefficiency, high quality power processing products that we design require acomprehensive understanding of new and innovative DSP techniques at the systemas well as the device level. We will continue to research and improve ourDigital Power Processing technology.

* *

*Power SemiconductorCircuit Design Expertise*

 

We havedeveloped significant expertise in designing power circuits in semiconductors.This requires a specialized understanding of complex issues, such as thermaleffects and reliability related to the control of power.

 

*Packaging DesignExpertise*

 

We havedeveloped significant competency and knowledge regarding packaging requirementsfor various applications in different markets. Our customers have specificrequirements in terms of form factor and package type for their end-useproducts.

 

**Research andDevelopment**

 

Our researchand development efforts are focused on developing products based on our DigitalPower Processing technology for high growth markets, such as the consumeraudio, DSL and wireless communications markets. As of December 31, 2002, ourresearch and development staff consisted of 39 employees, many of whom haveexperience across multiple engineering disciplines. In 2002, 2001 and 2000, ourresearch and development expenses were approximately $11.7 million (includingstock-based compensation expense of $195,000), $19.9 million (includingstock-based compensation benefit of $133,000) and $26.1 million (includingstock-based compensation expense of $8.1 million), respectively.

 

6

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**Manufacturing**

* *

*Wafer Fabrication*

 

We are able touse independent silicon foundries to manufacture our integrated circuitsbecause our products are manufactured with standard processes. By outsourcingour manufacturing requirements, we are able to focus our resources on designengineering.

 

Our operationsgroup closely manages the interface between manufacturing, design engineeringand sales. The group provides manufacturing support required for test &product engineering, process & device engineering, package engineering,reliability, quality assurance and production control. We maintain our organizationalstructure and quality standards to match with market leading semiconductormanufacturers. We use an online work-in-progress controlmethodology wherever possible, and maintain close reporting mechanisms with allof our suppliers to ensure that the manufacturing subcontracting process istransparent to our customers.

 

Our keysilicon foundries are United Microelectronics Corporation in Taiwan,STMicroelectronics Group in Europe and Mitsubishi Electric in Japan. We believewe have adequate capacity to support our current sales levels. We continue towork with our existing foundries to obtain more production capacity and we areactively qualifying new foundries to provide additional production capacity.

 

Our MixedSignal Processor devices are currently manufactured with Complementary MetalOxide Semiconductor (“CMOS”) and Diffusion Metal Oxide Semiconductor (“DMOS”)processes using >0.5 micron technology. CMOS and DMOS are industrystandard semiconductor manufacturing processes. We continuously evaluate thebenefits, on a product by product basis, of migrating to smaller designtechnologies to reduce costs. Our next generation products will utilize 0.18micron CMOS technology. Our power output circuitry is manufactured using a highvoltage process technology.

* *

*Assembly and Test*

 

We currentlyoutsource all of our assembly and testing operations to AMBIT MicrosystemsCorporation in China, Amkor Technology, Inc. in the Philippines, AdvancedSemiconductor Engineering (“ASE”) in Korea, Malaysia and Taiwan, SGS (formerlyISE Labs Assembly) in China and ST Assembly Test Services Ltd. in Singapore.

* *

*Quality Assurance*

 

We currentlyrely on our foundries and assembly subcontractors to assist in thequalification process of our products. We also participate in quality andreliability monitoring through each stage of the production cycle. We closelymonitor wafer foundry production to ensure consistent overall quality,reliability and yield levels.

 

**Marketing, Sales andCustomers**

 

Our marketingstrategy is to target existing and potential customers who are industry leadersin the consumer electronics (consumer, automotive and professional audio), DSLcommunications and wireless communications markets.  Currently, our marketing effort is primarily focused on marketsegments, divided among integrated audio products and module-based driverproducts, and separately divided among the home theater, television, automotiveand professional audio.

 

We rely on ourdirect sales force, independent sales representatives and distributors to penetrateeach of our target markets. Our sales headquarters is located in San Jose,California. In addition, we market and sell our products through our regionaloffices located in Japan and Taiwan, as well as through representatives andindependent distributors in Asia, Europe and the United States. We incorporatedour regional office in Japan as a wholly-owned subsidiary in January 2001.Our sales force, together with our engineering and technical staff, worksclosely with customers to integrate our amplifiers into their products. Webelieve that close working relationships with customers will help us to achievedesign wins and ultimately achieve high volume production.

 

End customersfor our products are primarily manufacturers of audio electronic components,communications infrastructure equipment and wireless communications equipment.Two, four and two end customers accounted for more than 10% of our sales in2002, 2001 and 2000, respectively.

 

For a detaileddescription of our sales by geographic region, see Note 2 (Segment andgeographic information) to our consolidated financial statements.

 

7

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**Competition**

 

We currentlycompete directly with audio amplifier and DSL line driver suppliers. Ourprincipal competitors in the audio amplifier market include Apogee Technology,Inc., National Semiconductor Corporation, Microsemi Corporation, PhilipsElectronics, ST Microelectronics Group and Texas Instruments Incorporated.  In addition, a number of companies, such as CirrusLogic Inc., have announced their intention to enter this market. We have beenactive in the audio amplifier market since our inception and we believe that wemaintain a strong competitive position.

 

In the DSLline driver market, our principal competitors include Analog Devices, Inc.,Intersil Corporation, Linear Technology Corporation and Texas InstrumentsIncorporated. This is a new market for us in which many of our competitors havelonger operating histories.

 

We believethat the principal factors of competition in these markets are productcapabilities, level of integration, reliability, price, power consumption,time-to-market, system cost, intellectual property, customer support andreputation.

 

In each ofthese markets, we believe that our main competitive advantages are our productcapabilities, low power consumption and level of integration. However, many ofour competitors are large public companies that have longer operating historiesand significantly greater resources than us. As a result, these competitors maycompete favorably on factors such as price, customer support and reputation.

 

**Intellectual Property**

 

We relyprimarily on a combination of patent, copyright, trademark, trade secret andother intellectual property laws, nondisclosure agreements and other protectivemeasures to protect our proprietary technologies and processes. We have 20issued United States patents and 21 additional pending United States patentapplications. In addition, we have 13 international patents issued and anadditional 63 international patents pending. We expect to continue to filepatent applications where appropriate to protect our proprietary technologies.

 

#### **Employees**

 

As of December31, 2002, we had 61 full-time employees, including 39 employees engaged inresearch and development, 10 engaged in sales and marketing and 12 engagedin general administration activities. None of our employees are represented bya labor union and we have never experienced a work stoppage. We consider ouremployee relations to be good.

 

8

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**Executive Officers ofthe Registrant**

 

The followingtable sets forth certain information regarding our executive officers as ofDecember 31, 2002:

 
| **Name**             |   | **Age** |   | **Position**                                                 |
|----------------------|--------|---------|--------|--------------------------------------------------------------|
| Dr. Adya S. Tripathi |   | 50      |   | President and Chief Executive Officer, Chairman of the Board |
| David P. Eichler     |   | 53      |   | Chief Financial Officer, Vice President of Finance           |
| Dr. Naresh C. Sharma |   | 51      |   | Vice President of Operations                                 |
| Graham K. Wright     |   | 43      |   | Vice President of Sales                                      |

 

*Dr. Adya S. Tripathi*foundedTripath and has served as our President, Chief Executive Officer and Chairmansince our inception in 1995. Before founding Tripath, Dr. Tripathi held avariety of senior management and engineering positions with Advanced MicroDevices, Hewlett-Packard, International Business Machines (“IBM”),International Microelectronic Products (“IMP”), National Semiconductor andVitel Communications. Dr. Tripathi holds Bachelor of Science and Master ofScience degrees in Electronics Engineering from Benaras Hindu University inIndia. He pursued graduate work at the University of Nevada-Reno and theUniversity of California-Berkeley, receiving his doctorate of philosophy inElectrical Engineering from the former in 1984. Dr. Tripathi has also taught atthe University of California-Berkeley Extension.

* *

*David P. Eichler*hasserved as our Chief Financial Officer and Vice President of Finance sinceOctober 2002. Prior to joining us, Mr. Eichler was Vice President ofFinance, Chief Financial Officer and Corporate Secretary with Gadzoox Networksfrom 2001 to 2002, Vice President of Finance and Administration and ChiefFinancial Officer with Alliance Semiconductor from 1999 to 2001 and VicePresident of Finance and Chief Accounting Officer with Adobe Systems from 1997through 1998. Mr. Eichler is a Certified Public Accountant and received hisMaster of Business Administration degree from the University of California LosAngeles and his Bachelor of Science in Accounting from Northeastern University.

* *

*Dr. Naresh C. Sharma* has served as our Vice President of  Operations since August 2001. Dr. Sharmajoined Tripath in 1998 serving as Director of Process Engineering andDevelopment. Prior to joining us, from 1997 to 1998, Dr. Sharma was Director,Foundry FAB Operations at Alliance Semiconductor and from 1992 to 1997, he wasSenior Manager, Strategic Fabs at Cirrus Logic. Dr. Sharma has also heldvarious management and engineering positions at Cypress Semiconductor, National(Fairchild) Semiconductor and American Microsystems. He received his doctorateof philosophy in Physics from Indian Institute of Technology (Delhi) in 1978and received his Master of Science in Solid State Physics from Indian Instituteof Technology (Roorkee) in India.

* *

*Graham K. Wright* hasserved as our Vice President of Sales since September 2002. Prior tojoining us, Mr. Wright held various positions with Cirrus Logic including VicePresident of Sales-Americas from 2000 to 2002 and Director of Western AreaSales from 1997 to 2000. Mr. Wright holds a Bachelor of Science in ElectricalEngineering from Michigan Technical University.

 

9

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###### **ITEM 2.PROPERTIES**

 

We lease onefacility in San Jose, California, which has approximately 65,000 square feetpursuant to the lease, which expires on March 31, 2007. This facility comprisesour headquarters and includes our administration, sales and marketing andresearch and development departments. We also lease approximately 2,400 square feet of office space outside ofTokyo, Japan for our Japanese sales office. The lease for this space expires onOctober 31, 2004.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

None

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None

 

**PART II**

 

**ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

Our commonstock has been quoted on the Nasdaq National Market and The Nasdaq SmallCapMarket under the symbol “TRPH” since our initial public offering inAugust 2000. Prior to this time, there was no public market for our stock.The following table sets forth for the periods indicated the high and low salesprices per share of our common stock as reported on the Nasdaq National Marketand The Nasdaq SmallCap Market.

 
|           |   | **2002** |   | **2001** |   |
|----------------|--------|----------|--------|----------|--------|
|           |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
|           |   |     |   |     |   |   |   |   |   |
| First Quarter  |   | $        | 2.94   |     | $      | 1.45 |   | $ | 17.00 |   | $ | 3.88 |   |
| Second Quarter |   | $        | 2.10   |     | $      | 0.77 |   | $ | 11.49 |   | $ | 5.38 |   |
| Third Quarter  |   | $        | 1.10   |     | $      | 0.13 |   | $ | 9.86 |   | $ | 0.51 |   |
| Fourth Quarter |   | $        | 0.60   |     | $      | 0.12 |   | $ | 2.40 |   | $ | 0.51 |   |

 

We have notdeclared or paid any cash dividends on our capital stock since our inception.We currently expect to retain future earnings, if any, for use in the operationand expansion of our business and do not anticipate paying any cash dividendsin the foreseeable future. As of March 14, 2003 there were 301 holders ofrecord of our common stock.

 

OnAugust 1, 2000, we completed our initial public offering (the “IPO”)pursuant to a Registration Statement on  Form S-1 (File No. 333-35028). Inthe IPO, we sold an aggregate of 5,100,000 shares of common stock (including anover-allotment option of 100,000 shares) at $10 per share. The IPO generatedaggregate gross proceeds of $51 million for us. The aggregate net proceeds tous were approximately $45.4 million, after deducting underwriting discounts andcommissions of approximately $3.6 million and expenses of the offering ofapproximately $2.0 million. We used the proceeds for general corporatepurposes, including working capital and capital expenditures.

 

**Securities Authorizedfor Issuance Under Equity Compensation Plans**

 

Theinformation required by this Item is incorporated by reference from ourdefinitive Proxy Statement under the heading “Securities Authorized forIssuance Under Equity Compensation Plans.”

 

10

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**ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA**

 

The following selectedhistorical information has been derived from the audited consolidated financialstatements of Tripath. The financial information as of December 31, 2002 and2001 and for each of the three years in the period ended December 31, 2002 arederived from audited consolidated financial statements and are includedelsewhere in this Annual Report on Form 10-K. The following Selected Consolidated Financial Data should be read inconjunction with Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and Item 8, “Consolidated FinancialStatements and Supplementary Data” included elsewhere in this Annual Report onForm 10-K.  The historical results arenot necessarily indicative of the results of operations to be expected in thefuture.

 
|                                                                   |   | **December  31,**                            |    |
|------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                   |   | **2002**                                     |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                   |   | **(In thousands, except per share amounts)** |    |
| Statement of Operations Data:                                          |   |                                         |    |   |   |   |   |   |   |   |   |
| Revenue                                                                |   | $                                            | 16,227  |   | $ | 13,541 |   | $ | 9,300 |   | $ | 648 |   | $ | 180 |   |
| Cost of revenue                                                        |   | 18,494                                       |    | 11,948 |   | 11,347 |   | 2,463 |   | 196 |   |
| Gross profit (loss)                                                    |   | (2,267                                       | )       | 1,593 |   | (2,047 | ) | (1,815 | ) | (16 | ) |
| Operating expenses:                                                    |   |                                         |    |   |   |   |   |   |   |   |   |
| Research and development                                               |   | 11,650                                       |    | 19,913 |   | 26,074 |   | 18,320 |   | 8,162 |   |
| Selling, general and administrative                                    |   | 5,557                                        |    | 8,664 |   | 14,772 |   | 12,935 |   | 26,481 |   |
| Restructuring and other charges                                        |   | —                                       |    | 684 |   | — |   | — |   | — |   |
| Total operating expenses                                               |   | 17,207                                       |    | 29,261 |   | 40,846 |   | 31,255 |   | 34,643 |   |
| Loss from operations                                                   |   | (19,474                                      | )       | (27,668 | ) | (42,893 | ) | (33,070 | ) | (34,659 | ) |
| Interest and other income, net                                         |   | 160                                          |    | 687 |   | 1,626 |   | 1,368 |   | 1,002 |   |
| Net loss                                                               |   | (19,314                                      | )       | (26,981 | ) | (41,267 | ) | (31,702 | ) | (33,657 | ) |
| Accretion on preferred stock                                           |   | (14,952                                      | )       | — |   | — |   | — |   | — |   |
| Net loss applicable to common stockholders                             |   | $                                            | (34,266 | ) | $ | (26,981 | ) | $ | (41,267 | ) | $ | (31,702 | ) | $ | (33,657 | ) |
|                                                                   |   |                                         |    |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share                                   |   | $                                            | (0.88   | ) | $ | (1.00 | ) | $ | (2.34 | ) | $ | (2.98 | ) | $ | (3.32 | ) |
|                                                                   |   |                                         |    |   |   |   |   |   |   |   |   |
| Number of shares used to compute basic and  diluted net loss per share |   | 38,823                                       |    | 27,009 |   | 17,625 |   | 10,624 |   | 10,143 |   |

 
|                                                                |   | **December  31,** |   |
|---------------------------------------------------------------------|--------|-------------------|--------|
|                                                                |   | **2002**          |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **Balance Sheet Data:**                                             |   |              |   |   |   |   |   |   |   |   |   |
| Cash, cash equivalents, short-term  investments and restricted cash |   | $                 | 10,598 |   | $ | 5,097 |   | $ | 36,515 |   | $ | 17,403 |   | $ | 33,955 |   |
| Working capital                                                     |   | 13,711            |   | 12,854 |   | 36,160 |   | 17,081 |   | 34,029 |   |
| Total assets                                                        |   | 20,685            |   | 22,160 |   | 47,111 |   | 22,634 |   | 37,391 |   |
| Long term obligations, net of current  portion                      |   | 933               |   | 262 |   | — |   | — |   | — |   |
| Convertible preferred stock                                         |   | —            |   | — |   | — |   | 49,611 |   | 49,611 |   |
| Total stockholders’ equity (deficit)                           |   | 15,436            |   | 15,347 |   | 40,088 |   | (30,262 | ) | (13,427 | ) |
|                                                                     |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

No dividends have been paid or declared since the Company’s inception.

 

11

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion and analysis contains forward-lookingstatements.  These statements are basedon our current expectations, assumptions, estimates and projections about ourbusiness and our industry, and involve known and unknown risks, uncertaintiesand other factors that may cause our or our industry’s results, levels ofactivity, performance or achievements to be materially different from anyfuture results, levels of activity, performance or achievements expressed orimplied in, or contemplated by, the forward-looking statements. Words such as“believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “should,”“estimate,” “predict,” “potential,” “continue” or the negative of such terms orother similar expressions, identify forward-looking statements.  Our actual results and the timing of eventsmay differ significantly from the results discussed in the forward-lookingstatements. Factors that might cause such a difference include, but are not limitedto, those discussed in “Risk Factors” as well as those discussed elsewhere inthis Annual Report on Form 10-K.  Youshould read the following discussion and analysis in conjunction with the“Selected Consolidated Financial Data” and the financial statements and notesthereto included in this Annual Report on Form 10-K.  Historical operating results are not necessarily indicative ofresults that may occur in future periods. The Company  undertakes noobligation to update any forward-looking statement to reflect events after thedate of this report.*

 

**Overview**

 

We design andsell amplifiers based on our proprietary Digital Power Processing technology.We currently supply amplifiers for audio electronics applications, and  have begun offering amplifiers for DSLapplications. We were incorporated in July 1995, and we began shippingproducts in the first quarter of 1998. Accordingly, we have limited historicalfinancial information and operating history for use in evaluating our Companyand our future prospects. We incurred net losses (before charge for beneficialconversion of $14.9 million) of approximately $19.3 million in 2002, $27.0million in 2001 and $41.3 million in 2000. We expect to continue to incurnet losses in 2003, and possibly beyond.

 

We sell ourproducts to original equipment manufacturers and distributors. We recognizerevenue from product sales upon shipment to original equipment manufacturersand end users, net of sales returns and allowances. Our sales to distributorsare made under arrangements allowing for returns or credits under certaincircumstances and we defer recognition on sales to distributors until productsare resold by the distributor to the end user. All of our sales are madein  United States (“U.S.”) dollars.

 

As a “fabless”semiconductor company, we contract with third party semiconductor fabricatorsto manufacture the silicon wafers based on our integrated circuit (“IC”)designs.  Each wafer contains numerousdie, which are cut from the wafer to create a chip for an IC.  We also contract with third party assemblyand test houses to assemble and package our die and conduct final producttesting.

 

Cost ofrevenue includes the cost of purchasing finished silicon wafers and diemanufactured by independent foundries, costs associated with assembly and finalproduct testing, as well as salaries and overhead costs associated withemployees engaged in activities related to manufacturing. Research anddevelopment expense consists primarily of salaries and related overhead costs associatedwith employees engaged in research, design and development activities, as wellas the cost of wafers and other materials and related services used in thedevelopment process. Selling, general and administrative expense consistsprimarily of employee compensation and related overhead expenses andadvertising and marketing expenses.

 

Stock-basedcompensation expense relates both to stock-based employee and consultantcompensation arrangements. Employee-related stock-based compensation expense isbased on the difference between the estimated fair value of our common stock onthe date of grant and the exercise price of options to purchase that stock andis being recognized on an accelerated basis over the vesting periods of therelated options, usually four years, or in the case of fully vested options, inthe period of grant. Consultant stock-based compensation expense is based onthe Black-Scholes option pricing model. Future compensation charges will bereduced if any employee or consultant terminates employment or consultationprior to the expiration of the option vesting period.

 

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**Critical Accounting Policies**

 

*Use of Estimates:* Management’s discussion and analysis offinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an ongoing basis,we evaluate our estimates, including those related to product returns, warrantyobligations, bad debts, inventories, accruals, stock options, warrants, incometaxes (including the valuation allowance for deferred taxes) and restructuringcosts. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from the other sources.Actual results may differ from these estimates under different assumptions orconditions. Material differences may occur in our results of operations for anyperiod if we made different judgments or utilized different estimates.

 

*Revenue Recognition:*We recognize revenue from product sales upon shipment to original equipmentmanufacturers and end users, net of reserves for estimated returns andallowances, provided that persuasive evidence of an arrangement exists, theprice is fixed, title has transferred, collectibility of resulting receivablesis reasonably assured, there are no acceptance requirements and there are noremaining significant obligations. Sales to distributors are made underarrangements allowing limited rights of return, generally under productwarranty provisions, stock rotation rights and price protection on productsunsold by the distributor. In addition, the distributor may request specialpricing and allowances which may be granted subject to approval by us. As aresult of these returns rights and potential pricing adjustments, we deferrecognition on sales to distributors until products are resold by thedistributor to the end user.

 

*Inventories:*   Inventoriesare stated at the lower of cost or market. This policy requires us to makeestimates regarding the market value of our inventory, including an assessmentof excess or obsolete inventory. We determine excess and obsoleteinventory  based on an estimate of thefuture demand and estimated selling prices for our products within a specifiedtime horizon, generally 12 months. The estimates we use for expected demand arealso used for near-term capacity planning and inventory purchasing and areconsistent with our revenue forecasts. Actual demand and market conditions maybe different from those projected by our management. If our unit demandforecast is less than our current inventory levels and purchase commitments,during the specified time horizon, or if the estimated selling price is lessthan our inventory value, we will be required to take additional excessinventory charges or write-downs to net realizable value which will decreaseour gross margin and net operating results in the future. During the periodended March 31, 2002, we recorded a provision for excess inventory ofapproximately $5 million related to excess inventory for our TA2022 product asa result of a decrease in forecasted sales for this product.

 

**Results of Operations**

 

**Years Ended December31, 2002, 2001 and 2000**

* *

*Revenue.*  Revenue for 2002 was $16.2 million, anincrease of $2.7 million or 20% from revenue of $13.5 million for 2001. Theincrease in revenue resulted primarily from increased shipments of our TA2024,TA3020 and TK2050 products, offset partially by decreased shipments of ourTA1101B and TA2022 products. Revenue for 2001 increased $4.2 million or 45%from revenue of $9.3 million in 2000. The increase in revenue from 2000 to 2001resulted primarily from increased shipments of our TA2022 product.

 

Our top fiveend customers accounted for 67% of revenue in 2002 versus 82% and 90% in 2001and 2000 respectively.  Our primarycustomers in 2002 were Apple Computer Inc. and Apex Digital Inc., representing31% and 19% of revenue, respectively. In 2001 our primary customers were Sony Corporation and Apple ComputerInc., representing 29% and 25% of revenue, respectively.  Sony Corporation and Apple Computer Inc.were also our top two customers in 2000, representing 60% and 24% of revenue,respectively.

 

In 2001 wewere able to offset the decline in revenue from Sony with increased shipmentsrelated to design wins with existing and new customers. The percentage ofrevenue to end customers located outside of the United States was 61% in 2002,72% in 2001 and 71% in 2000.

 

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*Gross Profit (Loss).*Gross loss for 2002 was $2.3 million (including stock-based compensationexpense of $23,000) compared to a gross profit of $1.6 million (includingstock-based compensation benefit of $95,000) for 2001 and a gross loss of$2.0 million (including stock-based compensation expense of $86,000) for2000. The gross loss for 2002 was primarily due to a reserve of $5.0 millionfor excess inventory during the first quarter of 2002. The inventory charge,related to excess inventory for our TA2022 product, was based on a decline inforecasted sales for this product. Excluding the inventory charge, gross profitfor the year ended December 31, 2002 was $2.7 million. The increase in grossprofit was due to increased revenues and ongoing product cost reductionefforts. The increase in gross profit in 2001 compared with the gross loss in2000 was due to better product mix, including increased shipments of higherpower/higher margin products related to new design wins, as well as ongoingcost reduction efforts.

 

*Research and Development.*  Research and development (R&D) expensesfor 2002 were $11.7 million (including stock-based compensation expense of$195,000), a decrease of $8.2 million or 41% from R&D expenses of$19.9 million (including stock-based compensation benefit of $133,000) in2001. The decrease in R&D expenses was due to a decrease in personnel costsdue to reduced headcount and a decrease in product development expenses.R&D expenses for 2001 decreased $6.2 million or 24% from R&Dexpenses of $26.1 million (including stock-based compensation expense of$8.1 million) in 2000. Excluding stock-based compensation expense, R&Dexpenses increased $2.0 million from 2000 to 2001, driven by higher headcountrelated costs, as well as higher depreciation, rent and insurance expenses.

* *

*Selling, General and Administrative Expenses.*  Selling, general and administrative(SG&A) expenses for 2002 were $5.6 million (including stock-basedcompensation benefit of $502,000), a decrease of $3.1 million or 36% fromSG&A expenses of $8.7 million (including stock-based compensationexpense of $488,000) in 2001.  Thedecrease in SG&A expenses was primarily due to decreased headcount andrelated costs and lower professional services costs. SG&A expenses for 2001decreased $6.1 million or 41% from SG&A expenses of $14.8 millionin 2000 (including stock-based compensation expense of $6.6 million).Excluding stock-based compensation expense, SG&A expenses were unchangedfrom 2000 to 2001.  2000 included aone-time charge for forgiveness of stockholder notes receivable, which wasoffset in 2001 by higher headcount related costs and professional servicesexpenses.

 

*Restructuring and Other Charges.*OnAugust 3, 2001, we announced a restructuring and cost reduction plan whichincluded a workforce reduction and write-off of abandoned assets. As a resultof the restructuring and cost reduction plan, we recorded restructuring andother charges of $684,000 during the quarter ended September 30, 2001. Underthe restructuring and cost reduction plan, we reduced our workforce byapproximately 40 employees across all functions and mostly located at ourheadquarters facility in Santa Clara, California. The workforce reductionresulted in a $164,000 charge relating primarily to severance and fringebenefits. We also abandoned assets for a charge of $520,000.

 

A summary ofthe restructuring and other charges is as follows:

 
|                          |   | **Total charges** |    | **Non-cash charges** |   | **Cash payments** |   |
|-------------------------------|--------|-------------------|---------|----------------------|--------|-------------------|--------|
| Work force reduction          |   | $                 | 164,000 |                 | $      | —            |   | $ | 164,000 |   |
| Write-off of abandoned assets |   | 520,000           |    | 520,000              |   | —            |   |
|                          |   | $                 | 684,000 |                 | $      | 520,000           |   | $ | 164,000 |   |

 

*Interest and Other Income, net.*Interest income for 2002 was $160,000, a decrease of $527,000 or 77% frominterest income of $687,000 in 2001. Interest income for 2001 decreased$913,000 or 57% from interest income of $1.6 million in 2000.  In 2002 and 2001, the decrease resulted fromdecreases in our average cash equivalents and short-term investment balances tofund operations, together with lower interest rates.

 

*Accretion on Preferred Stock.*Accretionon Preferred stock for 2002 was $14,952,000 compared to $0 for 2001. Theyear-over-year increase was due to the financing transaction that was completedin January 2002, in which we raised $21 million in gross proceeds through aprivate placement of non-voting Series A Preferred Stock and warrants. Theaccretion related to the beneficial conversion feature represents thedifference between the accounting conversion price and the fair value of thecommon stock on the date of the transaction, after valuing the warrants issuedin connection with the financing transaction.

 

14

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*Income Taxes.* We have incurred no income taxexpense to date. As of December 31, 2002, we had available federal netoperating loss carryforwards of approximately $100 million and state netoperating loss carryforwards of approximately $42 million. We also had researchand development tax credit carryforwards of approximately $5 million forfederal and state purposes. The net operating loss and credit carryforwardswill expire at various times through 2020. As of December 31, 2002, we haddeferred tax assets of approximately $45 million which consisted primarily ofnet operating loss carryforwards, research and development tax creditcarryforwards and nondeductible reserves and accruals. We have recorded no taxbenefit in our financial statements for these deferred tax assets. Deferred taxassets will be recognized in future periods as any taxable income is realizedand consistent profits are reported.

 

**Liquidity and CapitalResources**

 

Since ourinception, we have financed our operations through the private sale of ourequity securities, primarily the sale of preferred stock, through our initialpublic offering on August 1, 2000 and through a private placement in January2002.  Net proceeds to us as a result ofour initial public offering and our private placement were approximately $45.4million and $19.9 million, respectively.

 

Net cash usedby operating activities decreased to $13.0 million for the year ended December31, 2002 from $32.5 million for the year ended December 31, 2001. The decreasewas mainly due to a decrease in net loss of $7.7 million, a decrease ininventory purchases of $8.3 million and a provision for excess inventory of$5.0, million, partially offset by a decrease in accounts payable. Net cashused for operating activities during the year ended December 31, 2000 was$24.6 million, the majority of which was used to fund operating losses andworking capital.

 

Cash used ininvesting activities was $201,000 for the year ended December 31, 2002 ascompared to cash provided by investing activities of $22.1 million for the yearended December 31, 2001. The decrease was due to decrease in sale of short-terminvestments and an increase in purchase of property and equipment. In 2000 ourinvesting activities used cash in the amount of $18.8 million for thepurchase of short-term investments and capital equipment.

 

Cash providedby financing activities increased to $19.4 million for the year ended December31, 2002 from $1.8 million for the year ended December 31, 2001. The increasewas due to the additional financing, details of which are summarizedbelow.  In 2000, our financingactivities provided cash in the amount of $46.4 million, the majority of whichwas derived from our initial public offering.

 

On January 24,2002, we completed a financing in which we raised $21 million in gross proceedsthrough a private placement of non-voting Series A Preferred Stock andwarrants, at $30 per unit to a group of investors. At a Special Meeting ofStockholders held on March 7, 2002, our stockholders approved the issuance andsale of the Series A Preferred Stock and warrants, which then automaticallyconverted into 13,999,000 shares of common stock and warrants to purchase3,303,760 shares of common stock. If our common stock trades at $5.85 per shareor greater for a period of 20 out of 30 trading days, we can require theholders to exercise the warrants. As a result of the favorable conversion priceof the shares and related warrants at the date of issuance, we recordedaccretion of approximately $15 million relating to the beneficial conversionfeature at the date of the conversion, thereby increasing the “net lossapplicable to common stockholders” for the year ended December 31, 2002.

 

OnJuly 12, 2002, we entered into a credit agreement with a financialinstitution that provides for a one-year revolving credit facility in an amountof up to $10 million, subject to certain restrictions in the borrowingbase based on eligibility of receivables. Any advances under the creditagreement will be secured by our personal property and will bear interest atthe prime rate plus 0.875% per annum. We have agreed to provide a security interest in our intellectualproperty solely, in the event that a judicial authority holds that this isnecessary, to enable the financial institution to perfect the financialinstitution’s security interest in the rights to payment and proceeds from saleof our personal property. We have also agreed not to pledge our intellectualproperty to a third party.  The creditagreement contains certain financial and reporting covenants. Covenantsrelating to meeting minimum quarterly revenues, minimum tangible net worth andmeeting the deadline for submission of reporting items were violated during theyear ended December 31, 2002.  Waiverswere obtained from the financial institution for each of the covenants thatwere violated.

 

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The credit agreement wasused to issue stand-by letters of credit totaling $1.7 million tocollateralize our obligations to a third party for the purchase of inventoryand to provide a security deposit for the lease of new office space. AtDecember 31, 2002, there was up to $8.3 million available under thecredit facility, subject to certain restrictions in the borrowing base. TheCompany believes that it is eligible to borrow up to $1.1 million as of March15, 2003. The amount by which the aggregate face amount of all outstandingstand-by letters of credit exceeds the borrowing base, as determined byeligible receivables, represents the amount of restricted cash necessary tosecure the letters of credit. Subsequent to December 31, 2002, we have reducedthe amount of outstanding stand-by letters of credit by $1.0 million, from $1.7million to $0.7 million.

 

Our total potentialcommitments on our operating leases and inventory purchases as of December 31,2002, were as follows (in thousands):

 
| **Year Ending December 31,**                        |   | **Operating  Leases** |   | **Capital  Lease** |   | **Inventory  Purchase  Commitments** |   |
|-----------------------------------------------------|--------|-----------------------|--------|--------------------|--------|--------------------------------------|--------|
| 2003                                                |   | $                     | 422    |               | $      | 299                                  |   | $ | 1,216 |   |
| 2004                                                |   | 933                   |   | 406                |   | —                               |   |
| 2005                                                |   | 1,083                 |   | 408                |   | —                               |   |
| 2006                                                |   | 1,046                 |   | —             |   | —                               |   |
| 2007                                                |   | 270                   |   | —             |   | —                               |   |
| Total minimum lease payments                        |   | $                     | 3,754  |               | 1,113  |                                 | $      | 1,216 |   |
| Less: amount representing interest                  |   |                  |   | (150               | )      |                                 |   |
| Present value of minimum lease payments             |   |                  |   | 963                |   |                                 |   |
| Less: current  portion of capital lease obligations |   |                  |   | (225               | )      |                                 |   |
| Long-term capital lease obligations                 |   |                  |   | $                  | 738    |                                 |   |   |

 

We expect ourfuture liquidity and capital requirements will fluctuate depending on numerousfactors including: market acceptance and demand for current and futureproducts, the timing of new product introductions and enhancements to existingproducts, the success of on-going efforts to reduce our manufacturing costs aswell as operating expenses and need for working capital for such items asinventory and accounts receivable.

 

We haveincurred substantial losses and have experienced negative cash flow sinceinception and have an accumulated deficit of $172.3 million at December 31,2002. To conserve cash, we have implemented cost cutting measures and in August2001, implemented a restructuring program. In addition, on January 24, 2002, wecompleted financing in which we raised $21 million in gross proceeds through aprivate equity placement and in July 2002, we entered into a credit agreementwith a financial institution that provides for a one-year revolving creditfacility of up to $10 million, subject to certain restrictions in the borrowingbase based on eligibility of receivables. At March 15, 2003, we believe that weare eligible to borrow up to $1.1 million against this credit agreement, ofwhich approximately $0.4 million is still available.

 

Ourindependent accountants, have included an explanatory paragraph in their auditreport on our consolidated financial statements for the fiscal year endedDecember 31, 2002, which indicates that we have suffered recurring losses fromoperations and have a net stockholders’ deficit that raise substantial doubt aboutour ability to continue as a going concern. We respectfully disagree. While wehave incurred losses since our inception and are expected to incur losses thisyear at our current operating level, we believe that we have sufficient cash onhand and could take other measures to reduce operating expenses if necessary tooperate as a going concern for the next twelve months and perhaps beyond.

 

However, wemay need to raise additional funds to finance our activities next year andbeyond through public or private equity or debt financings, the formation ofstrategic partnerships or alliances with other companies or through bankborrowings with existing or new banks. We may not be able to obtain additionalfunds on terms that would be favorable to our stockholders and us, or at all.Without sufficient capital to fund our operations, we will no longer be able tocontinue as a going concern. Our consolidated financial statements have beenprepared on the basis of a going concern, which contemplates the realization ofassets and the satisfaction of liabilities in the normal course of business. Wehave not made any adjustment to our consolidated financial statements as aresult of the outcome of the uncertainty described above.

 

**RecentAccounting Pronouncements**

 

In April 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 145, “Rescission of FAS Nos. 4, 44 and 64,Amendment of FAS 13, and Technical Corrections.”  SFAS 145 rescinds FASB Statement No. 4, “Reporting Gains andLosses from Extinguishment of Debt,” and an amendment of that Statement, FASBStatement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-FundRequirements,” as well as FASB Statement No. 44, “Accounting for IntangibleAssets of Motor Carriers.” This Statement amends FASB Statement No.  13, “Accounting for Leases” to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects that are similar to sale-leaseback transactions.  This Statement also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings or describe their applicability under changed conditions.  The provisions of SFAS 145 will be adoptedduring fiscal year 2003. We do not anticipate that adoption of this statementwill have a material impact on our consolidated financial statements.

 

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In June 2002,the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities”(“SFAS 146”). SFAS 146 addresses significant issues regarding the recognition,measurement and reporting of costs that are associated with exit and disposalactivities, including restructuring activities that are currently accounted forunder EITF No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).” The scope of SFAS 146 also includes costs related toterminating a contract that is not a capital lease and termination benefitsthat employees who are involuntarily terminated receive under the terms of aone-time benefit arrangement that is not an ongoing benefit arrangement or anindividual deferred-compensation contract. SFAS 146 will be effective for exitor disposal activities that are initiated after December 31, 2002, and earlyapplication is encouraged. The provisions of EITF No. 94-3 shall continue toapply for an exit activity initiated under an exit plan that met the criteriaof EITF No. 94-3 prior to the adoption of SFAS 146. We do not anticipate thatadoption of this statement will have a material impact on our consolidatedfinancial statements.

 

In November2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others (“FIN 45”).” FIN 45 requires that a liability berecorded in the guarantor’s balance sheet upon issuance of a guarantee. Inaddition, FIN 45 requires disclosures about the guarantees that an entity hasissued, including a reconciliation of changes in the entity’s product warrantyliabilities.  The initial recognition and initial measurement provisionsof FIN 45 are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002, irrespective of the guarantor’s fiscalyear-end.  The disclosure requirements of FIN 45 are effective forfinancial statements of interim or annual periods ending after December 15,2002.   We do not anticipate that adoption of this standard will have amaterial impact on our consolidated financial statements.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation,Transition and Disclosure- an amendment of FASB Statement No. 123.” SFASNo. 148provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. SFASNo. 148 also requires that disclosures of the pro forma effect of using thefair value method of accounting for stock-based employee compensation bedisplayed more prominently and in a tabular format. Additionally, SFAS No. 148requires disclosure of the pro forma effect in interim financial statements.The transition and annual disclosure requirements of SFAS No. 148 are effectivefor fiscal years ended after December 15, 2002.  The interim disclosurerequirements are effective for interim periods ending after December 15, 2002. We will provide disclosures to comply with the requirements of SFAS No.148.

 

In January2003, the FASB issued FASB Interpretation No. 46, “Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51” (“FIN 46”).  FIN 46requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 is effectiveimmediately for all new variable interest entities created or acquired afterJanuary 31, 2003. For variable interest entities created or acquired prior toFebruary 1, 2003, the provisions of FIN 46 must be applied for the firstinterim or annual period beginning after June 15, 2003.   We do notanticipate that adoption of this standard will have a material impact on ourconsolidated financial statements.

 

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**Risk Factors**

 

Set forth below and elsewherein this annual report and in the other documents we file with the Securitiesand Exchange Commission are risks and uncertainties that could cause actualresults to differ materially from the results contemplated by the forwardlooking statements contained in this annual report.  Prospective and existing investors are strongly urged tocarefully consider the various cautionary statements and risks set forth inthis annual report and our other public filings.

 

**Risks Related to Our Business**

 

**Ourlimited operating history and dependence on new technologies make it difficultto evaluate our future products.**

 

We were incorporated in July1995 but did not begin shipping products until 1998. Some of our products haveonly recently been introduced. Accordingly, we have limited historicalfinancial information and operating history upon which you may evaluate us andour products. Our prospects must be considered in the light of the risks,challenges and difficulties frequently encountered by companies in their earlystage of development, particularly companies in intensely competitive andrapidly evolving markets such as the semiconductor industry. We cannot be surethat we will be successful in addressing these risks and challenges.

 

**We have a history of losses, expect futurelosses and may never achieve or sustain profitability.**

 

As of December 31, 2002, we hadan accumulated deficit of $172.3 million. We incurred net losses (before chargefor beneficial conversion feature of $14.9 million) of approximately $19.3million in the year ended December 31, 2002, $27.0 million in 2001 and $41.3million in 2000.  We expect to continueto incur net losses and these losses may be substantial. Furthermore, we expectto generate significant negative cash flow in the future. We will need togenerate substantially higher revenue to achieve and sustain profitability andpositive cash flow. Our ability to generate future revenue and achieveprofitability will depend on a number of factors, many of which are describedthroughout this section. If we are unable to achieve or maintain profitability,we will be unable to build a sustainable business. In this event, our shareprice and the value of your investment would likely decline and the Companymight be unable to continue as a going concern.

 

**Wemay need to raise additional capital to continue to grow our business, whichmay not be available to us.**

 

Because we have had losses, we have fundedour operating activities to date from the sale of securities, including ourmost recent financing in January 2002. Additionally, in July 2002 we put inplace a $10 million revolving line of credit whose availability is dependent onmeeting certain loan covenants. However, to grow our business significantly, wewill need additional capital. We cannot be certain that any such financing willbe available on acceptable terms, or at all. Moreover, additional equityfinancing, if available, would likely be dilutive to the holders of our commonstock, and debt financing, if available, would likely involve restrictivecovenants. If we cannot raise sufficient additional capital, it would adverselyaffect our ability to achieve our business objectives and to continue as agoing concern.

 

**Our independent accountants have included agoing concern explanatory paragraph in their report on our consolidatedfianancial statements.**

** **

Our independent accountants have included anexplanatory paragraph in their audit report on our consolidated financialstatements for the fiscal year ended December 31, 2002, which indicates that wehave suffered recurring losses from operations and have a net stockholders’deficit that raises substantial doubt about our ability to continue as a goingconcern.  The inclusion of a goingconcern explanatory paragraph in our independent auditor’s audit report on ourconsolidated financial statements for the fiscal year ended December 31, 2002could have a detrimental effect on our stock price, and our ability to raisenew capital.

 

**Wemay not be able to pay our debt and other obligations, which would cause us tobe in default under the terms of our credit facility, which would result inharm to our business and financial condition.**

 

On July 12, 2002, we entered into a creditagreement with a financial institution that provides for a one-year revolvingcredit facility in an amount of up to $10 million.  Any advances under the credit agreement will be secured by ourpersonal property and will bear interest at the prime rate plus 0.875% perannum. We have agreed to provide a security interest in our intellectualproperty solely, in the event that a judicial authority holds that this isnecessary, to enable the financial institution to perfect the financialinstitution’s security interest in the rights to payment and proceeds from saleof our personal property. We have also agreed not to pledge our intellectualproperty to a third party. The credit agreement contains certain financial andreporting covenants. Covenants relating to meeting minimum quarterly revenues,minimum tangible net worth and meeting the deadline for submission of reportingitems were violated during the year ended December 31, 2002.  Waivers were obtained from the financialinstitution for the covenants that were violated. We intend to fulfill our debtservice obligations from cash generated by our operations, if any, and from ourexisting cash and investments.  Therecan be no assurance that we will be able to meet our debt service obligationsof the credit facility.

 

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If our cash flow is inadequate to meet ourobligations under the credit facility or otherwise, we could face substantialliquidity problems.  If we are unable togenerate sufficient cash flow or otherwise obtain funds necessary to makerequired payments on the credit facility, we would be in default under theterms thereof, which would permit the financial institution that provided thecredit facility to accelerate the maturity of our obligations.  Any such default would harm our business,prospects, financial condition and operating results.  In addition, we cannot assure you that we would be able to repayamounts due in respect of the credit facility if payment were to be acceleratedfollowing the occurrence of any event of default under the terms of the creditfacility.

 

In addition, in the event ofour bankruptcy, liquidation or reorganization or upon acceleration of thepayments due under the credit facility due to an event of default, our assetswould be available for distribution to our current stockholders only after ourindebtedness has been paid in full. As a result, there may not be sufficientassets remaining to make any distributions to our stockholders.

 

**Wemust continue to reduce our costs and improve our margins in order to reachprofitability.**

 

Themarket for our products is extremely competitive and is characterized byaggressive pricing.  As a result,margins in our market are often low. Traditionally, we have experienced low oreven negative margins.  To reachprofitability, we must continue to increase our margins by reducing the cost ofour products.  We havetaken steps in the past and plan to take additional steps in 2003 and beyond toreduce our cost of manufacturing and improve our overall profit margin. Theseefforts include but are not limited to, reducing the size of the semiconductordie, shifting production to lower cost semiconductor wafer and assembly andtest suppliers, using lower cost test equipment and more cost efficient testprograms, and moving from higher cost custom to lower cost standard sizesemiconductor packages. There is no guarantee that we will be successful in ourefforts to reduce our manufacturing costs and improve our gross margins in thefuture.

 

**Ourquarterly operating results are likely to fluctuate significantly and may failto meet the expectations of securities analysts and investors, which may causeour share price to decline.**

 

Our quarterly operating resultshave fluctuated significantly in the past and are likely to continue to do soin the future. The many factors that could cause our quarterly results tofluctuate include, in part:

 

•                  level of sales;

 

•                  mix of high andlow margin products;

 

•                  availability andpricing of wafers;

 

•                  timing ofintroducing new products, including lower cost versions of existing products,fluctuations in manufacturing yields and other problems or delays in thefabrication, assembly, testing or delivery of products; and

 

•                  rate of developmentof target markets.

 

A large portion of ouroperating expenses, including salaries, rent and capital lease expenses, arefixed.  If we experience a shortfall inrevenues relative to our expenses, we may be unable to reduce our expenses quicklyenough to off-set the reduction in revenues during that accounting period,which would adversely affect our operating results.

 

Fluctuations in our operatingresults may also result in fluctuations in our common stock price. If themarket price of our stock is adversely affected, we may experience difficultyin raising capital or making acquisitions. In addition, we may become the object of securities class actionlitigation.

 

As a result, we do not believethat period-to-period comparisons of our revenues and operating results arenecessarily meaningful. You should not rely on the results of any one quarteras an indication of future performance.

 

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**Ourstock price may be subject to significant volatility.**

 

The stock prices for manytechnology companies have recently experienced large fluctuations, which may ormay not be directly related to the operating performance of the specificcompanies. Broad market fluctuations as well as general economic conditions maycause our stock price to decline. We believe that fluctuations of our stockprice may continue to be caused by a variety of factors, including:

 

•                   announcementsof developments related to our business;

•                   fluctuations inour financial results;

•                   general conditionsin the stock market or around the world, terrorism or developments in thesemiconductor and capital equipment industry and the general economy;

•                   sales orpurchases of our common stock in the marketplace;

•                   announcementsof our technological innovations or new products or enhancements or those ofour competitors;

•                   developments inpatents or other intellectual property rights;

•                   developments inour relationships with customers and suppliers;

•                   a shortfall orchanges in revenue, gross margins or earnings or other financial results fromanalysts’ expectations or an outbreak of hostilities or natural disasters; or

•                   acquisition ormerger activity and the success in implementing such acquisitions.

 

**Ourcustomers may cancel or defer product orders, which could result in excessinventory.**

 

Our sales are generally made pursuant toindividual purchase orders that may be canceled or deferred by customers onshort notice without significant penalty. Thus, orders in backlog may not result in future revenue.   In the past, we have had cancellations anddeferrals by customers.  Anycancellation or deferral of product orders could result in us holding excessinventory, which could seriously harm our profit margins and restrict ourability to fund our operations. During the quarter ended March 31, 2002, werecorded a provision for excess inventory of approximately $5.0 million.  We recognize revenue upon shipment ofproducts to the end customer.  Althoughwe have not experienced customer refusals to accept shipped products ormaterial difficulties in collecting accounts receivable, such refusals orcollection difficulties are possible and could result in significant chargesagainst income, which could seriously harm our revenues and our cash flow.

 

Industry-wide overcapacity hascaused and may continue to cause our results to fluctuate, and such shiftscould result in significant inventory write-downs and adversely affect ourrelationships with our suppliers.

 

We must build inventory well inadvance of product shipments. The semiconductor industry is highly cyclical andin light of the current downturn, which has resulted in excess capacity andoverproduction, there is a risk that we will continue to forecast inaccuratelyand produce excess inventories of our products.  As a result of such inventory imbalances, large future inventorywrite-downs may occur due to excess inventory or inventory obsolescence. Inaddition, any adjustment in our ordering patterns resulting from increasedinventory may adversely affect our suppliers’ willingness to meet our demand,if our demand increases in the future.

 

**Ourproduct shipment patterns make it difficult to predict our quarterly revenues.**

 

As is common in our industry,we frequently ship more products in the third month of each quarter than ineither of the first two months of the quarter, and shipments in the third monthare higher at the end of that month.  Webelieve this pattern is likely to continue. The concentration of sales in the last month of the quarter may causeour quarterly results of operations to be more difficult to predict.  Moreover, if sufficient business does notmaterialize or a disruption in our production or shipping occurs near the endof a quarter, our revenues for that quarter could be materially reduced.

 

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**Werely on a small number of customers for most of our revenue and a decrease inrevenue from these customers could seriously harm our business.**

 

A relatively small number ofcustomers have accounted for most of our revenues to date.  Any reduction or delay in sales of ourproducts to one or more of these key customers could seriously reduce our salesvolume and revenue and adversely affect our operating results.  In particular, sales to three large customers,including Apex Digital Inc., Apple Computer and Aiwa (which became awholly-owned subsidiary of Sony Corporation in February 2002) accounted forapproximately 19%, 31% and 7%, respectively, of revenue for the year endedDecember 31, 2002, 0%, 25%, and 12% respectively, of total revenue in 2001 and0%, 24% and 0% respectively in 2000. Moreover, sales to our five largest end customers representedapproximately 67% of our total revenue for the year ended December 31, 2002,82% of our total revenue in 2001 and 89% of our total revenue in 2000.  We expect that we will continue to rely onthe success of our largest customers and on our success in selling our existingand future products to those customers in significant quantities.  However, we cannot be sure that we willretain our largest customers or that we will be able to obtain additional keycustomers or replace key customers we may lose or who may reduce theirpurchases.

 

**We currently rely on sales of six productsfor a significant portion of our revenue, and the failure of these products tobe successful in the future could substantially reduce our sales.**

 

We currently rely on sales ofour TA1101B, TA2020, TA2022, TA2024, TA3020 and TK2050 digital audio amplifiersto generate a significant portion of our revenue. Sales of these productsamounted to 96% of our revenue for the year ended December 31, 2002, 94% of ourrevenue in 2001 and 93% of our revenue in 2000. We have developed additionalproducts and plan to introduce more products in the future, but there can be noassurance that these products will be commercially successful. Consequently, ifour existing products are not successful, our sales could declinesubstantially.

 

**Ourlengthy sales cycle makes it difficult for us to predict if or when a sale willbe made, to forecast our revenue and to budget expenses, which may causefluctuations in our quarterly results.**

 

Because of our lengthy salescycles, we may continue to experience a delay between increasing expenses forresearch and development, sales and marketing and general and administrativeefforts, as well as increasing investments in inventory, and the generation ofrevenue, if any, from such expenditures. In addition, the delays inherent in such a lengthy sales cycle raiseadditional risks of customer decisions to cancel or change product plans, whichcould result in our loss of anticipated sales. Our new products are generally incorporated into our customers’ productsor systems at the design stage.  To tryand have our products selected for design into new products of current andpotential customers, commonly referred to as design wins, often requiressignificant expenditures by us without any assurance of success.  Once we have achieved a design win, oursales cycle will start with the test and evaluation of our products by thepotential customer and design of the customer’s equipment to incorporate ourproducts.  Generally, different partshave to be redesigned to incorporate our devices successfully into ourcustomers’ products.  The sales cyclefor the test and evaluation of our products can range from a minimum of threeto six months, and it can take a minimum of an additional six to nine monthsbefore a customer commences volume production of equipment that incorporatesour products.  Achieving a design winprovides no assurance that such customer will ultimately ship productsincorporating our products or that such products will be commerciallysuccessful.  Our revenue or prospectiverevenue would be reduced if a significant customer curtails, reduces or delaysorders during our sales cycle, or chooses not to release products incorporatingour products.

 

**Thecurrent general economic downturn in the semiconductor industry has lead andmay continue to lead to decreased revenue.**

 

During 2001 and 2002, slowingworldwide demand for semiconductors has resulted in significant inventorybuildups for semiconductor companies. Presently, we have no visibility regarding how long the semiconductorindustry downturn will last or how severe the downturn will be. If the downturncontinues or worsens, we may experience greater levels of cancellations and/orpush-outs of orders for our products in the future, which could adverselyaffect our business and operating results, including the possibility of additionalinventory write-downs, over a prolonged period of time. In addition, we reducedour workforce during fiscal 2002 by approximately 20%, or about 15 people.  If we continue to reduce our workforce, itmay adversely impact our ability to respond rapidly to any renewed growthopportunities in the future.

 

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**Wemay experience difficulties in the introduction of new or enhanced productsthat could result in significant, unexpected expenses or delay their launch,which would harm our business.**

 

Our failure or our customers’failure to develop and introduce new products successfully and in a timelymanner would seriously harm our ability to generate revenues.  Consequently, our success depends on ourability to develop new products for existing and new markets, introduce suchproducts in a timely and cost-effective manner and to achieve design wins.  The development of these new devices ishighly complex, and from time to time we have experienced delays in completingthe development and introduction of new products.

 

The successful introduction ofa new product may currently take up to 18 months.  Successful product development and introduction depends on anumber of factors, including:

 

•                  accurateprediction of market requirements and evolving standards;

•                  accurate newproduct definition;

•                  timelycompletion and introduction of new product designs;

•                  availability offoundry capacity;

•                  achievingacceptable manufacturing yields;

•                  marketacceptance of our products and our customers’ products; and

•                  marketcompetition.

 

We seek but cannot guaranteesuccess with regard to these factors.

 

**Ifwe are unable to retain key personnel, we may not be able to operate ourbusiness successfully.**

 

We may not be successful inretaining executive officers and other key management and technicalpersonnel.  A high level of technicalexpertise is required to support the implementation of our technology in ourexisting and new customers’ products. In addition, the loss of the managementand technical expertise of Dr. Adya S. Tripathi, our founder, president andchief executive officer, could seriously harm us. We do not have any employmentcontracts with our employees.

 

**Ourheadquarters, as well as the facilities of our principal manufacturers andcustomers, are located in geographic regions with increased risks of powersupply failure, natural disasters, labor strikes and political unrest.**

 

Our headquarters is located inSan Jose, California, an area on or near a known earthquake fault within thestate. In addition, in the past the State of California has experienced ashortage of available electrical power, which has resulted in electricalblackouts for businesses in certain areas. In the event that Californiaexperiences another shortage of available electrical power, and there areadditional blackouts, the operations of our facilities within California couldbe disrupted.

 

Our principal manufacturers andcustomers are located in the Pacific Rim region. The risk of earthquakes in thisregion, particularly in Taiwan, is significant due to the proximity of majorearthquake fault lines. Earthquakes, fire, flooding and other natural disastersin the Pacific Rim region likely would result in the disruption of our foundrypartners’ assembly and testing capacity and the ability of our customers topurchase our products. Labor strikes or political unrest in these regions wouldlikely also disrupt operations of our foundries and customers. In particular,there is a recent history of political unrest between China and Taiwan. Anydisruption resulting from such events could cause significant delays inshipments of our products until we are able to shift our manufacturing,assembly and testing from the affected contractor to another third party vendor.We cannot be sure that such alternative capacity could be obtained on favorableterms, if at all. Moreover, any such disruptions could also cause significantdecreases in our sales to these customers until our customers resume normalpurchasing volumes.

 

**Stockholderswill incur additional dilution upon the exercise of warrants, and managementwill have sole discretion to use the proceeds received from exercise of thesewarrants**.

 

To the extent that the warrantsissued in connection with the January 2002 Series A financing are exercised,there will be additional dilution to your shares.  If all of the warrants are exercised, we will be required toissue an additional 3,328,760 shares of common stock, or approximately 8% ofthe common stock outstanding as of December 31, 2002. If all of the warrantsare exercised in full, we would receive approximately $6.4 million inproceeds.  Our management will have solediscretion over use of these proceeds and may spend the proceeds in ways withwhich our stockholders may not agree.

 

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**Themarket may be adversely affected due to the large number of shares eligible forsale under the registration statement filed in connection with the****January 2002financing.**

 

The shares of common stockeligible for sale under the registration statement filed in connection with theJanuary 2002 financing represent a large percentage of our outstanding commonstock.  The market for our common stockmay be adversely affected as a result of sales of a large number of shares inthe market or the perception that large sales may occur.

 

**Wemay not maintain The Nasdaq Small Cap Market listing requirements, and as aresult, our common stock may be subject to delisting.**

 

On August 13, 2002, we receiveda deficiency notice from the Nasdaq Stock Market, or Nasdaq, for failing tomaintain the Nasdaq National Market’s minimum bid price requirement forcontinued listing, which includes meeting a $1.00 minimum bid price for 10consecutive trading days. As we were unable to maintain this requirement, wesubmitted an application to Nasdaq for transfer to their SmallCap Market.  The application was approved and accordinglywe are now listed on The Nasdaq SmallCap Market. To remain listed on The NasdaqSmallCap Market, we must meet the minimum listing requirement that the bidprice of our common stock closes at $1.00 per share or higher for a minimum of10 consecutive trading dates.  As we hadnot met this minimum listing requirement by the initial deadline of February10, 2003, we applied for and, on February 11, 2002, were provided with, anadditional 180 days, or until August 8, 2003, to gain compliance with TheNasdaq SmallCap Market minimum listing requirement.  If we are unable to meet the minimum listing requirement prior toAugust 8, 2003, we may be delisted from The Nasdaq SmallCap Market, or, in thealternative, we may be granted an additional grace period to regain compliance.Furthermore, we may be eligible to transfer back to the Nasdaq National Marketif by August 8, 2003 the bid price of our common stock maintains the $1.00 pershare requirement for 30 consecutive trading days and we have maintainedcompliance with all other continued listing requirements of the Nasdaq NationalMarket.

 

On January 30, 2003, The Nasdaq Stock Market, Inc. announced plans to extenda pilot program governing bid price rules for all Nasdaq National Market and Nasdaq SmallCap issuers. The pilot program willallow issuers that meet core SmallCap initial listing criteria to benefit fromextended compliance periods for satisfying minimum bid price requirements. Ifthis term of the pilot program is extended, and if we meet the core SmallCapinitial listing criteria, we will be eligible to apply for an extendedcompliance period for satisfying the minimum bid price requirements.Stock trading on The Nasdaq SmallCap Market is typically less liquid andusually involves larger variations between the bid and ask price than stocktrading on the Nasdaq National Market. Therefore, the transfer of our stock from the Nasdaq National Market toThe Nasdaq SmallCap Market could have an adverse effect on the liquidity of ourcommon stock and your ability to sell our common stock.

 

Additionally, if our common stock is delistedfrom The Nasdaq SmallCap Market, sales of our common stock would likely beconducted only in the over-the-counter market or potentially in regionalexchanges. This may have a negative impact on the liquidity and the price ofour common stock, and investors may find it more difficult to purchase ordispose of, or to obtain accurate quotations as to the market value of, ourcommon stock.  In addition, if ourcommon stock is not listed on the Nasdaq National Market or The Nasdaq SmallCapMarket and the trading price of our common stock was to remain below $1.00 pershare, trading in our common stock would also be subject to the requirements ofcertain rules promulgated under the Exchange Act, which require additionaldisclosures by broker-dealers in connection with any trades involving a stockdefined as a “penny stock” (generally, a non-Nasdaq equity security that has amarket price of less than $5.00 per share, subject to certain exceptions).  In such event, the additional burdens imposedupon broker-dealers to effect transactions in our common stock could furtherlimit the market liquidity of our common stock and the ability of investors totrade our common stock.

 

We also believe that the current per shareprice level of our common stock has reduced the effective marketability of ourshares of common stock because of the reluctance of many leading brokeragefirms to recommend low-priced stock to their clients. Certain investors viewlow-priced stock as speculative and unattractive. In addition, a variety ofbrokerage house policies and practices tend to discourage individual brokerswithin those firms from dealing in low-priced stock. Such policies andpractices pertain to the payment of broker’s commissions and to time-consumingprocedures that make the handling of low-priced stocks unattractive to brokersfrom an economic standpoint.

 

In addition, because brokerage commissions onlow-priced stock generally represent a higher percentage of the stock pricethan commissions on higher-priced stock, the current share price of our commonstock can result in individual stockholders paying transaction costs(commissions, markups or markdowns) that represent a higher percentage of theirtotal share value than would be the case if the share price were substantiallyhigher. This factor also may limit the willingness of institutions to purchaseour common stock at its current low share price.

 

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**Ifwe engage in acquisitions, we will incur a variety of costs, and theanticipated benefits of the acquisitions may never be realized.**

 

In the future we may pursueacquisitions of complementary product lines, technologies and businesses.  We may have to issue debt or equitysecurities to pay for future acquisitions, which could be dilutive to our thencurrent stockholders. In addition, we may incur certain liabilities or otherexpenses in connection with future acquisitions, which could materiallyadversely affect our business, financial condition and results of operations.

 

Any future acquisitions mayinvolve numerous other risks, including:

 

•                  difficultiesassimilating the operations, personnel, technologies and products of theacquired companies;

 

•                  diversion of ourmanagement’s attention from other business concerns;

 

•                  increasedcomplexity and costs associated with internal management structures;

 

•                  risks ofentering markets in which we have no or limited experience; and

 

•                  the potentialloss of key employees of the acquired companies.

 

For these reasons, amongothers, we cannot be certain what effect future acquisitions may have on ourbusiness, financial condition and results of operations.

 

**Terrorist attacks and threats, and governmentresponses thereto, may negatively impact all aspects of our operations,**

**revenues, costs and stock price.**

 

The threat of  terrorist attacks in the United States, thecurrent war with Iraq and the related decline in consumer confidence andcontinued economic weakness have had a substantial adverse impact on theeconomy.  If consumer confidence doesnot recover, our revenues may be adversely impacted for fiscal 2003 and beyond.Moreover, any further terrorist attacks in the U.S., or any additional U.S.military actions overseas may disrupt our operations or those of our customersand suppliers.  These events have hadand may continue to have an adverse impact on the U.S. and world economy ingeneral and consumer confidence and spending in particular, which could harmour sales. Any of these events could increase volatility in the U.S. and worldfinancial markets which could harm our stock price and may limit the capitalresources available to us and our customers or suppliers. This could have asignificant impact on our operating results, revenues and costs and may resultin increased volatility in the market price of our common stock.

 

**We are subject to anti-takeover provisionsthat could delay or prevent an acquisition of our company.**

 

Provisions of our restatedcertificate of incorporation, shareholder rights plan, equity incentive plans,bylaws and Delaware law may discourage transactions involving a change incorporate control.  In addition to theforegoing, the stockholdings of our officers, directors and persons or entitiesthat may be deemed affiliates, our shareholder rights plan and the ability ofour board of directors to issue preferred stock without further stockholderapproval could have the effect of delaying, deferring or preventing a thirdparty from acquiring us and may adversely affect the voting and other rights ofholders of our common stock.

 

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**RisksRelated to Manufacturing**

 

**Wedepend on three outside foundries for our semiconductor device manufacturingrequirements.**

 

We do not own or operate afabrication facility, and substantially all of our semiconductor devicerequirements are currently supplied by three outside foundries, UnitedMicroelectronics Corporation, or UMC, in Taiwan, STMicroelectronics Group inEurope and Mitsubishi, in Japan. Although we primarily utilize these three outside foundries, most of ourcomponents are not manufactured at both foundries at the same time.  As a result, each foundry is a sole sourcefor certain products.  There aresignificant risks associated with our reliance on outside foundries, including:

 

•                  the lack ofguaranteed wafer supply;

 

•                  limited controlover delivery schedules, quality assurance and control, manufacturing yieldsand production costs; and

 

•                  theunavailability of or delays in obtaining access to key process technologies.

 

In addition, the manufacture ofintegrated circuits is a highly complex and technologically demandingprocess.  Although we work closely withour foundries to minimize the likelihood of reduced manufacturing yields, ourfoundries have from time to time experienced lower than anticipatedmanufacturing yields, particularly in connection with the introduction of newproducts and the installation and start-up of new process technologies.

 

We provide our foundries withcontinuous forecasts of our production requirements; however, the ability ofeach foundry to provide us with semiconductor devices is limited by thefoundry’s available capacity.  In manycases, we place our orders on a purchase order basis, and foundries mayallocate capacity to the production of other companies’ products while reducingthe deliveries to us on short notice. In particular, foundry customers that are larger and better financedthan us or that have long-term agreements with our foundries may cause suchfoundries to reallocate capacity in a manner adverse to us.

 

If we use a new foundry,several months would be typically required to complete the qualificationprocess before we can begin shipping products from the new foundry. In theevent either of our current foundries suffers any damage or destruction to theirrespective facilities, or in the event of any other disruption of foundrycapacity, we may not be able to qualify alternative manufacturing sources forexisting or new products in a timely manner. Even our current outside foundries would need to have certainmanufacturing processes qualified in the event of disruption at anotherfoundry, which we may not be able to accomplish in a timely enough manner toprevent an interruption in supply of the affected products.

 

If we encounter shortages ordelays in obtaining semiconductor devices for our products in sufficientquantities when required, delivery of our products could be delayed, resultingin customer dissatisfaction and decreased revenues.

 

**Wedepend on third-party subcontractors for most of our semiconductor assembly andtesting requirements and any unexpected interruption in their services couldcause us to miss scheduled shipments to customers and to lose revenues.**

 

Semiconductor assembly andtesting are complex processes, which involve significant technologicalexpertise and specialized equipment.  Asa result of our reliance on third-party subcontractors for assembly and testingof our products, we cannot directly control product delivery schedules, which hasin the past, and could in the future, result in product shortages or qualityassurance problems that could increase the costs of manufacture, assembly ortesting of our products.  Almost all ofour products are assembled and tested by one of five subcontractors: AMBITMicrosystems Corporation in Taiwan, Amkor Technology, Inc. in the Philippines,ASE in Korea, Malaysia and Taiwan, SGS in China, and ST Assembly Test ServicesLtd. in Singapore.  We do not havelong-term agreements with any of these suppliers and retain their services on aper order basis.  The availability ofassembly and testing services from these subcontractors could be adverselyaffected in the event a subcontractor suffers any damage or destruction totheir respective facilities, or in the event of any other disruption of assemblyand testing capacity.  Due to the amountof time normally required to qualify assemblers and testers, if we are requiredto find alternative manufacturing assemblers or testers of our components,shipments could be delayed.  Anyproblems associated with the delivery, quality or cost of our products couldseriously harm our business.

 

25

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**Failureto transition our products to more effective and/or increasingly smallersemiconductor chip sizes and packaging could cause us to lose our competitiveadvantage and reduce our gross margins.**

 

We evaluate the benefits, on aproduct-by-product basis, of migrating to smaller semiconductor processtechnologies in order to reduce costs and have commenced migration of someproducts to smaller semiconductor processes. We believe that the transition of our products to increasingly smallersemiconductor processes will be important for us to reduce manufacturing costsand to remain competitive. Moreover, we are dependent on our relationships withour foundries to migrate to smaller semiconductor processes successfully.  We cannot be sure that our future processmigrations will be achieved without difficulties, delays or increased expenses.  Our gross margins would be seriously harmedif any such transition is substantially delayed or inefficiently implemented.

 

**Ourinternational operations subject us to risks inherent in doing business on aninternational level that could harm our operating results.**

 

We currently obtain almost allof our manufacturing, assembly and test services from suppliers located outsidethe United States and may expand our manufacturing activities abroad.  Approximately 61% of our total revenue forthe year ended December 31, 2002 was derived from sales to end customers basedoutside the United States.  In 2001 and2000, 72% and 71%, respectively, of our total revenue was derived from sales toend customers based outside of the United States.  In addition, we often ship products to our domestic customers’international manufacturing divisions and subcontractors.

 

Accordingly, we are subject torisks inherent in international operations, which include:

 

•                  political,social and economic instability;

 

•                  traderestrictions and tariffs;

 

•                  the impositionof governmental controls;

 

•                  exposure todifferent legal standards, particularly with respect to intellectual property;

 

•                  import andexport license requirements;

 

•                  unexpectedchanges in regulatory requirements;

 

•                  difficulties incollecting receivables; and

 

•                  potentiallyadverse tax consequences.

 

All of our international salesto date have been denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative toforeign currencies could make our products less competitive in internationalmarkets.  Conversely, a decrease in thevalue of the U.S. dollar relative to foreign currencies would increase the costof our overseas manufacturing, which would reduce our gross margins.

 

26

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**Risks Related to Our Product Lines**

 

**Ourability to achieve revenue growth will be harmed if we are unable to persuadeelectronic systems manufacturers to adopt our new amplifier technology.**

 

We face difficulties inpersuading manufacturers to adopt our products using our new amplifiertechnology. Traditional amplifiers use design approaches developed in the1930s.  These approaches are still usedin most amplifiers and engineers are familiar with these design approaches.  To adopt our products, manufacturers andengineers must understand and accept our new technology.  To take advantage of our products,manufacturers must redesign their systems, particularly components such as thepower supply and heat sinks. Manufacturers must work with their suppliers to obtain modifiedcomponents and they often must complete lengthy evaluation and testing.  In addition, our amplifiers are often moreexpensive as components than traditional amplifiers. For these reasons,prospective customers may be reluctant to adopt our technology.

 

**Wecurrently depend on consumer audio markets that are typically characterized byaggressive pricing, frequent new product introductions and intense competition.**

 

A substantial portion of ourcurrent revenue is generated from sales of products that address the consumeraudio markets, including home theater, computer audio and the automotive audiomarkets.  These markets arecharacterized by frequent new product introductions, declining prices andintense competition. Pricing in these markets is aggressive, and we expectpricing pressure to continue.  In thecomputer audio segment, our success depends on consumer awareness andacceptance of existing and new products by our customers and consumers, inparticular, the elimination of externally-powered speakers.  In the automotive audio segment, we facepressure from our customers to deliver increasingly higher-powered solutionsunder significant engineering limitations due to the size constraints in cardashboards.  In addition, our ability toobtain prices higher than the prices of traditional amplifiers will depend onour ability to educate manufacturers and their customers about the benefits ofour products.  Failure of our customersand consumers to accept our existing or new products will seriously harm ouroperating results.

 

**Ifwe are not successful in developing and marketing new and enhanced products forthe DSL high speed communications markets that keep pace with technology andour customers’ needs, our operating results will suffer.**

 

The market for our DSL productsis new and emerging, and is characterized by rapid technological advances,intense competition and a relatively small number of potential customers. Thiswill likely result in price erosion on existing products and pressure for cost-reducedfuture versions. We recently started to ship our TA4012 DSL line driver andexpect to commence the testing phase of our dual channel line driver in thenext couple of months. Implementation of our products require manufacturers toaccept our technology and redesign their products.  If potential customers do not accept our technology or experienceproblems implementing our devices in their products, our products could berendered obsolete and our business would be harmed.  If we are unsuccessful in introducing future products withenhanced performance, our ability to achieve revenue growth will be seriouslyharmed.

 

**Wemay experience difficulties in the development and introduction of a newamplifier product for use in the cellular phone market, which could result insignificant expenses or delay in its launch.**

 

We are currently developing anamplifier product for use in the cellular phone market.  We currently have no design wins orcustomers for this product. We may not introduce our amplifier product for thecellular phone market on time, and this product may never achieve marketacceptance.  Furthermore, competition inthis market is likely to result in price reductions, shorter product lifecycles, reduced gross margins and longer sales cycles compared with what wehave experienced to date with our other products.

 

27

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**Intensecompetition in the semiconductor industry and in the consumer audio andcommunications markets could prevent us from achieving or sustainingprofitability.**

 

The semiconductor industry andthe consumer audio and communications markets are highly competitive.  We compete with a number of major domesticand international suppliers of semiconductors in the audio and communications markets.  We also may face competition from suppliersof products based on new or emerging technologies.  Many of our competitors operate their own fabrication facilitiesand have longer operating histories and presence in key markets, greater namerecognition, access to larger customer bases and significantly greaterfinancial, sales and marketing, manufacturing, distribution, technical andother resources than us.  As a result,such competitors may be able to adapt more quickly to new or emerging technologiesand changes in customer requirements or devote greater resources to thepromotion and sale of their products than us. Current and potential competitors have established or may establishfinancial or strategic relationships among themselves or with existing orpotential customers, resellers or other third parties.  Accordingly, it is possible that newcompetitors or alliances among competitors could emerge and rapidly acquiresignificant market share.  In addition,existing or new competitors may in the future develop technologies that moreeffectively address the transmission of digital information through existinganalog infrastructures at a lower cost or develop new technologies that mayrender our technology obsolete.  Therecan be no assurance that we will be able to compete successfully in the futureagainst our existing or potential competitors, or that our business will not beharmed by increased competition.

 

**Ourproducts are complex and may have errors and defects that are detected onlyafter deployment in customers’ products, which may harm our business.**

 

Products such as those that weoffer may contain errors and defects when first introduced or as new versionsare released.  We have in the pastexperienced such errors and defects, in particular in the development stage ofa new product.  Delivery of productswith production defects or reliability, quality or compatibility problems couldsignificantly delay or hinder market acceptance of such products, which coulddamage our reputation and seriously harm our ability to retain our existingcustomers and to attract new customers. Moreover, such errors and defects could cause problems, interruptions,delays or a cessation of sales to our customers.  Alleviating such problems may require substantial redesign,manufacturing and testing which would result in significant expenditures ofcapital and resources.  Despite testingconducted by us, our suppliers and our customers, we cannot be sure that errorsand defects will not be found in new products after commencement of commercialproduction.  Such errors and defectscould result in additional development costs, loss of, or delays in, marketacceptance, diversion of technical and other resources from our other developmentefforts, product repair or replacement costs, claims by our customers or othersagainst us or the loss of credibility with our current and prospectivecustomers.  Any such event could resultin the delay or loss of market acceptance of our products and would likely harmour business.

 

**Downturnsin the highly cyclical semiconductor industry and rapid technological changecould result in substantial period-to-period fluctuations in wafer supply,pricing and average selling prices, which make it difficult to predict ourfuture performance.**

 

We provide semiconductordevices to the audio, personal computer and communications markets.  The semiconductor industry is highlycyclical and subject to rapid technological change and has been subject tosignificant economic downturns at various times, characterized by diminishedproduct demand, accelerated erosion of average selling prices and productionovercapacity.  The semiconductorindustry also periodically experiences increased demand and production capacityconstraints.  As a result, we have experiencedand may experience in the future substantial period-to-period fluctuations inour results of operations due to general semiconductor industry conditions,overall economic conditions or other factors, many of which are outside ourcontrol.  Due to these risks, you shouldnot rely on period-to-period comparisons to predict our future performance.

 

28

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**Risks Related to Our Intellectual Property**

 

**Ourintellectual property and proprietary rights may be insufficient to protect ourcompetitive position**.

 

Our business depends, in part,on our ability to protect our intellectual property.  We rely primarily on patent, copyright, trademark and tradesecret laws to protect our proprietary technologies.  We cannot be sure that such measures will provide meaningfulprotection for our proprietary technologies and processes. As of December 31,2002, we have 20 issued United States patents, and 21 additional United Statespatent applications which are pending. In addition, we have 13 internationalpatents issued and an additional 63 international patents pending. We cannot besure that any patent will issue as a result of these applications or futureapplications or, if issued, that any claims allowed will be sufficient toprotect our technology.  In addition, wecannot be sure that any existing or future patents will not be challenged,invalidated or circumvented, or that any right granted thereunder would provideus meaningful protection.  The failureof any patents to provide protection to our technology would make it easier forour competitors to offer similar products. In connection with our participation in the development of variousindustry standards, we may be required to agree to license certain of ourpatents to other parties, including our competitors, that develop productsbased upon the adopted standards.

 

We also generally enter intoconfidentiality agreements with our employees and strategic partners, andgenerally control access to and distribution of our documentation and otherproprietary information.  Despite theseprecautions, it may be possible for a third party to copy or otherwise obtainand use our products, services or technology without authorization, developsimilar technology independently or design around our patents.  In addition, effective copyright, trademarkand trade secret protection may be unavailable or limited in certain foreigncountries.  Some of our customers haveentered into agreements with us pursuant to which such customers have the rightto use our proprietary technology in the event we default in our contractualobligations, including product supply obligations, and fail to cure the defaultwithin a specified period of time.

 

**Wemay be subject to intellectual property rights disputes that could divertmanagement’s attention and could be costly.**

 

The semiconductor industry ischaracterized by vigorous protection and pursuit of intellectual propertyrights.  From time to time, we mayreceive in the future notices of claims of infringement, misappropriation ormisuse of other parties’ proprietary rights. We cannot be sure that we will prevail in these actions, or that otheractions alleging infringement by us of third-party patents, misappropriation ormisuse by us of third-party trade secrets or the invalidity of one or morepatents held by us will not be asserted or prosecuted against us, or that anyassertions of infringement, misappropriation or misuse or prosecutions seekingto establish the invalidity of our patents will not seriously harm ourbusiness.  For example, in a patent ortrade secret action, an injunction could be issued against us requiring that wewithdraw particular products from the market or necessitating that specific productsoffered for sale or under development be redesigned.  We have also entered into certain indemnification obligations infavor of our customers and strategic partners that could be triggered upon anallegation or finding of our infringement, misappropriation or misuse of otherparties’ proprietary rights. Irrespective of the validity or successful assertion of such claims, wewould likely incur significant costs and diversion of our management andpersonnel resources with respect to the defense of such claims, which couldalso seriously harm our business.  Ifany claims or actions are asserted against us, we may seek to obtain a licenseunder a third party’s intellectual property rights.  We cannot be sure that under such circumstances a license wouldbe available on commercially reasonable terms, if at all.  Moreover, we often incorporate theintellectual property of our strategic customers into our designs, and we havecertain obligations with respect to the non-use and non-disclosure of suchintellectual property.

 

We cannot be sure that thesteps taken by us to prevent our, or our customers’, misappropriation orinfringement of intellectual property will be successful.

 

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

 

The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk of loss. Some of the securities that we mayinvest in the future may be subject to market risk for changes in interestrates. To mitigate this risk, we plan to maintain a portfolio of cashequivalents and short term investments in a variety of securities, which mayinclude commercial paper, money market funds, government and non-governmentdebt securities. Currently, we are exposed to minimal market risks. We managethe sensitivity of our results of operations to these risks by maintaining aconservative portfolio, which is comprised solely of highly-rated, short-terminvestments. We do not hold or issue derivatives, derivative commodityinstruments or other financial instruments for trading purposes.

 

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**ITEM 8. CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS**

 
| Report of Independent Accountants                               |
|-----------------------------------------------------------------|
| Consolidated Balance Sheets                                     |
| Consolidated Statements of Operations                           |
| Consolidated Statements of Stockholders’ Equity  (Deficit) |
| Consolidated Statements of Cash Flows                           |
| Notes to Consolidated Financial Statements                      |

 

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**REPORTOF INDEPENDENT ACCOUNTANTS**

 

To the Board of Directors and Stockholders of

Tripath Technology Inc.

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of operations, of stockholders’ equity(deficit) and of cash flows present fairly, in all material respects, thefinancial position of Tripath Technology Inc. and its subsidiary at December31, 2002 and 2001, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2002 in conformitywith accounting principles generally accepted in the United States of America.These financial statements are the responsibility of the Company’s management;our responsibility is to express an opinion on these financial statements basedon our audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

The accompanying financialstatements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 1 to the financial statements, the Companyhas suffered recurring losses from operations and has a net stockholders’deficit that raise substantial doubt about its ability to continue as a goingconcern. Management's plans in regard to these matters are also described inNote 1. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

PricewaterhouseCoopers LLP

San Jose, California

January 30, 2003

 

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**TRIPATH TECHNOLOGYINC.**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands, exceptshare data)**

** **
|                                                                                                                                                                  |   | **December 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                                                                  |   | **2002**         | ** ** | **2001** | ** ** |
| **ASSETS**                                                                                                                                                            |   |             |       |   |   |
| Current  assets:                                                                                                                                                      |   |             |       |   |   |
| Cash and  cash equivalents                                                                                                                                            |   | $                | 10,112     |   | $ | 3,997 |   |
| Short-term  investments                                                                                                                                               |   | —           |       | 1,100 |   |
| Restricted  cash                                                                                                                                                      |   | 486              |       | — |   |
| Accounts  receivable, net of allowances for doubtful accounts of $345 and $267 at  December 31, 2002 and 2001, respectively                                           |   | 1,471            |       | 2,521 |   |
| Inventories                                                                                                                                                           |   | 5,252            |       | 10,958 |   |
| Prepaid  expenses and other current assets                                                                                                                            |   | 706              |       | 829 |   |
| Total  current assets                                                                                                                                                 |   | 18,027           |       | 19,405 |   |
| Property and  equipment, net                                                                                                                                          |   | 2,474            |       | 2,381 |   |
| Other assets                                                                                                                                                          |   | 184              |       | 374 |   |
| Total assets                                                                                                                                                          |   | $                | 20,685     |   | $ | 22,160 |   |
|                                                                                                                                                                  |   |             |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                         |   |             |       |   |   |
| Current  liabilities:                                                                                                                                                 |   |             |       |   |   |
| Accounts  payable                                                                                                                                                     |   | $                | 2,395      |   | $ | 4,352 |   |
| Current  portion of capital lease obligations                                                                                                                         |   | 225              |       | 349 |   |
| Accrued  expenses                                                                                                                                                     |   | 1,070            |       | 1,238 |   |
| Deferred  distributor revenue                                                                                                                                         |   | 626              |       | 612 |   |
| Total  current liabilities                                                                                                                                            |   | 4,316            |       | 6,551 |   |
|                                                                                                                                                                  |   |             |       |   |   |
| Accrued rent                                                                                                                                                          |   | 195              |       | — |   |
| Capital  lease obligations                                                                                                                                            |   | 738              |       | 262 |   |
|                                                                                                                                                                  |   | 933              |       | 262 |   |
|                                                                                                                                                                  |   |             |       |   |   |
| Commitments  and contingencies (Note 10)                                                                                                                         |   |             |       |   |   |
|                                                                                                                                                                  |   |             |       |   |   |
| Stockholders’  equity :                                                                                                                                          |   |             |       |   |   |
| Preferred  stock, $0.001 par value,  5,000,000  shares authorized; 0 shares issued and outstanding                                                               |   | —           |       | — |   |
| Common  stock, $0.001 par value, 100,000,000 shares authorized; 41,326,760 and  27,259,154 shares issued and outstanding at December 31, 2002 and 2001,  respectively |   | 41               |       | 27 |   |
| Additional  paid-in capital                                                                                                                                           |   | 187,835          |       | 154,675 |   |
| Deferred  stock-based compensation                                                                                                                                    |   | (91              | )          | (1,272 | ) |
| Accumulated  deficit                                                                                                                                                  |   | (172,349         | )          | (138,083 | ) |
| Total  stockholders’ equity                                                                                                                                      |   | 15,436           |       | 15,347 |   |
| Total  liabilities and stockholders’ equity                                                                                                                      |   | $                | 20,685     |   | $ | 22,160 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**TRIPATH TECHNOLOGYINC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, exceptper share data)**

 
|                                                                   |   | **Year Ended December 31,** |       |
|------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                   |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
| Revenue                                                                |   | $                                | 16,227     |   | $ | 13,541 |   | $ | 9,300 |   |
| Cost of  revenue                                                       |   | 18,494                           |       | 11,948 |   | 11,347 |   |
| Gross profit  (loss)                                                   |   | (2,267                           | )          | 1,593 |   | (2,047 | ) |
| Operating  expenses:                                                   |   |                             |       |   |   |   |   |
| Research and  development                                              |   | 11,650                           |       | 19,913 |   | 26,074 |   |
| Selling,  general and administrative                                   |   | 5,557                            |       | 8,664 |   | 14,772 |   |
| Restructuring  and other charges                                       |   | —                           |       | 684 |   | — |   |
| Total  operating expenses                                              |   | 17,207                           |       | 29,261 |   | 40,846 |   |
| Loss from  operations                                                  |   | (19,474                          | )          | (27,668 | ) | (42,893 | ) |
| Interest and  other income, net                                        |   | 160                              |       | 687 |   | 1,626 |   |
| Net loss                                                               |   | (19,314                          | )          | (26,981 | ) | (41,267 | ) |
| Accretion on  preferred stock                                          |   | (14,952                          | )          | — |   | — |   |
| Net loss  applicable to common stockholders                            |   | $                                | (34,266    | ) | $ | (26,981 | ) | $ | (41,267 | ) |
|                                                                   |   |                             |       |   |   |   |   |
| Basic and  diluted net loss per share                                  |   | $                                | (0.88      | ) | $ | (1.00 | ) | $ | (2.34 | ) |
|                                                                   |   |                             |       |   |   |   |   |
| Number of  shares used to compute basic and diluted net loss per share |   | 38,823                           |       | 27,009 |   | 17,625 |   |
|                                                                   |   |                             |       |   |   |   |   |
| Stock-based  compensation included in:                                 |   |                             |       |   |   |   |   |
| Cost of  revenue                                                       |   | $                                | 23         |   | $ | (95 | ) | $ | 86 |   |
| Research and  development                                              |   | 195                              |       | (133 | ) | 8,072 |   |
| Selling,  general and administrative                                   |   | (502                             | )          | 488 |   | 6,635 |   |
|                                                                   |   | $                                | (284       | ) | $ | 260 |   | $ | 14,793 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**TRIPATH TECHNOLOGYINC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**(in thousands)**

 
|                                                                         |   | **Common** |   | **Additional  Paid-in  Capital** |   | **Stockholder  Notes  Receivable** |   | **Deferred  Stock-based  Compensation** |   | **Accumulated  Deficit** |   | **Total  Stockholders  Equity (Deficit)** |   |
|------------------------------------------------------------------------------|--------|------------|--------|----------------------------------|--------|------------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|
| **Shares**                                                                   |   | **Amount** |
| **Balance at December 31, 1999**                                        |   | 10,899     |   | $                                | 11     |                               | $      | 50,854                                  |   | $                        | (726   | )                                         | $      | (10,566 | ) | $ | (69,835 | ) | $ | (30,262 | ) |
| Issuance of common stock  upon exercise of stock options                     |   | 1,127      |   | 1                                |   | 1,016                              |   | —                                  |   | —                   |   | —                                    |   | 1,017 |   |
| Repurchase of common stock                                                   |   | (12        | )      | —                           |   | (18                                | )      | —                                  |   | —                   |   | —                                    |   | (18 | ) |
| Issuance of common stock  upon exercise of warrants                          |   | 18         |   | —                           |   | 26                                 |   | —                                  |   | —                   |   | —                                    |   | 26 |   |
| Issuance of common stock  from initial public offering                       |   | 5,100      |   | 5                                |   | 45,387                             |   | —                                  |   | —                   |   | —                                    |   | 45,392 |   |
| Issuance of common stock  warrants                                           |   | —     |   | —                           |   | 58                                 |   | —                                  |   | —                   |   | —                                    |   | 58 |   |
| Deferred stock-based  compensation                                           |   | —     |   | —                           |   | 11,596                             |   | —                                  |   | (11,596                  | )      | —                                    |   | — |   |
| Amortization of deferred  stock-based compensation                           |   | —     |   | —                           |   |                               |   | —                                  |   | 14,793                   |   | —                                    |   | 14,793 |   |
| Interest on stockholder  notes receivable                                    |   | —     |   | —                           |   | 12                                 |   | (12                                     | )      | —                   |   | —                                    |   | — |   |
| Forgiveness of stockholder  notes receivable and related interest receivable |   | —     |   | —                           |   | —                             |   | 738                                     |   | —                   |   | —                                    |   | 738 |   |
| Conversion of preferred  stock from initial public offering                  |   | 9,085      |   | 9                                |   | 49,602                             |   | —                                  |   | —                   |   | —                                    |   | 49,611 |   |
| Net loss                                                                     |   | —     |   | —                           |   | —                             |   | —                                  |   | —                   |   | (41,267                                   | )      | (41,267 | ) |
| **Balance at  December 31, 2000**                                       |   | 26,217     |   | 26                               |   | 158,533                            |   | —                                  |   | (7,369                   | )      | (111,102                                  | )      | 40,088 |   |
| Issuance of common stock  upon exercise of stock options                     |   | 865        |   | 1                                |   | 1,270                              |   | —                                  |   | —                   |   | —                                    |   | 1,271 |   |
| Issuance of common stock  upon exercise of warrants                          |   | 90         |   | —                           |   | —                             |   | —                                  |   | —                   |   | —                                    |   | — |   |
| Issuance of common stock  through the ESPP                                   |   | 87         |   | —                           |   | 709                                |   | —                                  |   | —                   |   | —                                    |   | 709 |   |
| Reversal of previously  recognized compensation due to forfeitures           |   | —     |   | —                           |   | (5,837                             | )      | —                                  |   | 1,529                    |   | —                                    |   | (4,308 | ) |
| Amortization of deferred  stock-based compensation                           |   | —     |   | —                           |   | —                             |   | —                                  |   | 4,568                    |   | —                                    |   | 4,568 |   |
| Net loss                                                                     |   | —     |   | —                           |   | —                             |   | —                                  |   | —                   |   | (26,981                                   | )      | (26,981 | ) |
| **Balance at  December 31, 2001**                                       |   | 27,259     |   | 27                               |   | 154,675                            |   | —                                  |   | (1,272                   | )      | (138,083                                  | )      | 15,347 |   |
| Issuance of common stock  upon exercise of stock options                     |   | 4          |   | —                           |   | 6                                  |   | —                                  |   | —                   |   | —                                    |   | 6 |   |
| Issuance of common stock  through the ESPP                                   |   | 65         |   | —                           |   | 90                                 |   | —                                  |   | —                   |   | —                                    |   | 90 |   |
| Reversal of previously  recognized compensation due to forfeitures           |   | —     |   | —                           |   | (1,465                             | )      | —                                  |   | 266                      |   | —                                    |   | (1,199 | ) |
| Amortization of deferred  stock-based compensation                           |   | —     |   | —                           |   |                               |   | —                                  |   | 915                      |   | —                                    |   | 915 |   |
| Issuance of common stock  warrants                                           |   | —     |   | —                           |   | 6,046                              |   | —                                  |   | —                   |   | —                                    |   | 6,046 |   |
| Beneficial conversion  feature on issuance of preferred stock (Note 6)       |   | —     |   | —                           |   | 13,545                             |   | —                                  |   | —                   |   | —                                    |   | 13,545 |   |
| Accretion on preferred  stock                                                |   | —     |   | —                           |   | —                             |   | —                                  |   | —                   |   | (14,952                                   | )      | (14,952 | ) |
| Conversion of preferred  stock to common stock                               |   | 13,999     |   | 14                               |   | 14,938                             |   | —                                  |   | —                   |   | —                                    |   | 14,952 |   |
| Net Loss                                                                     |   | —     |   | —                           |   | —                             |   | —                                  |   | —                   |   | (19,314                                   | )      | (19,314 | ) |
| **Balance at  December 31, 2002**                                       |   | 41,327     |   | $                                | 41     |                               | $      | 187,835                                 |   | $                        | — |                                      | $      | (91 | ) | $ | (172,349 | ) | $ | 15,436 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

35

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**TRIPATH TECHNOLOGYINC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
|                                                                         |   | **Year Ended December 31,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                         |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Cash flows from operating activities:**                                    |   |                             |       |   |   |   |   |
|                                                                         |   |                             |       |   |   |   |   |
| Net loss                                                                     |   | $                                | (19,314    | ) | $ | (26,981 | ) | $ | (41,267 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                             |       |   |   |   |   |
| Depreciation  and amortization                                               |   | 1,396                            |       | 2,086 |   | 1,155 |   |
| Non-cash  restructuring and other charges                                    |   | —                           |       | 520 |   | — |   |
| Loss on  disposal of equipment                                               |   | 3                                |       | 182 |   | — |   |
| Allowance  for doubtful accounts                                             |   | 700                              |       | 117 |   | 120 |   |
| Provision for excess inventory                                               |   | 4,977                            |       | — |   | — |   |
| Stock-based  compensation                                                    |   | (284                             | )          | 260 |   | 14,793 |   |
| Amortization  of warrants                                                    |   | —                           |       | — |   | 58 |   |
| Forgiveness  of stockholder notes receivable                                 |   | —                           |       | — |   | 738 |   |
| Changes in  assets and liabilities:                                          |   |                             |       |   |   |   |   |
| Accounts  receivable                                                         |   | 350                              |       | (372 | ) | (1,972 | ) |
| Inventories                                                                  |   | 729                              |       | (7,638 | ) | (1,019 | ) |
| Prepaid  expenses and other assets                                           |   | 313                              |       | 112 |   | (921 | ) |
| Accounts  payable                                                            |   | (1,957                           | )          | 425 |   | 3,181 |   |
| Accrued  expenses                                                            |   | 27                               |       | (1,052 | ) | 698 |   |
| Deferred  distributor revenue                                                |   | 14                               |       | (194 | ) | (141 | ) |
| Net cash  used in operating activities                                       |   | (13,046                          | )          | (32,535 | ) | (24,577 | ) |
| **Cash flows from investing activities:**                                    |   |                             |       |   |   |   |   |
| Purchases of  short-term investments                                         |   | —                           |       | (15,065 | ) | (25,829 | ) |
| Sales of  short-term investments                                             |   | 1,100                            |       | 37,829 |   | 8,800 |   |
| Restricted  cash                                                             |   | (486                             | )          | — |   | 1,000 |   |
| Purchase of  property and equipment                                          |   | (840                             | )          | (667 | ) | (2,728 | ) |
| Sale of  property and equipment                                              |   | 25                               |       | — |   | — |   |
| Net cash  provided by (used in) investing activities                         |   | (201                             | )          | 22,097 |   | (18,757 | ) |
| **Cash flows from financing activities:**                                    |   |                             |       |   |   |   |   |
| Proceeds  from initial public offering, net of issuance costs                |   | —                           |       | — |   | 45,392 |   |
| Proceeds  from issuance of preferred stock and warrants                      |   | 19,591                           |       | — |   | — |   |
| Proceeds  from issuance of common stock                                      |   | 96                               |       | 1,980 |   | 1,017 |   |
| Repurchase  of common stock                                                  |   | —                           |       | — |   | (18 | ) |
| Issuance of  common stock upon exercise of warrants                          |   | —                           |       | — |   | 26 |   |
| Principal  payments on capital lease obligations                             |   | (325                             | )          | (196 | ) | — |   |
| Net cash  provided by financing activities                                   |   | 19,362                           |       | 1,784 |   | 46,417 |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | 6,115                            |       | (8,654 | ) | 3,083 |   |
| Cash and  cash equivalents at beginning of year                              |   | 3,997                            |       | 12,651 |   | 9,568 |   |
| Cash and  cash equivalents at end of  year                              |   | $                                | 10,112     |   | $ | 3,997 |   | $ | 12,651 |   |
|                                                                         |   |                             |       |   |   |   |   |
| **Supplemental disclosure of cash flow information:**                        |   |                             |       |   |   |   |   |
| Interest                                                                     |   | $                                | 69         |   | $ | 102 |   | $ | — |   |
| **Non-cash investing and financing  activities:**                            |   |                             |       |   |   |   |   |
| Property and  equipment acquired by capital lease                            |   | $                                | 677        |   | $ | 807 |   | $ | — |   |
| Interest on  stockholder notes receivable                                    |   | $                                | —     |   | $ | — |   | $ | 12 |   |
| Forgiveness  of stockholder notes receivable                                 |   | $                                | —     |   | $ | — |   | $ | 738 |   |
| Issuance of  common stock warrants for services                              |   | $                                | —     |   | $ | — |   | $ | 58 |   |
| Conversion  of preferred stock into common stock                             |   | $                                | 14,952     |   | $ | — |   | $ | 49,611 |   |
| Issuance of  common stock warrants                                           |   | $                                | 6,046      |   | $ | — |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

36

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**TRIPATH TECHNOLOGYINC.**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE1—THE COMPANY AND BASIS OF PRESENTATION:**

 

***The Company***

 

Tripath Technology Inc. (the “Company” or“Tripath”) was incorporated in California in July 1995. The Company wasreincorporated in Delaware in July 2000. The Company designs, develops andmarkets integrated circuit devices for the Consumer Electronics,  DSL and Wireless markets.

 

***Basis of Presentation***

 

The consolidated financial statements includethe accounts of Tripath and its wholly owned subsidiary, Tripath TechnologyJapan Ltd.. All significant intercompany accounts and transactions have beeneliminated. Accounts denominated in foreign currency have been remeasured usingthe U.S. dollar as the functional currency.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates, and such differences could affect the results of operations reportedin future periods and such differences could be material.

 

***Liquidity***

 

The Company has incurred substantial losses and has experiencednegative cash flow since inception and has an accumulated deficit of $172.3million at December 31, 2002. To conserve cash, the Company has implementedcost cutting measures and in August 2001, implemented a restructuring program.In addition, on January 24, 2002, the Company completed financing in which itraised $21 million in gross proceeds through a private equity placement and inJuly 2002, the Company entered into a credit agreement with a financialinstitution that provides for a one-year revolving credit facility of up to $10million, subject to certain restrictions in the borrowing base based oneligibility of receivables.

 

The Company’s independent accountants have included an explanatoryparagraph in their audit report on the Company’s consolidated financialstatements for the fiscal year ended December 31, 2002, which indicates thatthe Company has suffered recurring losses from operations and has a netstockholders’ deficit that raise substantial doubt about its ability tocontinue as a going concern. While the Company has incurred losses since itsinception and is expected to incur losses this year at its current operatinglevel, the Company believes that it has sufficient cash on hand and could takeother measures to reduce operating expenses if necessary to operate as a goingconcern for the next twelve months and perhaps beyond.

 

However, the Company may need to raise additional funds to finance itsactivities next year and beyond through public or private equity or debtfinancings, the formation of strategic partnerships or alliances with othercompanies or through bank borrowings with existing or new banks. The Companymay not be able to obtain additional funds on terms that would be favorable toits stockholders and the Company, or at all. Without sufficient capital to fundthe Company’s operations, the Company will no longer be able to continue as agoing concern. The Company’s consolidated financial statements have beenprepared on the basis of a going concern, which contemplates the realization ofassets and the satisfaction of liabilities in the normal course of business.The Company has not made any adjustment to its consolidated financialstatements as a result of the outcome of the uncertainty described above.

 

***Initial Public Offering***

 

On August 1, 2000, the Company completedits initial public offering of 5 million shares of common stock at $10.00 pershare. Net proceeds to the Company as a result of the initial public offering,plus the proceeds relating to the exercise of the underwriters’ over-allotmentoption to purchase 100,000 shares of common stock, were approximately $45.4million.

 

***Foreign CurrencyTranslation***

The U.S. dollar is the functional currencyfor the Company’s Japanese wholly-owned subsidiary. Assets and liabilities thatare not denominated in the functional currency are remeasured into U.S. dollarsand the resulting gains or losses are included in “Interest and other income,net." Such gains or losses have not been material for any periodpresented.

 

37

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**NOTE2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

***Revenue recognition***

 

The Company recognizes revenue from productsales upon shipment to original equipment manufacturers and end users, net ofsales returns and allowances. The Company’s sales to distributors are madeunder arrangements allowing limited rights of return, generally under productwarranty provisions, stock rotation rights and price protection on productsunsold by the distributor. In addition, the distributor may request specialpricing and allowances which may be granted subject to approval by the Company.As a result of these returns rights and potential pricing adjustments, theCompany defers recognition on sales to distributors until products are resoldby the distributor to the end user.

 

***Cash and cash equivalents, short-terminvestments and restricted cash***

 

The Company considers all highly liquid investments with a maturity ofthree months or less from the date of purchase to be cash equivalents. Cash andcash equivalents consist of cash on deposit with banks, money market funds andcommercial paper, bonds and notes, the fair value of which approximates cost.

 

The Company categorizes short-term investments asavailable-for-sale. Accordingly, these investments are carried at fair value.The fair value of such securities approximates cost, and there were no materialunrealized gains or losses as of December 31, 2002 and 2001. Short-terminvestments generally have maturities of less than one year from the date ofpurchase. The following table summarizes the Company’s cash and cashequivalents and short-term investments (in thousands):

 
|                            |   | **December 31,** |       |
|---------------------------------|--------|------------------|------------|
|                            |   | **2002**         | ** ** | **2001** | ** ** |
| Cash and cash equivalents:      |   |             |       |   |   |
| Cash                            |   | $                | 394        |   | $ | 230 |   |
| Money market funds              |   | 9,718            |       | 3,767 |   |
| Commercial paper                |   | —           |       | — |   |
|                            |   | $                | 10,112     |   | $ | 3,997 |   |
|                            |   |             |       |   |   |
| Short-term investments:         |   |             |       |   |   |
| U.S. Government bonds and notes |   | $                | —     |   | $ | 1,100 |   |
| Commercial paper                |   | —           |       | — |   |
|                            |   | $                | —     |   | $ | 1,100 |   |

 

The Company has a credit facility with a financial institution that hascertain restrictions in the borrowing base. The amount by which the aggregateface amount of all outstanding stand-by letters of credit exceeds the borrowingbase, as determined by eligible receivables, represents the amount ofrestricted cash necessary to secure the letters of credit. At December 31,2002, the Company had $486,000 in restricted cash.

 

***Concentration of credit risk and significantcustomers***

 

Financial instruments that potentially subject the Company toconcentrations of credit risk consist primarily of cash, cash equivalents andshort-term investments. Substantially all of the Company’s cash and cashequivalents are invested in highly-liquid money market funds and commercialsecurities with major financial institutions. Short-term investmentsconsist of U.S. government and commercial bonds and notes. The Company sellsits products principally to original equipment manufacturers. The Companyperforms ongoing credit evaluations of its customers and maintains an allowancefor potential credit losses, as considered necessary by management. Creditlosses to date have been consistent with management’s estimates. During theyear ended December 31, 2002, the Company wrote-off bad debts totalingapproximately $700,000. The Company had no significant write-offs or recoveriesduring the years ended December 31, 2001 and 2000.

 

38

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The followingtable summarizes sales to end customers comprising 10% or more of the Company’stotal revenue for the periods indicated :

 
|       |   | **% of Revenue for  the Year  Ended December 31,** |       |
|------------|--------|----------------------------------------------------|------------|
|       |   | **2002**                                           | ** ** | **2001** | ** ** | **2000** | ** ** |
|       |   |                                               |       |   |   |   |   |
| Customer A |   | —                                             |       | 29 | % | 60 | % |
| Customer B |   | —                                             |       | — |   | — |   |
| Customer C |   | —                                             |       | — |   | — |   |
| Customer D |   | —                                             |       | 12 | % | — |   |
| Customer E |   | —                                             |       | 13 | % | — |   |
| Customer F |   | 31                                                 | %          | 25 | % | 24 | % |
| Customer G |   | 19                                                 | %          | — |   | — |   |

 

The Company’saccounts receivable were concentrated with five customers at December 31, 2002representing 17%, 16%, 14%, 14% and 14% of aggregate gross receivables, fivecustomers at December 31, 2001 representing 15%, 15%, 13%, 12% and 12% ofaggregate gross receivables, and two customers at December 31, 2000representing 58% and 33% of aggregate gross receivables.

 

***Fair value of financial instruments***

 

Carrying amounts of certain of the Company’sfinancial instruments, including cash and cash equivalents, short-terminvestments, accounts receivable and accounts payable, approximate their fairvalue due to their relative short maturities and based upon comparable marketinformation available at the respective balance sheet dates. The Company doesnot hold or issue financial instruments for trading purposes.

 

***Inventories***

 

Inventories are stated at the lower of cost or market. This policyrequires the Company to make estimates regarding the market value of theCompany’s inventory, including an assessment of excess or obsolete inventory.The Company determines excess and obsolete inventory based on an estimate ofthe future demand and estimated selling prices for the Company’s productswithin a specified time horizon, generally 12 months. The estimates the Companyuses for expected demand are also used for near-term capacity planning andinventory purchasing and are consistent with the Company’s revenue forecasts.Actual demand and market conditions may be different from those projected bythe Company’s management. If the Company’s unit demand forecast is less thanthe Company’s current inventory levels and purchase commitments, during thespecified time horizon, or if the estimated selling price is less than theCompany’s inventory value, the Company will be required to take additionalexcess inventory charges or write-downs to net realizable value which willdecrease the Company’s gross margin and net operating results in the future.During the quarter ended March 31, 2002, the Company recorded a provision forexcess inventory of approximately $5 million related to excess inventory forthe Company’s TA2022 product as a result of a decrease in forecasted sales forthis product.

 

39

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***Inventory purchase commitments***

 

The Company accrues for estimated losses onnon-cancelable purchase orders. The estimated losses result fromanticipated future sale of products for sales prices less than the estimatedcost to manufacture. Inventory purchase commitment losses accrued at December31, 2002, 2001 and 2000 were $38,000, $190,000 and $821,000, respectively.

 

***Research and development expenses***

 

Research and development costs are charged toexpense as incurred.

 

***Property and equipment***

 

Property and equipment, including leaseholdimprovements, are stated at historical cost, less accumulated depreciation andamortization. Property and equipment under capital leases are stated at thepresent value of minimum lease payments. Amortization of leasehold improvementsis computed using the straight-line method over the shorter of the estimateduseful lives of the assets or the term of the lease. Depreciation is computedusing the straight-line method over the estimated useful lives of the assets asfollows:

 
| Furniture  and fixtures |   | 5 years                                   |   |
|-------------------------|--------|-------------------------------------------|--------|
| Software                |   | Shorter of three years or term of license |   |
| Equipment               |   | 2-5 years                                 |   |

 

Upon disposal, the assets and related accumulateddepreciation and amortization are removed from the Company’s accounts, and theresulting gains or losses are reflected in the statement of operations.

 

Long-lived assets held and used by the Company are reviewed forimpairment whenever events or changes in circumstances indicate that their netbook value may not be recoverable. An impairment loss is recognized if the sumof the expected future cash flows (undiscounted and before interest) from theuse of the assets is less than the net book value of the asset. The amount ofthe impairment loss, if any, will generally be measured as the differencebetween net book value of the assets and their estimated fair values.

 

***Comprehensive income***

 

Statement of Financial Accounting StandardsNo. 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive incomeand its components in a full set of general-purposes financial statements.There was no difference between the Company’s net loss and its totalcomprehensive loss for the years ended December 31, 2002, 2001 and 2000.

 

40

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***Accounting for stock-based compensation***

 

At December 31, 2002, the Company has twostock-based employee compensation plans, which are described more fully in Note7.  The Company accounts for those plansunder the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees,*”*and related Interpretations.  Nostock-based employee compensation cost is reflected in net income for the yearsended December 31, 2002 and 2001, as all options granted under those plans hadan exercise price equal to the market value of the underlying common stock onthe date of grant.  For the year endedDecember 31, 2000 the Company recorded compensation expense totaling $14.8million for options granted with an exercise price lower than the market valueof the underlying common stock on the date of the grant. The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123,“Accounting for Stock-Based Compensation*”,*to stock-based employee compensation.

 
|                                                                                                                                  |   | **Year Ended December 31,** |       |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                                                  |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** |
| Net loss  applicable to common stockholders, as reported                                                                              |   | $                           | (34,266    | ) | $ | (26,981 | ) | $ | (41,267 | ) |
|                                                                                                                                  |   |                        |       |   |   |   |   |
| Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |   | (3,792                      | )          | (8,165 | ) | (14,679 | ) |
| Proforma net  loss applicable to common stockholders                                                                                  |   | $                           | (38,058    | ) | $ | (35,146 | ) | $ | (55,946 | ) |
|                                                                                                                                  |   |                        |       |   |   |   |   |
| As reported                                                                                                                           |   | $                           | (0.88      | ) | $ | (1.00 | ) | $ | (2.34 | ) |
|                                                                                                                                  |   |                        |       |   |   |   |   |
| Pro forma                                                                                                                             |   | $                           | (0.98      | ) | $ | (1.30 | ) | $ | (3.17 | ) |

 

***Segment and geographic information***

 

The Companyhas determined that it has one reportable business segment: the design, licenseand marketing of integrated circuits.

 

The followingis a geographic breakdown of the Company’s sales by shipping destination forthe following periods:

 
|          |   | **Year Ended December 31,** |       |
|---------------|--------|-----------------------------|------------|
|          |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** |
| United States |   | $                           | 566        |   | $ | 872 |   | $ | 644 |   |
| Japan         |   | 3,816                       |       | 6,460 |   | 5,717 |   |
| Singapore     |   | 3,097                       |       | 1,569 |   | 2,489 |   |
| Taiwan        |   | 2,615                       |       | 2,686 |   | — |   |
| China         |   | 3,666                       |       | 273 |   | — |   |
| Rest of world |   | 2,467                       |       | 1,681 |   | 450 |   |
|          |   | $                           | 16,227     |   | $ | 13,541 |   | $ | 9,300 |   |

 

***Reclassifications***

*** ***

Certainamounts reported in previous years have been reclassified to conform to the2002 presentation.

 

41

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**RecentAccounting Pronouncements**

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission ofFAS Nos. 4, 44 and 64, Amendment of FAS 13, and Technical Corrections.”  SFAS 145 rescinds FASB Statement No. 4, “ReportingGains and Losses from Extinguishment of Debt,” and an amendment of thatStatement, FASB Statement No. 64, “Extinguishments of Debt Made to SatisfySinking-Fund Requirements,” as well as FASB Statement No. 44, “Accounting forIntangible Assets of Motor Carriers.” This Statement amends FASB StatementNo.  13, “Accounting for Leases” toeliminate an inconsistency between the required accounting for sale-leasebacktransactions and the required accounting for certain lease modifications thathave economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings or describe their applicability under changed conditions.  The provisions of SFAS 145 will be adoptedduring fiscal year 2003. The Company does not anticipate that adoption of thisstatement will have a material impact on its consolidated financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit orDisposal Activities” (“SFAS 146”). SFAS 146 addresses significant issuesregarding the recognition, measurement and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3, “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146also includes costs related to terminating a contract that is not a capitallease and termination benefits that employees who are involuntarily terminatedreceive under the terms of a one-time benefit arrangement that is not anongoing benefit arrangement or an individual deferred-compensation contract.SFAS 146 will be effective for exit or disposal activities that are initiatedafter December 31, 2002, and early application is encouraged. The provisions ofEITF No. 94-3 shall continue to apply for an exit activity initiated under anexit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS146. The Company does not anticipate that adoption of this statement will havea material impact on its consolidated financial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires thata liability be recorded in the guarantor’s balance sheet upon issuance of aguarantee. In addition, FIN 45 requires disclosures about the guarantees thatan entity has issued, including a reconciliation of changes in the entity’sproduct warranty liabilities.  The initial recognition and initialmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002, irrespective of theguarantor’s fiscal year-end.  The disclosure requirements of FIN 45 areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002.   The Company does not anticipate that adoption of thisstandard will have a material impact on its consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation, Transition and Disclosure- an amendment of FASBStatement No. 123.” SFAS No. 148 provides alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation. SFAS No. 148 also requires that disclosures of the proforma effect of using the fair value method of accounting for stock-basedemployee compensation be displayed more prominently and in a tabular format.Additionally, SFAS No. 148 requires disclosure of the pro forma effect ininterim financial statements. The transition and annual disclosure requirementsof SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periodsending after December 15, 2002.  The Company will provide disclosures tocomply with the requirements of SFAS No. 148.

 

In January 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”(“FIN 46”).  FIN 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46 is effective immediately for all new variable interest entitiescreated or acquired after January 31, 2003. For variable interest entitiescreated or acquired prior to February 1, 2003, the provisions of FIN 46 must beapplied for the first interim or annual period beginning after June 15, 2003.  The Company does not anticipate that adoption of this standard will havea material impact on its consolidated financial statements.

 

42

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# ***Net loss per share***

 

Basic net loss per share is computed by dividing the net loss availableto common stockholders for the period by the weighted average number of commonstock outstanding during the period. Diluted net loss per share is computedbased on the weighted average number of common stock and dilutive potentialcommon stock outstanding. The calculation of diluted net loss per shareexcludes potential common stock if the effect is anti-dilutive. Potentialcommon stock consist of incremental common stock issuable upon the exercise ofstock options, shares issuable upon conversion of convertible preferred stockand common stock issuable upon the exercise of common stock warrants.

 

The following table sets forth thecomputation of basic and diluted net loss per share for the periods presented(in thousands, except per share amounts):

 
|                                       |   | **Year Ended December 31,** |       |
|--------------------------------------------|--------|-----------------------------|------------|
|                                       |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** |
| Numerator:                                 |   |                        |       |   |   |   |   |
|                                       |   |                        |       |   |   |   |   |
| Net loss applicable to common stockholders |   | $                           | (34,266    | ) | $ | (26,981 | ) | $ | (41,267 | ) |
|                                       |   |                        |       |   |   |   |   |
| Denominator:                               |   |                        |       |   |   |   |   |
|                                       |   |                        |       |   |   |   |   |
| Weighted average common stock              |   | 38,823                      |       | 27,009 |   | 17,625 |   |
|                                       |   |                        |       |   |   |   |   |
| Net loss per share:                        |   |                        |       |   |   |   |   |
|                                       |   |                        |       |   |   |   |   |
| Basic and diluted                          |   | $                           | (0.88      | ) | $ | (1.00 | ) | $ | (2.34 | ) |

 

The following table sets forth potentialshares of common stock that are not included in the diluted net loss per sharecalculation above because to do so would be anti-dilutive for the periodspresented (in thousands):

 
|                                            |   | **December 31,** |       |
|-------------------------------------------------|--------|------------------|------------|
|                                            |   | **2002**         | ** ** | **2001** | ** ** | **2000** | ** ** |
| Common stock options                            |   | 10,935           |       | 8,217 |   | 8,115 |   |
| Common stock under Employee Stock Purchase Plan |   | 349              |       | 413 |   | 500 |   |
| Common stock warrants                           |   | 3,329            |       | 25 |   | 127 |   |

 

**NOTE3—RESTRUCTURING AND OTHER CHARGES:**

 

On August 3,2001, the Company announced a restructuring and cost reduction plan whichincluded a workforce reduction and write-off of abandoned assets. As a resultof the restructuring and cost reduction plan, the Company recordedrestructuring and other charges of $684,000 during the quarter ended September30, 2001.

 

Under the restructuringand cost reduction plan, the Company reduced its workforce by approximately 40employees across all functions and mostly located at its former headquartersfacility in Santa Clara, California. The workforce reduction resulted in a$164,000 charge relating primarily to severance and fringe benefits. TheCompany also abandoned assets resulting in a charge of  $520,000.

 

A summary ofthe restructuring and other charges is as follows:

 
|                          |   | **Total charges** |    | **Non-cash charges** |   | **Cash payments** |   |
|-------------------------------|--------|-------------------|---------|----------------------|--------|-------------------|--------|
| Work force reduction          |   | $                 | 164,000 |                 | $      | —            |   | $ | 164,000 |   |
| Write-off of abandoned assets |   | 520,000           |    | 520,000              |   | —            |   |
|                          |   | $                 | 684,000 |                 | $      | 520,000           |   | $ | 164,000 |   |

 

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**NOTE4—BALANCE SHEET COMPONENTS (in thousands):**

 
|                                            |   | **December 31,** |       |
|-------------------------------------------------|--------|------------------|------------|
|                                            |   | **2002**         | ** ** | **2001** | ** ** |
| **Accounts  receivable, net:**                  |   |             |       |   |   |
| Accounts receivable                             |   | $                | 1,816      |   | $ | 2,788 |   |
| Less: allowance for doubtful accounts           |   | (345             | )          | (267 | ) |
|                                            |   | $                | 1,471      |   | $ | 2,521 |   |
|                                            |   |             |       |   |   |
| **Inventories:**                                |   |             |       |   |   |
| Raw materials                                   |   | $                | 1,868      |   | $ | 6,531 |   |
| Work-in-process                                 |   | 551              |       | 273 |   |
| Finished goods                                  |   | 2,409            |       | 3,798 |   |
| Inventory held by distributors                  |   | 424              |       | 356 |   |
|                                            |   | $                | 5,252      |   | $ | 10,958 |   |
|                                            |   |             |       |   |   |
| **Property and  equipment, net:**               |   |             |       |   |   |
| Furniture and fixtures                          |   | $                | 220        |   | $ | 384 |   |
| Software                                        |   | 4,175            |       | 3,372 |   |
| Equipment                                       |   | 3,629            |       | 3,050 |   |
| Leasehold improvements                          |   | 128              |       | 134 |   |
|                                            |   | 8,152            |       | 6,940 |   |
| Less: accumulated depreciation and amortization |   | (5,678           | )          | (4,559 | ) |
|                                            |   | $                | 2,474      |   | $ | 2,381 |   |

 

Property and equipment includes assets undercapital leases and accumulated amortization of assets under capital leases of$1,484,000 and $555,000, respectively, at December 31, 2002 and $807,000 and$293,000, respectively at December 31, 2001.

 

**Accruedexpenses:**
| Accrued  compensation and related benefits |   | $      | 245    |   | $      | 459   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|-------|--------|
| Accrued rent                               |   | — |   | 116    |   |
| Inventory  purchase commitments            |   | 38     |   | 190    |   |
| Other  accrued expenses                    |   | 787    |   | 473    |   |
|                                       |   | $      | 1,070  |   | $      | 1,238 |   |

 

**NOTE 5—LINE OF CREDIT:**

 

OnJuly 12, 2002, the Company entered into a credit agreement with afinancial institution that provides for a one-year revolving credit facility inan amount of up to $10 million, subject to certain restrictions in theborrowing base based on eligibility of receivables. Any advances under thecredit agreement will be secured by the Company’s personal property and willbear interest at the prime rate plus 0.875% per annum. The Company has agreedto provide a security interest in its intellectual property solely, in theevent that a judicial authority holds that this is necessary, to enable thefinancial institution to perfect the financial institution’s security interestin the rights to payment and proceeds from sale of the Company’s personalproperty. The Company has also agreed not to pledge its intellectual propertyto a third party.  The credit agreementcontains certain financial and reporting covenants. Covenants relating tomeeting minimum quarterly revenues, minimum tangible net worth and meeting thedeadline for submission of reporting items were violated during the year endedDecember 31, 2002.  Waivers wereobtained from the financial institution for the covenants that were violated.

 

Thecredit agreement was used to issue stand-by letters of credit totaling$1.7 million to collateralize the Company’s obligations to a third partyfor the purchase of inventory and to provide a security deposit for the leaseof new office space. At December 31, 2002, there was up to$8.3 million available under the credit facility, subject to certainrestrictions in the borrowing base. The amount by which the aggregate faceamount of all outstanding stand-by letters of credit exceeds the borrowingbase, as determined by eligible receivables, represents the amount ofrestricted cash necessary to secure the letters of credit. At December 31,2002, the Company had outstanding stand-by letters of credit of $1.7 million.

 

44

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**NOTE6—COMMON STOCK:**

 

The Company’s Amended and Restated Articles of Incorporation authorizethe Company to issue 100,000,000 shares of common stock. At December 31, 2002and 2001, there were 41,326,760 shares and 27,259,154 shares, respectively, ofcommon stock issued and outstanding.

 

The Company has reserved the following numberof shares of common stock for future issuance (in thousands):

 
|                                                    |   | **December 31,** |       |
|---------------------------------------------------------|--------|------------------|------------|
|                                                    |   | **2002**         | ** ** | **2001** | ** ** | **2000** | ** ** |
| Common stock warrants                                   |   | 3,329            |       | 25 |   | 127 |   |
| Common stock under Employee Stock Purchase Plan         |   | 349              |       | 413 |   | 500 |   |
| Common stock upon exercise of outstanding stock options |   | 10,935           |       | 8,217 |   | 8,115 |   |
|                                                    |   | 14,613           |       | 8,655 |   | 8,742 |   |

 

OnJanuary 24, 2002, the Company completed a financing in which it raised$21 million in gross proceeds through a private placement of non-votingSeries A Preferred Stock and warrants, at $30 per unit to a group ofinvestors, which was convertible into 13,999,000 shares of common stock andwarrants to purchase 3,303,760 shares of common stock. Each share ofSeries A Preferred Stock was convertible into 20 shares of Common Stock(or an effective Common Stock price of $1.50 per share). Investors alsoreceived warrants to purchase up to an additional 20 percent of shares ofSeries A Preferred Stock. The warrants have a term of three years and anexercise price equal to $39.00 per share (or an effective Common Stock exerciseprice of $1.95 per share). If the common stock trades at $5.85 per share orgreater for a period of 20 out of 30 trading days, the Company can require theholders to exercise the warrants.

 

Ata Special Meeting of Stockholders held on March 7, 2002, the stockholdersapproved the issuance and sale of 699,950 shares of Series A Preferred Stockand warrants. As a result, the Preferred Stock and warrants automaticallyconverted into 13,999,000 shares of common stock and warrants to purchase3,303,760 shares of common stock.

 

Asa result of the favorable conversion price of the preferred shares at the dateof issuance, the Company recorded accretion of approximately $15 million(thus increasing the “net loss applicable to common stockholders” for the yearended December 31, 2002) relating to the beneficial conversion featurerepresenting the difference between the accounting conversion price and thefair value of the common stock on the date of the transaction, after valuingthe warrants issued in connection with the financing transaction. The Companyvalued the warrants using the Black-Scholes option pricing model, applying anexpected life of three years, a weighted average risk-free rate of 3.61%,an expected dividend yield of zero percent, a volatility of 130% and a deemedfair value of common stock of $2.35, which was the value of the Company’scommon stock on the date of grant.

 

***Stock Repurchase Program***

 

In August 2002, the Company’s Board of Directors approved a StockRepurchase Program and authorized the repurchase of up to one million shares ofthe Company’s common stock in the open market over the next year. No shareshave been repurchased since the authorization of the Stock Repurchase Program.

 

45

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***Common stock warrants***

 

In August 1997, in connection with aco-operation agreement with Intel Corporation, a shareholder of the Company,the Company issued a fully vested, immediately exercisable and non-forfeitablewarrant to purchase 102,250 shares of common stock at $1.00 per share.  The Company determined the value of thewarrant to be $187,000, based on the Black-Scholes option pricing model, andwas recognized as selling, general and administrative expense during the yearended December 31, 1997. During March, 2001, Intel exercised its warranton a net share basis and the Company issued 90,122 shares of common stock.

 

In March 1998, in connection with the extension of the Company’sfacility lease, and for services provided by consultants to the Company, theCompany issued fully vested, immediately exercisable and non-forfeitablewarrants to purchase 7,500 and 20,000 shares of common stock, respectively, at$1.50 per share. The warrants expire in March 2008. In March 2000, theCompany issued 17,500 shares of common stock upon exercise of 17,500 warrants.The warrants include certain registration rights and provide for exercise on a“net share” basis. The Company determined the value of the warrants to be$264,000, based on the Black-Scholes option pricing model. The valueattributable to the warrants for the lease of $79,000 is being recognized asselling, general and administrative expense over the term of the lease, whichcommenced in March 1998. The value attributable to the warrants forconsulting services of $185,000 was recognized as selling, general andadministrative expense during the year ended December 31, 1998.

 

In July 1999, in connection with a marketing agreement, theCompany issued a fully vested, immediately exercisable and non-forfeitablewarrant to purchase 9,000 shares of common stock at $1.50 per share. Thewarrant expires in July 2009. The warrant includes certain registrationrights and provides for exercise on a “net share” basis. The Company determinedthe value of the warrant to be $140,000, based on the Black-Scholes optionpricing model. The related charge was recognized in selling, general andadministrative expenses during the year ended December 31, 1999.

 

In July 2000, in connection withservices provided to the Company, the Company issued a fully vested,immediately exercisable and non forfeitable warrant to purchase 6,000 shares ofcommon stock at $12.00 per share. The warrant expires in July 2010. Thewarrant includes certain registration rights and provides for exercise on a“net share” basis. The Company determined the value of the warrant to be$58,000, based on the Black-Scholes option pricing model. The related chargewas recognized in selling, general and administrative expenses during the yearended December 31, 2000.

 

***Notes receivablefrom shareholder for the exercise of stock options***

 

In January 1997 and March 1998, thePresident of the Company exercised stock options by issuing the Company notestotaling $223,000 and $413,000 (the “Notes”), respectively. The Notes werenon-recourse, and bore fixed interest at 6.01% and 5.51%, respectively,compounded semi-annually. The Notes were accounted for in accordance with EITF95-16 “Accounting for Stock Compensation Arrangements with Employer LoanFeatures Under APB Opinion No. 25.” Due to certain terms of the Notes, theoptions were accounted for as variable options, with compensation costsassociated with shares purchased with non-recourse notes being recorded at eachperiod end. On April 14, 2000, the notes and related interest were forgiven bythe Board of Directors and compensation expense of $738,000 was recorded by theCompany.

 

**NOTE7—EMPLOYEE BENEFIT PLANS:**

 

***Stock Option Plans***

 

In April 2000, the Company adopted the2000 Stock Option Plan (the “2000 Plan”). Upon adoption of the 2000 Plan,shares reserved for issuance under the 1995 Stock Option Plan relating toungranted options were cancelled, and outstanding options under the 1995 Planbecame subject to the 2000 Plan. The 2000 Plan authorizes the Board ofDirectors to grant incentive stock options (“ISOs”) and nonstatutory stockoptions (“NSOs”) to employees, directors and consultants for up to 17,300,000shares of common stock. ISOs may be granted only to employees of the Company(including officers and directors who are also employees). NSOs may be grantedto employees and consultants of the Company. No person will be eligible toreceive more than 200,000 shares in any fiscal year pursuant to awards underthe 2000 Plan other than a new employee of the Company who will be eligible toreceive no more than 700,000 shares in the fiscal year in which such employeecommences employment.

 

46

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Under the 2000 Plan, ISOs and NSOs aregranted at a price that is not to be less than 100% of the fair market value ofthe common stock on the date of grant, as determined by the Board of Directors.Options generally vest at 25% on the first anniversary of the date of grant andvest in equal monthly installments over the remaining 36 months. Optionsgranted to shareholders who own more than 10% of the outstanding stock of theCompany at the time of grant must be issued at prices not less than 110% of theestimated fair value of the stock on the date of grant. Options under the 2000Plan may be granted for periods up to 10 years.

 

The following table summarizes stock optionactivity under the Company’s Stock Option Plans (in thousands, except per sharedata):

 
|                          |   |                               |       | **Options Outstanding** |       |
|-------------------------------|--------|------------------------------------|------------|-------------------------|------------|
|                          |   | **Options  Available  for  Grant** | ** ** | **Shares**              | ** ** | **Weighted Average  Exercise Price   Per Share** | ** ** |
| Balance at December 31, 1999  |   | 683                                |       | 3,767                   |       | $ | 1.22 |   |
| Additional shares reserved    |   | 8,000                              |       | —                  |       | $ | — |   |
| Granted                       |   | (6,374                             | )          | 6,374                   |       | $ | 10.28 |   |
| Canceled                      |   | 899                                |       | (899                    | )          | $ | 6.78 |   |
| Exercised                     |   | —                             |       | (1,127                  | )          | $ | 0.89 |   |
| Balance at December 31, 2000  |   | 3,208                              |       | 8,115                   |       | $ | 7.79 |   |
| Granted                       |   | (5,815                             | )          | 5,815                   |       | $ | 2.84 |   |
| Additional shares reserved    |   | 1,300                              |       | —                  |       | $ | — |   |
| Canceled                      |   | 4,848                              |       | (4,848                  | )          | $ | 7.67 |   |
| Exercised                     |   | —                             |       | (865                    | )          | $ | 1.47 |   |
| Balance at December 31, 2001  |   | 3,541                              |       | 8,217                   |       | $ | 5.03 |   |
| Granted                       |   | (5,582                             | )          | 5,582                   |       | $ | 0.44 |   |
| Additional shares reserved    |   | 2,000                              |       | —                  |       | $ | — |   |
| Canceled                      |   | 2,860                              |       | (2,860                  | )          | $ | 3.33 |   |
| Exercised                     |   | —                             |       | (4                      | )          | $ | 1.50 |   |
| Balance at  December 31, 2002 |   | 2,819                              |       | 10,935                  |       | $ | 3.12 |   |

 

47

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Significant options groups outstanding atDecember 31, 2002 and related weighted average exercise prices and contractuallife information are as follows:

 
|                                   |   | **Options Outstanding** |   | **Options Vested and  Exercisable**               |   |
|----------------------------------------|--------|-------------------------|--------|---------------------------------------------------|--------|
| **Range of Exercise Prices**           |   | **Number**              |   | **Weighted  Average   Contractual  Life (Years)** |   | **Weighted  Average  Exercise Price  Per Share** |   | **Number Vested  and  Exercisable** |   | **Weighted  Average  Exercise Price  Per Share** |   |
| **Outstanding**                        |
| $   0.14-$    0.21 |   | 4,374,625               |   | 9.7                                               |   | $ | 0.15 |   | 1,802,188 |   | $ | 0.14 |   |
| $   0.50-$    1.00 |   | 1,759,499               |   | 8.5                                               |   | $ | 0.54 |   | 1,692,200 |   | $ | 0.54 |   |
| $   1.50-$    2.50 |   | 1,733,387               |   | 8.0                                               |   | $ | 1.61 |   | 1,150,053 |   | $ | 1.58 |   |
| $   4.50-$    8.00 |   | 1,035,149               |   | 8.1                                               |   | $ | 4.93 |   | 1,035,149 |   | $ | 4.93 |   |
| $   8.25-$ 12.00             |   | 1,925,187               |   | 7.3                                               |   | $ | 11.92 |   | 1,925,187 |   | $ | 11.92 |   |
| $ 12.06-$  19.88                       |   | 72,500                  |   | 8.0                                               |   | $ | 14.18 |   | 72,500 |   | $ | 14.18 |   |
| $ 20.00-$  21.75                       |   | 35,000                  |   | 7.7                                               |   | $ | 20.36 |   | 35,000 |   | $ | 20.36 |   |
|                                   |   | 10,935,347              |   |                                              |   |   |   | 7,712,277 |   |   |   |

 

***2000 Employee Stock Purchase Plan***

 

In April 2000 the Company adopted the 2000 Employee Stock PurchasePlan (the “Purchase Plan”) under which 500,000 shares of common stock have beenreserved for issuance. Eligible employees may elect to withhold up to 10% oftheir salary to purchase shares of the Company’s common stock at a price equalto 85% of the market value of the stock at the beginning or ending of a sixmonth offering period, whichever is lower. No more than 2,000 shares may bepurchased by an eligible employee during any calendar year. The Purchase Planwill terminate in 2010. Under the Purchase Plan, 64,606, 86,566 and 0 shareswere issued during the years ended December 31, 2002, 2001 and 2000.

 

The Company did not recognize compensationexpense related to employee purchase rights in 2002, 2001 or 2000.

 

***401(k) Plan***

 

The Company sponsors a 401(k) Plan (the “401(k) Plan”) which providestax-deferred salary deductions for eligible employees. Employees may contributeup to 15% of their annual compensation to the 401(k) Plan, limited to a maximumannual amount as set periodically by the Internal Revenue Service. The 401(k)Plan permits, but does not require, the Company to make matching contributions.To date, no such matching contributions have been made.

 

***Fair valuedisclosures***

 

Pro forma information regarding net loss and net loss per share isrequired by SFAS No. 123, which also requires that the information bedetermined as if the Company had accounted for its employee stock options underthe fair value method. The fair value for these options was estimated using theBlack-Scholes option pricing model.

 

The Black-Scholes option pricing model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable. Option pricing models require the input of highlysubjective assumptions, including the expected stock price volatility.Accordingly, option pricing models may not necessarily provide a reliablesingle measure of the fair value of options.

 

48

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The fair value of options at the date of grant was estimated on thedate of grant based on the method prescribed by SFAS No. 123. The followingtable summarizes the estimated fair value of options and assumptions used inthe SFAS No. 123 calculations for stock option plans:

 
|                      |   | **Year Ended December 31,** |       |
|---------------------------|--------|-----------------------------|------------|
|                      |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** |
| Estimated fair value      |   | $                           | 0.35       |   | $ | 4.77 |   | $ | 8.29 |   |
| Expected lives (in years) |   | 5                           |       | 5 |   | 5 |   |
| Volatility                |   | 110                         | %          | 110 | % | 70 | % |
| Risk-free interest rate   |   | 3.83                        | %          | 4.56 | % | 6.27 | % |
| Dividend yield            |   | —                      |       | — |   | — |   |
|                           |        |                             |            |  |  |  |  |  |  |  |

 

The following table summarizes the estimated fair value of employees’purchase rights and assumptions used in the SFAS No. 123 calculations:

 
|                      |   | **Year Ended December 31,** |       |
|---------------------------|--------|-----------------------------|------------|
|                      |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** |
| Estimated fair value      |   | $                           | 0.38       |   | $ | 0.70 |   | $ | 6.39 |   |
| Expected lives (in years) |   | 0.5                         |       | 0.5 |   | 0.5 |   |
| Volatility                |   | 110                         | %          | 110 | % | 70 | % |
| Risk-free interest rate   |   | 3.83                        | %          | 4.56 | % | 5.36 | % |
| Dividend yield            |   | —                      |       | — |   | — |   |
|                           |        |                             |            |  |  |  |  |  |  |  |

 

**NOTE8—DEFERRED STOCK-BASED COMPENSATION:**

 

***Employee options and restricted stock***

 

In connection with certain employee stock option grants and issuance ofrestricted stock to a former officer made since January 1998, the Companyrecognized deferred stock-based compensation, which is being amortized over thevesting periods of the related options and stock, generally four years, usingan accelerated basis. The fair value per share used to calculate deferred stock-basedcompensation was derived by reference to convertible preferred stock issuanceprices and quoted market prices. Future compensation charges are subject toreduction for any employee who terminates employment prior to such employee’soption vesting date.

 

The following tables sets forth, for each ofthe periods presented, deferred stock-based compensation recorded and theamortization of deferred stock-based compensation (in thousands):

 
|                                                              |   | **Year Ended December 31,** |       |
|-------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                              |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** |
| Deferred stock-based compensation                                 |   | $                           | (1,465     | ) | $ | (5,837 | ) | $ | 10,256 |   |
| Amortization of deferred stock-based compensation                 |   | 915                         |       | 4,568 |   | 13,359 |   |
| Reversal of previously recognized compensation due to forfeitures |   | (1,199                      | )          | (4,308 | ) | — |   |
|                                                                   |        |                             |            |  |  |  |  |  |  |  |

 

49

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***Non-employeeoptions***

 

During theperiod from January 1997 through December 2000, the Company grantedoptions to purchase 657,375 shares of common stock to consultants in exchangefor services at exercise prices ranging from $0.20 to $12.06 per share.

 

The Companydetermined the value of the options granted to consultants based on theBlack-Scholes option pricing model. The fair value of options granted toconsultants was determined using the following assumptions: expected lives of10 years, risk free interest rates ranging from 4.45% to 6.80%, dividend yieldof 0.00% and volatility of 70.00%. The following table summarizes, for each ofthe periods presented, the fair values of the options granted, deferredstock-based compensation recorded and the related amortization recorded (inthousands, except per share data):

 
|                                                                                       |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                       |   | **2002**                     |   | **2001** |   | **2000** |   |
| Weighted average fair value per share of  options granted to consultants during the period |   | —                       |   | — |   | $ | 10.37 |   |
| Deferred stock-based compensation                                                          |   | —                       |   | — |   | 1,340 |   |
| Amortization of deferred stock-based  compensation                                         |   | —                       |   | — |   | 1,434 |   |
|                                                                                            |        |                              |        |  |  |  |  |  |

 

Unamortizeddeferred stock-based compensation at December 31, 2002 and December 31,2001 was 91,000 and $1,272,000, respectively.

 

Stock-basedcompensation attributable to individuals that worked in the following functionsis as follows (in thousands):

 
|                                        |   | **Year Ended  December 31,** |   |
|---------------------------------------------|--------|------------------------------|--------|
|                                        |   | **2002**                     |   | **2001** |   | **2000** |   |
| Manufacturing/operations (cost of revenues) |   | $                            | 23     |   | $ | (95 | ) | $ | 86 |   |
| Research and development                    |   | 195                          |   | (133 | ) | 8,072 |   |
| Selling, general and administrative         |   | (502                         | )      | 488 |   | 6,635 |   |
| Total stock-based compensation              |   | $                            | (284   | ) | $ | 260 |   | $ | 14,793 |   |

 

**NOTE 9—INCOME TAXES:**

 

At December31, 2002, the Company had net operating loss carryforwards for federal andstate income tax purposes of approximately $100,000,000 and $42,000,000respectively, which expire in varying amounts beginning in 2004 through 2020.In addition, the Company has credit carryforwards of approximately $5,000,000for federal and state purposes. The federal and state carryforwards expire invarying amounts through 2020. Under the Tax Reform Act of 1986, the amounts ofand benefits from net operating loss and tax credit carryforwards may beimpaired or limited in certain circumstances. Events which could causelimitations in the amount of net operating loss and tax credit carryforwardsthat the Company may utilize in any one year include, but are not limited to, acumulative ownership change of more than 50%, as defined, over a three-yearperiod.

 

Deferred taxescomprise the following (in thousands):

 
|                                 |   | **December  31,** |   |
|--------------------------------------|--------|-------------------|--------|
|                                 |   | **2002**          |   | **2001** |   |
| Net operating loss carryforwards     |   | $                 | 36,533 |   | $ | 30,146 |   |
| Non-deductible reserves and accruals |   | 2,163             |   | 537 |   |
| Credit carryforwards                 |   | 3,774             |   | 2,691 |   |
| Capitalized research and development |   | 2,089             |   | 985 |   |
| Depreciation                         |   | 185               |   | 22 |   |
| Net deferred tax assets              |   | 44,744            |   | 34,381 |   |
| Less: Valuation allowance            |   | (44,744           | )      | (34,381 | ) |
| Net deferred tax assets              |   | —            |   | — |   |
|                                      |        |                   |        |  |  |  |  |

 

50

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The Companybelieves that, based on number of factors, the available objective evidencecreates sufficient uncertainty regarding the realizability of the deferred taxassets such that a full valuation allowance has been recorded. These factorsinclude the Company’s history of losses, and relatively high expense levels,the fact that the market in which the Company competes is intensely competitiveand characterized by rapidly changing technology, the lack of carrybackcapacity to realize deferred tax assets and the uncertainty regarding marketacceptance of the Company’s products. The Company will continue to assess therealizability of the deferred tax assets based on actual and forecastedoperating results.

 

**NOTE 10—COMMITMENTSAND CONTINGENCIES:**

 

***Lease commitments***

 

The Companyleases office space and equipment under non-cancelable operating leases withvarious expiration dates through 2007. Rent expense for operating leases was asfollows (in thousands):

 
|         |   | **Year Ended  December 31,** |   |
|--------------|--------|------------------------------|--------|
|         |   | **2002**                     |   | **2001** |   | **2000** |   |
| Rent expense |   | $                            | 1,812  |   | $ | 1,583 |   | $ | 1,360 |   |
|              |        |                              |        |  |  |  |  |  |  |  |

 

On July 18, 2002, theCompany entered into a sublease agreement for the lease of new office space.Under the terms of the sublease agreement, commencing September 1, 2002the Company became entitled to free rent until June 30, 2003. Subsequently,the Company will make monthly payments ranging from $0.65 persquare foot to $1.35 per square foot until the sublease expires onMarch 31, 2007. As a result, the Company had $195,000 of accrued rent atDecember 31, 2002.The Company’s lease for the old office space expired onNovember 30, 2002.

 

OnSeptember 26, 2002, the Company renegotiated its existing capital leasefor research and development related software to extend the term and defer aportion of the payments beyond the term of the original lease. The remainingvalues of the asset and obligation of the original lease prior to therenegotiation were $328,000 and $349,000 respectively. The value of the assetand obligation recorded under the new lease as of December 31, 2002 is$1,005,000 and $1,026,000 respectively.

 

Future minimum lease paymentsunder non-cancelable operating leases and the capital lease are asfollows (in thousands):

 
| **Year Ending December 31,**                        |   | **Operating  Leases** |   | **Capital  Lease** |   |
|-----------------------------------------------------|--------|-----------------------|--------|--------------------|--------|
| 2003                                                |   | $                     | 422    |               | $      | 299 |   |
| 2004                                                |   | 933                   |   | 406                |   |
| 2005                                                |   | 1,083                 |   | 408                |   |
| 2006                                                |   | 1,046                 |   | —             |   |
| 2007                                                |   | 270                   |   | —             |   |
| Total minimum lease payments                        |   | $                     | 3,754  |               | 1,113  |   |
| Less: amount representing interest                  |   |                  |   | (150               | )      |
| Present value of minimum lease payments             |   |                  |   | 963                |   |
| Less: current  portion of capital lease obligations |   |                  |   | (225               | )      |
| Long-term capital lease obligations                 |   |                  |   | $                  | 738    |   |

 

***Contingencies***

 

From time totime, in the normal course of business, various claims are made against theCompany. In the opinion of the Company’s management, there are no pendingclaims, the outcome of which is expected to result in a material adverse effecton the financial position or results of operations of the Company.

 

51

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**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**PART III**

 

**ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT**

 

Theinformation required by this Item regarding our directors is incorporated byreference from “Election of Directors—Directors and Nominees” in our ProxyStatement for our 2003 Annual Meeting of Stockholders.  The information required by this Itemconcerning our executive officers is contained in the section entitled“Executive Officers of the Registrant” in Part I of this Form 10-K.

** **

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”) requiresthe Company’s executive officers and directors and persons who own more thanten percent  of a registered class ofthe Company’s equity securities to file reports of ownership and changes inownership with the Securities and Exchange Commission (the “Commission”) andthe National Association of Securities Dealers, Inc. Executive officers,directors and greater than ten percent stockholders are required by Commission regulation to furnish theCompany with copies of all Section 16(a) forms they file. The Company believesthat all Executive Officers and Directors of the Company complied with allapplicable filing requirements during the fiscal year ended December 31, 2002,except that Form 4s which were related to a single stock option grant made bythe Company in October 2002 to each of A. K. Acharya, Y. S. Fu, Andy Jasuja,Naresh Sharma and Adya Tripathi were not filed on a timely basis. All such Form4s, have since been filed with the Commission.

 

**ITEM11.  EXECUTIVE COMPENSATION**

 

Theinformation required by this Item is incorporated by reference from ourdefinitive Proxy Statement referred to in Item 10 above under the heading“Executive Compensation and Other Matters.”

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS**

** **

Theinformation required by this Item is incorporated by reference from ourdefinitive Proxy Statement referred to in Item 10 above under the headings “SecuritiesAuthorized for Issuance Under Equity Compensation Plans” and “SecurityOwnership of Certain Beneficial Owners and Management.”

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Theinformation required by this Item is incorporated by reference from ourdefinitive Proxy Statement referred to in Item 10 above under the heading“Certain Relationships and Related Transactions.”

 

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**ITEM14.  CONTROLS AND PROCEDURES**

 

***Evaluationof disclosure controls and procedures.***  Based on their evaluation as of a datewithin 90 days of the filing date of this Annual Report on Form 10-K, theCompany’s principal executive officer and principal financial officer haveconcluded that the Company’s disclosure controls and procedures, as defined inRules 13a-14(c) and 15d-14(c) under the Exchange Act, are effective to ensurethat information required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Commission’s rules and forms.

 

***Changes in internalcontrols.*** There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation, nor were there anysignificant deficiencies or material weaknesses in the Company’s internalcontrols. Accordingly, no corrective actions were required or undertaken.

 

***Limitations on the effectiveness ofcontrols.***Thecompany’s management, including the chief executive officer and chief financialofficer, does not expect that our disclosure controls and procedures or ourinternal controls will prevent all error and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, control may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

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**PART IV**

 

**ITEM 15****.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULESAND REPORTS ON FORM 8-K**

 
|   | (a)    | The following documents are filed as part of this Form 10-K:                                                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                        |
|   | (1)    | Financial Statements:                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Report of Independent Accountants                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Consolidated Statements of Operations for  the years ended December 31, 2002, 2001 and 2000                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Consolidated Statements of Stockholders’  Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Consolidated Statements of Cash Flows for the  years ended December 31, 2002, 2001 and 2000                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Notes to Consolidated Financial Statements                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                        |
|   | (2)    | Financial Statement Schedules:                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Financial statement schedules have been omitted since the required  information is not present in amounts sufficient to require submission of the  schedules or because the information required is included in the financial  statements or notes thereto. |
|   |   |                                                                                                                                                                                                                                                        |
|   | (3)    | Exhibits:  The items listed on  the Index to Exhibits on page 58 is incorporated herein by reference.                                                                                                                                                  |

 

b)                                     Reports on Form8-K

 

On November 19, 2002 the Company filed a Current Report on Form 8-Kannouncing the transfer of the listing of its common stock from the NasdaqNational Market to The Nasdaq SmallCap Market.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                  | **TRIPATH TECHNOLOGY  INC.** |
|-----------------------|------------------------------|
|                  | By:                          | /s/  DR. ADYA S. TRIPATHI |
|                  |                         | Dr. Adya S. Tripathi*President  and Chief Executive Officer,  Chairman of the Board* |
| Dated: March 28, 2003 |                         |   |

 

 

**POWER OF ATTORNEY**

 

KNOW ALLPERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Dr. Adya S. Tripathi and David P. Eichler, andeach of them, his true and lawful attorneys-in-fact, each with full power ofsubstitution, for him in any and all capacities, to sign any amendments to thisreport on Form 10-K and to file the same, with exhibits thereto and otherdocuments in connection therewith, with the Securities and Exchange Commission,hereby ratifying and confirming all that each of said attorneys-in-fact ortheir substitute or substitutes may do or cause to be done by virtue hereof.

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**                  |   | **Title**                                                            |   | **Date**       |
|--------------------------------|--------|----------------------------------------------------------------------|--------|----------------|
|                           |   |                                                                 |   |           |
| /s/  DR. ADYA S. TRIPATHI |   | President and Chief Executive Officer (Principal Executive Officer)  |   | March 28, 2003 |
| Dr. Adya S. Tripathi           |   |                                                                 |   |           |
|                           |   |                                                                 |   |           |
| /s/  DAVID P. EICHLER     |   | Chief Financial Officer (Principal Financial and Accounting Officer) |   | March 28, 2003 |
| David P. Eichler               |   | Vice President of Finance                                            |   |           |
|                           |   |                                                                 |   |           |
| /s/  A.K. ACHARYA         |   | Director                                                             |   | March 28, 2003 |
| A.K. Acharya                   |   |                                                                 |   |           |
|                           |   |                                                                 |   |           |
| /s/  Y.S. FU              |   | Director                                                             |   | March 28, 2003 |
| Y.S. Fu                        |   |                                                                 |   |           |
|                           |   |                                                                 |   |           |
| /s/  ANDY JASUJA          |   | Director                                                             |   | March 28, 2003 |
| Andy Jasuja                    |   |                                                                 |   |           |

 

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**CERTIFICATIONS**

 

I, Dr. Adya S. Tripathi,certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Tripath Technology Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)             Designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)            Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)             Presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)             All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)            Any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: March 28, 2003

 

 
| /s/ Dr. Adya  S. Tripathi |   |
|---------------------------|--------|
| Dr. Adya S.  Tripathi     |
| Chief  Executive Officer  |

 

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**CERTIFICATIONS**

 

I, David P. Eichler, certifythat:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Tripath Technology Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)             Designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)            Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)             Presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)             All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)            Any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: March 28, 2003

 

 
| /s/ David P.  Eichler   |   |
|-------------------------|--------|
| David P.  Eichler       |
| Chief Financial Officer |

 

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**Exhibit Index**

 
| **Number** |   | **Description  of Document**                                                                                                                                              |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*       |   | Restated Certificate of Incorporation of Tripath Technology Inc.                                                                                                          |
| 3.2*       |   | Bylaws of Tripath Technology Inc.                                                                                                                                         |
| 3.3**      |   | Certificate of Designation of Preferences and Rights of Series A  Preferred Stock                                                                                         |
| 4.1*       |   | Specimen common stock certificate                                                                                                                                         |
| 4.2*       |   | Second Amended and Restated Shareholder Rights Agreement, dated  September 15, 1998, between Tripath Technology Inc. and Certain Stockholders  of Tripath Technology Inc. |
| 4.3**      |   | Registration Rights Agreement, dated January 22, 2002, by and among  Tripath Technology Inc. and Certain Stockholders of Tripath Technology Inc.                          |
| 4.4**      |   | Form of Certificate for Warrants to Purchase Tripath Technology  Inc.’s Series A Preferred Stock, dated January 24, 2002                                             |
| 10.1*      |   | Form of Indemnification Agreement, between Tripath Technology Inc.  and each of its directors and officers                                                                |
| 10.2*      |   | License and Supply Agreement, dated July 9, 1999, between  STMicroelectronics, Inc. and Tripath Technology Inc.                                                           |
| 10.3*      |   | Lease Agreement, by and between Tripath Technology Inc. and  Peery/Arrillaga dated October 16, 1997                                                                       |
| 10.4*      |   | 2000 Stock Plan and form of option agreement                                                                                                                              |
| 10.5*      |   | 2000 Employee Stock Purchase Plan                                                                                                                                         |
| 10.6**     |   | Securities Purchase Agreement, dated January 22, 2002, by and among  Tripath Technology Inc. and certain purchasers of its capital stock                                  |
| 10.7***    |   | Loan and Security Agreement, dated July 12, 2002, between Comerica  Bank-California and Tripath Technology Inc.                                                           |
| 10.8***    |   | First Amendment to Loan and Security Agreement, dated July 12, 2002,  between Comerica Bank-California and Tripath Technology Inc.                                        |
| 10.9       |   | Form of Second Amendment to Loan and Security Agreement, dated July  12, 2002, between Comerica Bank-California and Tripath Technology Inc.                               |
| 10.10***   |   | Intellectual Property Agreement, dated July 12, 2002, between  Comerica Bank-California and Tripath Technology Inc.                                                       |
| 10.11***   |   | Sublease Agreement, dated July 18, 2002, between Nortel Networks,  Inc. and Tripath Technology Inc.                                                                       |
| 23.1       |   | Consent of PricewaterhouseCoopers LLP, Independent Accountants                                                                                                            |
| 24.1       |   | Power of Attorney (See Form 10-K Signature Page)                                                                                                                          |
| 99.1****   |   | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                  |

 

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*                                         Incorporatedby reference to Tripath Technology Inc.’s registration statement on Form S-1,registration number 333-35028, as amended.

**                                  Incorporated byreference to Tripath Technology Inc.’s Form 8-K filed on January 30, 2002.

***                           Incorporated by reference toTripath Technology Inc.’s Form 10-Q for the quarter ended September 30, 2002.

****                    Thiscertification accompanies this Annual Report on Form 10-K and shall not bedeemed “filed” by Tripath Technology Inc. for purposes of Section 18 of theSecurities Exchange Act of 1934, as amended.

 

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