**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM 10-K/A****Amendment No. 2**

 

**FOR ANNUAL AND TRANSITIO****NAL REPORTSPURSUANT TO SECTIONS 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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**(Mark One)**
| 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 ofregistrant as specified in its charter)

 
| **Delaware** (State or other jurisdiction of incorporation or organization) |   | **77-0407364** (I.R.S. EmployerIdentification  Number) |
|----------------------------------------------------------------------------------|--------|-------------------------------------------------------------|

 

**2560 OrchardParkway****San Jose, CA 95131****(408) 750-3000**(Address,including zip code, or registrant’s principal executive officesand telephonenumber, including area code)

 

 **3900 Freedom CircleSanta Clara, California 95054**(Former name, former address and former fiscal year if changed since lastreport)

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

Securitiesregistered 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes ý   No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be contained, to the best of Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

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

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the Registrant’s most recently completed second fiscal quarter: $43,393,098.

There were 41,360,894shares of Tripath Technology Inc. common stock outstanding on April 18, 2003.

 

 

 

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**EXPLANATORY NOTE**

                    This amended filing to the Annual Report on Form 10-K filed by Tripath Technology Inc. with the Securities and Exchange Commission on March 28, 2003, as amended on April 2, 2003, includes Part III information and a revised opinion of the Company’s former independent accountants, PricewaterhouseCoopers LLP.  In the previously included opinion, PricewaterhouseCoopers LLP stated that the Company’s recurring losses from operations and net stockholders’ deficit raise substantial doubt about the Company’s ability to continue as a going concern.  In the revised opinion, PricewaterhouseCoopers LLP states that the Company's recurring losses from operations and accumulated deficit raise substantial doubt about the Company's ability to continue as a going concern.

                In addition, thisamended filing to the Annual Report includes revised disclosure of the numberof shares of the Company’s common stock issuable upon exercise of outstandingstock options, which had been previously overstated by 3.4 million shares.

 

                Item 7,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” Item 8, “Consolidated Financial Statements and SupplementaryData,” and Item 14, "Controls and Procedures,'' are amended and restatedin their entirety as set forth herein.

 

 

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**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

*The following discussion andanalysis contains 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 such as “believe,” “anticipate,” “expect,”“intend,” “plan,” “will,” “may,” “should,” “estimate,” “predict,” “potential,”“continue” or the negative of such terms or other similar expressions, identifyforward-looking statements.  Our actualresults and the timing of events may differ significantly from the resultsdiscussed in the forward-looking statements. Factors that might cause such adifference include, but are not limited to, those discussed in “Risk Factors”as well as those discussed elsewhere in this Annual Report on Form 10-K.  You should read the following discussion andanalysis in conjunction with the “Selected Consolidated Financial Data” and thefinancial statements and notes thereto included in this Annual Report on Form10-K.  Historical operating results arenot necessarily indicative of results that may occur in future periods.  The Company undertakes no obligation to update any forward-looking statement toreflect events after the date of this report.*

 

**Overview**

 

We design and sell amplifiers based on our proprietaryDigital Power Processing technology. We currently supply amplifiers for audioelectronics applications, and  havebegun offering amplifiers for DSL applications. We were incorporated inJuly 1995, and we began shipping products in the first quarter of 1998.Accordingly, we have limited historical financial information and operatinghistory for use in evaluating our Company and our future prospects. We incurrednet losses (before charge for beneficial conversion of $14.9 million) ofapproximately $19.3 million in 2002, $27.0 million in 2001 and$41.3 million in 2000. We expect to continue to incur net losses in 2003,and possibly beyond.

 

We sell our products to original equipmentmanufacturers and distributors. We recognize revenue from product sales uponshipment to original equipment manufacturers and end users, net of salesreturns and allowances. Our sales to distributors are made under arrangementsallowing for returns or credits under certain circumstances and we deferrecognition on sales to distributors until products are resold by thedistributor to the end user. All of our sales are made in  United States (“U.S.”) dollars.

 

As a “fabless” semiconductor company, we contract withthird party semiconductor fabricators to manufacture the silicon wafers basedon our integrated circuit (“IC”) designs. Each wafer contains numerous die, which are cut from the wafer to createa chip for an IC.  We also contract withthird party assembly and test houses to assemble and package our die andconduct final product testing.

 

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Cost of revenue includes the cost of purchasingfinished silicon wafers and die manufactured by independent foundries, costsassociated with assembly and final product testing, as well as salaries andoverhead costs associated with employees engaged in activities related tomanufacturing. Research and development expense consists primarily of salariesand related overhead costs associated with employees engaged in research,design and development activities, as well as the cost of wafers and othermaterials and related services used in the development process. Selling,general and administrative expense consists primarily of employee compensationand related overhead expenses and advertising and marketing expenses.

 

Stock-based compensation expense relates both tostock-based employee and consultant compensation arrangements. Employee-relatedstock-based compensation expense is based on the difference between theestimated fair value of our common stock on the date of grant and the exerciseprice of options to purchase that stock and is being recognized on an acceleratedbasis over the vesting periods of the related options, usually four years, orin the case of fully vested options, in the period of grant. Consultantstock-based compensation expense is based on the Black-Scholes option pricingmodel. Future compensation charges will be reduced if any employee orconsultant terminates employment or consultation prior to the expiration of theoption vesting period.

 

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**CriticalAccounting Policies**

 

*Use of Estimates:* Management’s discussion and analysis of financial condition and resultsof operations is based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an ongoing basis, we evaluate ourestimates, including those related to product returns, warranty obligations,bad debts, inventories, accruals, stock options, warrants, income taxes(including the valuation allowance for deferred taxes) and restructuring costs.We base our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from the other sources. Actualresults 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.

 

*RevenueRecognition:* We recognize revenue from product sales uponshipment to original equipment manufacturers and end users, net of reserves forestimated returns and allowances, provided that persuasive evidence of anarrangement exists, the price is fixed, title has transferred, collectibilityof resulting receivables is reasonably assured, there are no acceptancerequirements and there are no remaining significant obligations. Sales todistributors are made under arrangements allowing limited rights of return,generally under product warranty provisions, stock rotation rights and priceprotection on products unsold by the distributor. In addition, the distributormay request special pricing and allowances which may be granted subject toapproval by us. As a result of these returns rights and potential pricingadjustments, we defer recognition on sales to distributors until products areresold by the distributor 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.

 

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**Results of Operations**

 

**Years Ended December 31, 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 five end customers accounted for 67% ofrevenue in 2002 versus 82% and 90% in 2001 and 2000 respectively.  Our primary customers in 2002 were AppleComputer Inc. and Apex Digital Inc., representing 31% and 19% of revenue,respectively.  In 2001 our primarycustomers were Sony Corporation and Apple Computer Inc., representing 29% and25% of revenue, respectively.  SonyCorporation and Apple Computer Inc. were also our top two customers in 2000,representing 60% and 24% of revenue, respectively.

 

In 2001 we were able to offset the decline in revenuefrom Sony with increased shipments related to design wins with existing and newcustomers. The percentage of revenue to end customers located outside of theUnited States was 61% in 2002, 72% in 2001 and 71% in 2000.

 

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*GrossProfit (Loss).* Gross loss for 2002 was $2.3 million(including stock-based compensation expense of $23,000) compared to a grossprofit of $1.6 million (including stock-based compensation benefit of$95,000) for 2001 and a gross loss of $2.0 million (including stock-basedcompensation expense of $86,000) for 2000. The gross loss for 2002 wasprimarily due to a reserve of $5.0 million for excess inventory during the firstquarter of 2002. The inventory charge, related to excess inventory for ourTA2022 product, was based on a decline in forecasted sales for this product.Excluding the inventory charge, gross profit for the year ended December 31,2002 was $2.7 million. The increase in gross profit was due to increasedrevenues and ongoing product cost reduction efforts. The increase in grossprofit in 2001 compared with the gross loss in 2000 was due to better productmix, including increased shipments of higher power/higher margin productsrelated to new design wins, as well as ongoing cost reduction efforts.

 

*Researchand Development.* Research and development (R&D) expenses for 2002 were$11.7 million (including stock-based compensation expense of $195,000), adecrease of $8.2 million or 41% from R&D expenses of $19.9 million(including stock-based compensation benefit of $133,000) in 2001. The decreasein R&D expenses was due to a decrease in personnel costs due to reducedheadcount and a decrease in product development expenses. R&D expenses for2001 decreased $6.2 million or 24% from R&D expenses of $26.1 million(including stock-based compensation expense of $8.1 million) in 2000.Excluding stock-based compensation expense, R&D expenses increased $2.0million from 2000 to 2001, driven by higher headcount related costs, as well ashigher 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.

 

*Restructuringand Other Charges.*On August 3, 2001, we announced arestructuring and cost reduction plan which included a workforce reduction andwrite-off of abandoned assets. As a result of the restructuring and costreduction plan, we recorded restructuring and other charges of $684,000 duringthe quarter ended September 30, 2001. Under the restructuring and costreduction plan, we reduced our workforce by approximately 40 employees acrossall functions and mostly located at our headquarters facility in Santa Clara,California. The workforce reduction resulted in a $164,000 charge 

 

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relating primarily to severance and fringe benefits. We also abandonedassets for a charge of $520,000.

 

A summary of the restructuring and other charges is asfollows:

 
|                           |   | **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 |   |

 

*Interestand Other Income, net.* Interest income for 2002 was $160,000,a decrease of $527,000 or 77% from interest 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 and2001, the decrease resulted from decreases in our average cash equivalents andshort-term investment balances to fund operations, together with lower interestrates.

 

*Accretionon Preferred Stock.*Accretion on Preferred stock for 2002 was$14,952,000 compared to $0 for 2001. The year-over-year increase was due to thefinancing transaction that was completed in January 2002, in which we raised$21 million in gross proceeds through a private placement of non-voting SeriesA Preferred Stock and warrants. The accretion related to the beneficialconversion feature represents the difference between the accounting conversionprice and the fair value of the common stock on the date of the transaction,after valuing the warrants issued in connection with the financing transaction.

 

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*Income Taxes.* We have incurred no income tax expense to date. As of December31, 2002, we had available federal net operating loss carryforwards ofapproximately $100 million and state net operating loss carryforwards ofapproximately $42 million. We also had research and development tax creditcarryforwards of approximately $5 million for federal and state purposes. Thenet operating loss and credit carryforwards will expire at various timesthrough 2020. As of December 31, 2002, we had deferred tax assets ofapproximately $45 million which consisted primarily of net operating losscarryforwards, research and development tax credit carryforwards andnondeductible reserves and accruals. We have recorded no tax benefit in ourfinancial statements for these deferred tax assets. Deferred tax assets will berecognized in future periods as any taxable income is realized and consistentprofits are reported.

 

**Liquidity and Capital Resources**

 

Since our inception, we have financed our operationsthrough the private sale of our equity securities, primarily the sale ofpreferred stock, through our initial public offering on August 1, 2000 andthrough a private placement in January 2002. Net proceeds to us as a result of our initial public offering and ourprivate placement were approximately $45.4 million and $19.9 million,respectively.

 

Net cash used by operating activities decreased to$13.0 million for the year ended December 31, 2002 from $32.5 million for theyear ended December 31, 2001. The decrease was mainly due to a decrease in netloss of $7.7 million, a decrease in inventory purchases of $8.3 million and aprovision for excess inventory of $5.0, million, partially offset by a decreasein accounts payable. Net cash used for operating activities during the yearended December 31, 2000 was $24.6 million, the majority of which wasused to fund operating losses and working capital.

 

Cash used in investing activities was $201,000 for theyear ended December 31, 2002 as compared to cash provided by investingactivities of $22.1 million for the year ended December 31, 2001. The decreasewas due to decrease in sale of short-term investments and an increase inpurchase of property and equipment. In 2000 our investing activities used cashin the amount of $18.8 million for the purchase of short-term investmentsand capital equipment.

 

Cash provided by financing activities increased to$19.4 million for the year ended December 31, 2002 from $1.8 million for theyear ended December 31, 2001. The increase was due to the additional financing,details of which are summarized below. In 2000, our financing activities provided cash in the amount of$46.4 million, the majority of which was derived from our initial publicoffering.

 

On January 24, 2002, we completed a financing in whichwe raised $21 million in gross proceeds through a private placement ofnon-voting Series A Preferred Stock and warrants, at $30 per unit to a group ofinvestors. At a Special Meeting of Stockholders 

 

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held on March 7, 2002, our stockholders approved the issuance and saleof 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.

 

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, subject to certainrestrictions in the borrowing base based on eligibility of receivables. Anyadvances under the credit agreement will be secured by our personal propertyand will bear interest at the prime rate plus 0.875% per annum.  We have agreed to provide a securityinterest in our intellectual property solely, in the event that a judicialauthority holds that this is necessary, to enable the financial institution toperfect the financial institution’s security interest in the rights to paymentand proceeds from sale of our personal property. We have also agreed not topledge our intellectual property to a third party.  The credit agreement contains certain financial and reportingcovenants. Covenants relating to meeting minimum quarterly revenues, minimumtangible net worth and meeting the deadline for submission of reporting itemswere violated during the year ended December 31, 2002.  Waivers were obtained from the financialinstitution for each of the covenants that were violated.

 

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The credit agreement was used to issue stand-by lettersof credit totaling $1.7 million to collateralize our obligations to athird party for the purchase of inventory and to provide a security deposit forthe lease of 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. We believe that we are eligible to borrowup to $1.1 million as of March 15, 2003. 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. Subsequent toDecember 31, 2002, we have reduced the amount of outstanding stand-by lettersof credit by $1.0 million, from $1.7 million to $0.7 million.

 

Our total potential commitments on our operatingleases and inventory purchases as of December 31, 2002, were as follows (inthousands):

 
| **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 our future liquidity and capitalrequirements will fluctuate depending on numerous factors including: marketacceptance and demand for current and future products, the timing of newproduct introductions and enhancements to existing products, the success ofon-going efforts to reduce our manufacturing costs as well as operating expensesand need for working capital for such items as inventory and accountsreceivable.

 

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 ofbusiness.  We have incurred substantiallosses and experienced negative cash flow since inception, and have anaccumulated deficit of $172.3 million at December 31, 2002.  As a result of these circumstances, ourindependent accountants’ report indicates that there is a substantial doubtabout our ability to continue as a going concern.

 

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To conserve cash, we have implemented cost cuttingmeasures, and in August 2001, implemented a restructuring program. In addition,on January 24, 2002, we completed a financing in which we raised $21 million ingross proceeds through a private equity placement.  Moreover, in July 2002, we entered into a credit agreement with afinancial institution that provides for a one-year revolving credit facility ofup to $10 million, subject to certain restrictions in the borrowing base, basedon eligibility of receivables.  At March15, 2003, we believe that we are eligible to borrow up to $1.1 million againstthis credit agreement, of which approximately $0.4 million is still available.

 

If liquidity problems should arise, we, as a lastresort, will take measures to reduce our operating expenses, such as reducingheadcount or canceling research and development projects. However, we may needto raise additional funds to finance our activities next year and beyondthrough public or private equity or debt financings, the formation of strategicpartnerships or alliances with other companies or through bank borrowings withexisting or new banks. We may not be able to obtain additional funds on termsthat would be favorable to us and our stockholders, or at all.

 

We believe, based on our ability to implement theaforementioned measures, if needed, that we will have liquidity sufficient tomeet our operating, working capital and financing needs for the next twelvemonths and perhaps beyond.  We have notmade any adjustment to our consolidated financial statements as a result of theoutcome of the uncertainty described above.

 

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**Recent Accounting Pronouncements**

 

In April 2002, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.145, “Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13, and TechnicalCorrections.”  SFAS 145 rescinds FASBStatement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” andan amendment of that Statement, FASB Statement No. 64, “Extinguishments of DebtMade to Satisfy Sinking-Fund Requirements,” as well as FASB Statement No. 44,“Accounting for Intangible Assets of Motor Carriers.” This Statement amendsFASB Statement No.  13, “Accounting forLeases” to eliminate 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. We do not anticipate that adoption of this statement willhave a material impact on our consolidated financial statements.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addressessignificant issues regarding the recognition, measurement and reporting ofcosts that are associated with exit and disposal activities, includingrestructuring activities that are currently accounted for under EITF No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).” 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 November 2002, the FASB issued FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others (“FIN 45”).” FIN 45requires that a liability be recorded in the guarantor’s balance sheet uponissuance of a guarantee. In addition, FIN 45 requires disclosures about theguarantees that an entity has issued, including a reconciliation of changes inthe entity’s product warranty liabilities.  The initial recognition andinitial measurement provisions of FIN 45 are applicable on a prospective basisto guarantees issued or modified after December 31, 2002, irrespective of theguarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effectivefor financial statements of interim or annual periods ending after December 15,2002. The Company did not have significant warranty expense for the year endedDecember 31, 2002. We do not anticipate 

 

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that adoption of this standard will have a material impact on ourconsolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation, Transition and Disclosure- anamendment of FASB Statement No. 123.” SFASNo. 148 provides alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. SFAS No. 148 also requiresthat disclosures of the pro forma effect of using the fair value method ofaccounting for stock-based employee compensation be displayed more prominentlyand in a tabular format. Additionally, SFAS No. 148 requires disclosure of thepro forma effect in interim financial statements. The transition and annualdisclosure requirements of SFAS No. 148 are effective for fiscal years endedafter December 15, 2002.  The interim disclosure requirements areeffective for interim periods ending after December 15, 2002.  We willprovide disclosures to comply with the requirements of SFAS No. 148.

 

In January 2003, the FASB issued FASB InterpretationNo. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARBNo. 51” (“FIN 46”).  FIN 46 requires certain variable interest entities tobe consolidated by the primary beneficiary of the entity if the equityinvestors in the entity do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. FIN 46 is effective immediately for all new variable interestentities created or acquired after January 31, 2003. For variable interestentities created or acquired prior to February 1, 2003, the provisions of FIN46 must be applied for the first interim or annual period beginning after June15, 2003.   We do not anticipate that adoption of this standard will havea material impact on our consolidated financial statements.

 

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**RiskFactors**

 

Set forth below and elsewhere in this annual report and in the otherdocuments we file with the Securities and Exchange Commission are risks anduncertainties that could cause actual results to differ materially from theresults contemplated by the forward looking statements contained in this annualreport.  Prospective and existinginvestors are strongly urged to carefully consider the various cautionarystatements and risks set forth in this annual report and our other publicfilings.

 

**Risks Relatedto Our Business**

 

**Our limited operating history anddependence on new technologies make it difficult to evaluate our futureproducts.**

 

We were incorporated in July 1995 but did not begin shipping productsuntil 1998. Some of our products have only recently been introduced.Accordingly, we have limited historical financial information and operatinghistory upon which you may evaluate us and our products. Our prospects must beconsidered in the light of the risks, challenges and difficulties frequentlyencountered by companies in their early stage of development, particularlycompanies in intensely competitive and rapidly evolving markets such as thesemiconductor industry. We cannot be sure that we will be successful inaddressing these risks and challenges.

 

**We havea history of losses, expect future losses and may never achieve or sustainprofitability.**

 

As of December 31, 2002, we had an accumulated deficit of $172.3million. We incurred net losses (before charge for beneficial conversionfeature of $14.9 million) of approximately $19.3 million in the year endedDecember 31, 2002, $27.0 million in 2001 and $41.3 million in 2000.  We expect to continue to incur net lossesand these losses may be substantial. Furthermore, we expect to generatesignificant negative cash flow in the future. We will need to generatesubstantially higher revenue to achieve and sustain profitability and positivecash flow. Our ability to generate future revenue and achieve profitabilitywill depend on a number of factors, many of which are described throughout thissection. If we are unable to achieve or maintain profitability, we will beunable to build a sustainable business. In this event, our share price and thevalue of your investment would likely decline and the Company might be unableto continue as a going concern.

 

**We may need to raise additionalcapital to continue to grow our business, which may not be available to us.**

 

Because we havehad losses, we have funded our operating activities to date from the sale ofsecurities, including our most recent financing in January 2002. Additionally,in July 2002 we put in place a $10 million revolving line of credit whoseavailability is 

 

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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.

 

**Ourindependent accountants have included a going concern explanatory paragraph intheir report on our consolidated fianancial statements.**

 

Our independentaccountants have included an explanatory paragraph in their audit report on ourconsolidated financial statements for the fiscal year ended December 31, 2002,which indicates that we have suffered recurring losses from operations and havean accumulated deficit that raises substantial doubt about our ability tocontinue as a going concern.  Theinclusion of a going concern explanatory paragraph in our independent auditor’saudit report on our consolidated financial statements for the fiscal year endedDecember 31, 2002 could have a detrimental effect on our stock price, and ourability to raise new capital.

 

**We may not be able to pay our debtand other obligations, which would cause us to be in default under the terms ofour credit facility, which would result in harm to our business and financialcondition.**

 

On July 12, 2002,we entered into a credit agreement with a financial institution that providesfor a one-year revolving credit facility in an amount of up to $10million.  Any advances under the creditagreement will be secured by our personal property and will bear interest at theprime rate plus 0.875% per annum. We have agreed to provide a security interestin our intellectual property solely, in the event that a judicial authorityholds that this is necessary, to enable the financial institution to perfectthe financial institution’s security interest in the rights to payment andproceeds from sale of our personal property. We have also agreed not to pledgeour intellectual property to a third party. The credit agreement containscertain financial and reporting covenants. Covenants relating to meetingminimum quarterly revenues, minimum tangible net worth and meeting the deadlinefor submission of reporting items were violated during the year ended December31, 2002.  Waivers were obtained fromthe financial institution for the covenants that were violated. We intend tofulfill our debt service obligations from cash generated by our operations, ifany, and from our existing cash and investments.  There can be no assurance that we will be able to meet our debtservice obligations of the credit facility.

 

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If our cash flowis inadequate to meet our obligations under the credit facility or otherwise,we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtainfunds necessary to make required payments on the credit facility, we would bein default under the terms thereof, which would permit the financialinstitution that provided the credit facility to accelerate the maturity of ourobligations.  Any such default wouldharm our business, prospects, financial condition and operating results.  In addition, we cannot assure you that wewould be able to repay amounts due in respect of the credit facility if paymentwere to be accelerated following the occurrence of any event of default underthe terms of the credit facility.

 

In addition, in the event of our bankruptcy, liquidation orreorganization or upon acceleration of the payments due under the creditfacility due to an event of default, our assets would be available fordistribution to our current stockholders only after our indebtedness has beenpaid in full. As a result, there may not be sufficient assets remaining to makeany distributions to our stockholders.

 

**We must continue to reduce our costsand improve our margins in order to reach profitability.**

 

The market for our products is extremelycompetitive and is characterized by aggressive pricing.  As a result, margins in our market are oftenlow. Traditionally, we have experienced low or even negative margins.  To reach profitability, we must continue toincrease our margins by reducing the cost of our products.  We have taken steps in the past and plan totake additional steps in 2003 and beyond to reduce our cost of manufacturingand improve our overall profit margin. These efforts include but are notlimited to, reducing the size of the semiconductor die, shifting production tolower cost semiconductor wafer and assembly and test suppliers, using lowercost test equipment and more cost efficient test programs, and moving fromhigher cost custom to lower cost standard size semiconductor packages. There isno guarantee that we will be successful in our efforts to reduce ourmanufacturing costs and improve our gross margins in the future.

 

**Our quarterly operating results arelikely to fluctuate significantly and may fail to meet the expectations ofsecurities analysts and investors, which may cause our share price to decline.**

 

Our quarterly operating results have fluctuated significantly in thepast and are likely to continue to do so in the future. The many factors thatcould cause our quarterly results to fluctuate include, in part:

 

**•**      level of sales;

 

**•**      mix of high and low margin products;

 

**•**      availability and pricing of wafers;

 

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**•**      timing of introducing new products,including lower cost versions of existing products, fluctuations inmanufacturing yields and other problems or delays in the fabrication, assembly,testing or delivery of products; and

 

**•**      rate of development of target markets.

 

A large portion of our operating expenses, including salaries, rent andcapital lease expenses, are fixed.  Ifwe experience a shortfall in revenues relative to our expenses, we may be unableto reduce our expenses quickly enough to off-set the reduction in revenuesduring that accounting period, which would adversely affect our operatingresults.

 

Fluctuations in our operating results may also result in fluctuationsin our common stock price. If the market price of our stock is adverselyaffected, we may experience difficulty in raising capital or makingacquisitions.  In addition, we maybecome the object of securities class action litigation.

 

As a result, we do not believe that period-to-period comparisons of ourrevenues and operating results are necessarily meaningful. You should not relyon the results of any one quarter as an indication of future performance.

 

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**Our stock price may be subject tosignificant volatility.**

 

The stock prices for many technology companies have recentlyexperienced large fluctuations, which may or may not be directly related to theoperating performance of the specific companies. Broad market fluctuations aswell as general economic conditions may cause our stock price to decline. Webelieve that fluctuations of our stock price may continue to be caused by avariety of factors, including:

 

**•**      announcements of developments related toour business;

**•**      fluctuations in our financial results;

**•**      general conditions in the stock market oraround the world, terrorism or developments in the semiconductor and capitalequipment industry and the general economy;

**•**      sales or purchases of our common stock inthe marketplace;

**•**      announcements of our technologicalinnovations or new products or enhancements or those of our competitors;

**•**      developments in patents or otherintellectual property rights;

**•**      developments in our relationships withcustomers and suppliers;

**•**      a shortfall or changes in revenue, grossmargins or earnings or other financial results from analysts’ expectations oran outbreak of hostilities or natural disasters; or

**•**      acquisition or merger activity and thesuccess in implementing such acquisitions.

 

**Our customers may cancel or deferproduct orders, which could result in excess inventory.**

 

Our sales aregenerally made pursuant to individual purchase orders that may be canceled ordeferred by customers on short notice without significant penalty.  Thus, orders in backlog may not result infuture revenue.   In the past, we havehad cancellations and deferrals by customers. Any cancellation or deferral of product orders could result in us holdingexcess inventory, 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 has caused and may continue to cause ourresults to fluctuate, and such shifts could result in significant inventorywrite-downs and adversely affect our relationships with our suppliers.

 

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We must build inventory well in advance of product shipments. Thesemiconductor industry is highly cyclical and in light of the current downturn,which has resulted in excess capacity and overproduction, there is a risk thatwe will continue to forecast inaccurately and produce excess inventories of ourproducts.  As a result of such inventoryimbalances, large future inventory write-downs may occur due to excessinventory or inventory obsolescence. In addition, any adjustment in ourordering patterns resulting from increased inventory may adversely affect oursuppliers’ willingness to meet our demand, if our demand increases in thefuture.

 

**Our product shipment patterns make itdifficult to predict our quarterly revenues.**

 

As is common in our industry, we frequently ship more products in thethird month of each quarter than in either of the first two months of thequarter, and shipments in the third month are higher at the end of thatmonth.  We believe this pattern islikely to continue.  The concentrationof sales in the last month of the quarter may cause our quarterly results ofoperations to be more difficult to predict. Moreover, if sufficient business does not materialize or a disruption inour production or shipping occurs near the end of a quarter, our revenues forthat quarter could be materially reduced.

 

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**We rely on a small number ofcustomers for most of our revenue and a decrease in revenue from thesecustomers could seriously harm our business.**

 

A relatively small number of customers have accounted for most of ourrevenues to date.  Any reduction ordelay in sales of our products to one or more of these key customers couldseriously reduce our sales volume and revenue and adversely affect ouroperating results.  In particular, salesto three large customers, including Apex Digital Inc., Apple Computer and Aiwa(which became a wholly-owned subsidiary of Sony Corporation in February 2002)accounted for approximately 19%, 31% and 7%, respectively, of revenue for theyear ended December 31, 2002, 0%, 25%, and 12% respectively, of total revenuein 2001 and 0%, 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.

 

**Wecurrently rely on sales of six products for a significant portion of ourrevenue, and the failure of these products to be successful in the future couldsubstantially reduce our sales.**

 

We currently rely on sales of our TA1101B, TA2020, TA2022, TA2024,TA3020 and TK2050 digital audio amplifiers to generate a significant portion ofour revenue. Sales of these products amounted to 96% of our revenue for theyear ended December 31, 2002, 94% of our revenue in 2001 and 93% of our revenuein 2000. We have developed additional products and plan to introduce moreproducts in the future, but there can be no assurance that these products willbe commercially successful. Consequently, if our existing products are notsuccessful, our sales could decline substantially.

 

**Our lengthy sales cycle makes itdifficult for us to predict if or when a sale will be made, to forecast ourrevenue and to budget expenses, which may cause fluctuations in our quarterlyresults.**

 

Because of our lengthy sales cycles, we may continue to experience adelay between increasing expenses for research and development, sales andmarketing and general and administrative efforts, as well as increasinginvestments in inventory, and the generation of revenue, if any, from suchexpenditures.  In addition, the delaysinherent in such a lengthy sales cycle raise additional risks of customerdecisions to cancel or change product plans, which could result in our loss ofanticipated sales.  Our new products aregenerally incorporated into our customers’ products or systems at the designstage.  To try and have our productsselected for design into new products of current and potential customers,commonly referred to as design wins, often requires significant expenditures byus without any assurance of success. Once we have achieved a design win, our sales 

 

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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.

 

**The current general economic downturnin the semiconductor industry has lead and may continue to lead to decreasedrevenue.**

 

During 2001 and 2002, slowing worldwide demand for semiconductors hasresulted in significant inventory buildups for semiconductor companies.  Presently, we have no visibility regardinghow long the semiconductor industry downturn will last or how severe thedownturn will be. If the downturn continues or worsens, we may experiencegreater levels of cancellations and/or push-outs of orders for our products inthe future, which could adversely affect our business and operating results,including the possibility of additional inventory write-downs, over a prolongedperiod of time. In addition, we reduced our workforce during fiscal 2002 byapproximately 20%, or about 15 people. If we continue to reduce our workforce, it may adversely impact ourability to respond rapidly to any renewed growth opportunities in the future.

 

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**We may experience difficulties in theintroduction of new or enhanced products that 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 productssuccessfully and in a timely manner would seriously harm our ability togenerate revenues.  Consequently, oursuccess depends on our ability to develop new products for existing and newmarkets, introduce such products in a timely and cost-effective manner and toachieve design wins.  The development ofthese new devices is highly complex, and from time to time we have experienceddelays in completing the development and introduction of new products.

 

The successful introduction of a new product may currently take up to18 months.  Successful productdevelopment and introduction depends on a number of factors, including:

 

**•**      accurate prediction of market requirementsand evolving standards;

**•**      accurate new product definition;

**•**      timely completion and introduction of newproduct designs;

**•**      availability of foundry capacity;

**•**      achieving acceptable manufacturing yields;

**•**      market acceptance of our products and ourcustomers’ products; and

**•**      market competition.

 

We seek but cannot guarantee success with regard to these factors.

 

**If we are unable to retain keypersonnel, we may not be able to operate our business successfully.**

 

We may not be successful in retaining executive officers and other keymanagement and technical personnel.  Ahigh level of technical expertise is required to support the implementation ofour technology in our existing and new customers’ products. In addition, theloss of the management and technical expertise of Dr. Adya S. Tripathi, ourfounder, president and chief executive officer, could seriously harm us. We donot have any employment contracts with our employees.

 

**Our headquarters, as well as thefacilities of our principal manufacturers and customers, are located ingeographic regions with increased risks of power supply failure, naturaldisasters, labor strikes and political unrest.**

 

Our headquarters is located in San Jose, California, an area on or neara known earthquake fault within the state. In addition, in the past the Stateof California has experienced a shortage of available electrical power, whichhas resulted in electrical blackouts for businesses in certain areas. In theevent that California experiences another 

 

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shortage of available electrical power, and there are additionalblackouts, the operations of our facilities within California could bedisrupted.

 

Our principal manufacturers and customers are located in the PacificRim region. The risk of earthquakes in this region, particularly in Taiwan, issignificant due to the proximity of major earthquake fault lines. Earthquakes,fire, flooding and other natural disasters in the Pacific Rim region likelywould result in the disruption of our foundry partners’ assembly and testingcapacity and the ability of our customers to purchase our products. Laborstrikes or political unrest in these regions would likely also disruptoperations of our foundries and customers. In particular, there is a recenthistory of political unrest between China and Taiwan. Any disruption resultingfrom such events could cause significant delays in shipments of our productsuntil we are able to shift our manufacturing, assembly and testing from theaffected contractor to another third party vendor. We cannot be sure that suchalternative capacity could be obtained on favorable terms, if at all. Moreover,any such disruptions could also cause significant decreases in our sales tothese customers until our customers resume normal purchasing volumes.

 

**Stockholders will incur additionaldilution upon the exercise of warrants, and management will have solediscretion to use the proceeds received from exercise of these warrants**.

 

To the extent that the warrants issued in connection with the January2002 Series A financing are exercised, there will be additional dilution toyour shares.  If all of the warrants areexercised, we will be required to issue an additional 3,328,760 shares ofcommon stock, or approximately 8% of the common stock outstanding as ofDecember 31, 2002. If all of the warrants are exercised in full, we wouldreceive approximately $6.4 million in proceeds.  Our management will have sole discretion over use of theseproceeds and may spend the proceeds in ways with which our stockholders may notagree.

 

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**The market may be adversely affecteddue to the large number of shares eligible for sale under the registrationstatement filed in connection with the****January 2002 financing.**

 

The shares of common stock eligible for sale under the registrationstatement filed in connection with the January 2002 financing represent a largepercentage of our outstanding common stock. The market for our common stock may be adversely affected as a result ofsales of a large number of shares in the market or the perception that largesales may occur.

 

**We may not maintain The Nasdaq SmallCap Market listing requirements, and as a result, our common stock may besubject to delisting.**

 

On August 13, 2002, we received a deficiency notice from the NasdaqStock Market, or Nasdaq, for failing to maintain the Nasdaq National Market’sminimum bid price requirement for continued listing, which includes meeting a$1.00 minimum bid price for 10 consecutive trading days. As we were unable tomaintain this requirement, we submitted an application to Nasdaq for transferto their SmallCap Market.  Theapplication was approved and accordingly we are now listed on The NasdaqSmallCap Market. To remain listed on The Nasdaq SmallCap Market, we must meetthe minimum listing requirement that the bid price of our common stock closesat $1.00 per share or higher for a minimum of 10 consecutive tradingdates.  As we had not met this minimumlisting requirement by the initial deadline of February 10, 2003, we appliedfor and, on February 11, 2002, were provided with, an additional 180 days, oruntil August 8, 2003, to gain compliance with The Nasdaq SmallCap Marketminimum listing requirement.  If we areunable to meet the minimum listing requirement prior to August 8, 2003, we maybe delisted from The Nasdaq SmallCap Market, or, in the alternative, we may begranted an additional grace period to regain compliance. Furthermore, we may beeligible to transfer back to the Nasdaq National Market if by August 8, 2003the bid price of our common stock maintains the $1.00 per share requirement for30 consecutive trading days and we have maintained compliance with all othercontinued listing requirements of the Nasdaq National Market.

 

On March 17, 2003, The Nasdaq Stock Market, Inc. extended a pilot programgoverning bid price rules for all Nasdaq National Market and NasdaqSmallCap issuers. The pilot program allows issuers that meet core SmallCapinitial listing criteria to benefit from extended compliance periods forsatisfying minimum bid price requirements. Therefore, if we meet the coreSmallCap initial 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.

 

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Additionally, ifour common stock is delisted from The Nasdaq SmallCap Market, sales of ourcommon stock would likely be conducted only in the over-the-counter market orpotentially in regional exchanges. This may have a negative impact on theliquidity and the price of our common stock, and investors may find it moredifficult to purchase or dispose of, or to obtain accurate quotations as to themarket value of, our common stock.  Inaddition, if our common stock is not listed on the Nasdaq National Market orThe Nasdaq SmallCap Market and the trading price of our common stock was to remainbelow $1.00 per share, trading in our common stock would also be subject to therequirements of certain rules promulgated under the Exchange Act, which requireadditional disclosures by broker-dealers in connection with any tradesinvolving a stock defined as a “penny stock” (generally, a non-Nasdaq equitysecurity that has a market price of less than $5.00 per share, subject tocertain exceptions).  In such event, theadditional burdens imposed upon broker-dealers to effect transactions in ourcommon stock could further limit the market liquidity of our common stock andthe ability of investors to trade our common stock.

 

We also believethat the current per share price level of our common stock has reduced theeffective marketability of our shares of common stock because of the reluctanceof many leading brokerage firms to recommend low-priced stock to their clients.Certain investors view low-priced stock as speculative and unattractive. Inaddition, a variety of brokerage house policies and practices tend todiscourage individual brokers within those firms from dealing in low-pricedstock. Such policies and practices pertain to the payment of broker’scommissions and to time-consuming procedures that make the handling oflow-priced stocks unattractive to brokers from an economic standpoint.

 

In addition,because brokerage commissions on low-priced stock generally represent a higherpercentage of the stock price than commissions on higher-priced stock, thecurrent share price of our common stock can result in individual stockholderspaying transaction costs (commissions, markups or markdowns) that represent ahigher percentage of their total share value than would be the case if theshare price were substantially higher. This factor also may limit thewillingness of institutions to purchase our common stock at its current lowshare price.

 

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**If we engage in acquisitions, we willincur a variety of costs, and the anticipated benefits of the acquisitions maynever be realized.**

 

In the future we may pursue acquisitions of complementary productlines, technologies and businesses.  Wemay have to issue debt or equity securities to pay for future acquisitions,which could be dilutive to our then current stockholders. In addition, we mayincur certain liabilities or other expenses in connection with futureacquisitions, which could materially adversely affect our business, financialcondition and results of operations.

 

Any future acquisitions may involve numerous other risks, including:

 

**•**      difficulties assimilating the operations,personnel, technologies and products of the acquired companies;

 

**•**      diversion of our management’s attentionfrom other business concerns;

 

**•**      increased complexity and costs associatedwith internal management structures;

 

**•**      risks of entering markets in which we haveno or limited experience; and

 

**•**      the potential loss of key employees of theacquired companies.

 

For these reasons, among others, we cannot be certain what effectfuture acquisitions may have on our business, financial condition and resultsof operations.

 

**Terroristattacks and threats, and government responses thereto, may negatively impactall aspects of our operations, revenues, costs and stock price.**

 

The threat of  terrorist attacksin the United States, the current war with Iraq and the related decline inconsumer confidence and continued economic weakness have had a substantialadverse impact on the economy.  Ifconsumer confidence does not recover, our revenues may be adversely impactedfor fiscal 2003 and beyond. Moreover, any further terrorist attacks in theU.S., or any additional U.S. military actions overseas may disrupt ouroperations or those of our customers and suppliers.  These events have had and may continue to have an adverse impacton the U.S. and world economy in general and consumer confidence and spendingin particular, which could harm our sales. Any of these events could increasevolatility in the U.S. and world financial markets which could harm our stockprice and may limit the capital resources available to us and our customers orsuppliers. This could have a significant impact on our operating results,revenues and costs and may result in increased volatility in the market priceof our common stock.

 

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**We aresubject to anti-takeover provisions that could delay or prevent an acquisitionof our company.**

 

Provisions of our restated certificate of incorporation, shareholderrights plan, equity incentive plans, bylaws and Delaware law may discouragetransactions involving a change in corporate control.  In addition to the foregoing, the stockholdings of our officers,directors and persons or entities that may be deemed affiliates, ourshareholder rights plan and the ability of our board of directors to issuepreferred stock without further stockholder approval could have the effect ofdelaying, deferring or preventing a third party from acquiring us and mayadversely affect the voting and other rights of holders of our common stock.

 

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**Risks Related to Manufacturing**

 

**We depend on three outside foundriesfor our semiconductor device manufacturing requirements.**

 

We do not own or operate a fabrication facility, and substantially allof our semiconductor device requirements are currently supplied by threeoutside foundries, United Microelectronics Corporation, or UMC, in Taiwan,STMicroelectronics Group in Europe and Mitsubishi, in Japan.  Although we primarily utilize these threeoutside foundries, most of our components are not manufactured at bothfoundries at the same time.  As aresult, each foundry is a sole source for certain products.  There are significant risks associated withour reliance on outside foundries, including:

 

**•**      the lack of guaranteed wafer supply;

 

**•**      limited control over delivery schedules,quality assurance and control, manufacturing yields and production costs; and

 

**•**      the unavailability of or delays inobtaining access to key process technologies.

 

In addition, the manufacture of integrated circuits is a highly complexand technologically demanding process. Although we work closely with our foundries to minimize the likelihoodof reduced manufacturing yields, our foundries have from time to timeexperienced lower than anticipated manufacturing yields, particularly inconnection with the introduction of new products and the installation andstart-up of new process technologies.

 

We provide our foundries with continuous forecasts of our productionrequirements; however, the ability of each foundry to provide us withsemiconductor devices is limited by the foundry’s available capacity.  In many cases, we place our orders on apurchase order basis, and foundries may allocate capacity to the production ofother companies’ products while reducing the deliveries to us on shortnotice.  In particular, foundrycustomers that are larger and better financed than us or that have long-termagreements with our foundries may cause such foundries to reallocate capacityin a manner adverse to us.

 

If we use a new foundry, several months would be typically required tocomplete the qualification process before we can begin shipping products fromthe new foundry. In the event either of our current foundries suffers anydamage or destruction to their respective facilities, or in the event of anyother disruption of foundry capacity, we may not be able to qualify alternativemanufacturing sources for existing or new products in a timely manner.  Even our current outside foundries wouldneed to have certain manufacturing processes qualified in the event ofdisruption at another foundry, which we may not be able to accomplish in atimely enough manner to prevent an interruption in supply of the affectedproducts.

 

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If we encounter shortages or delays in obtaining semiconductor devicesfor our products in sufficient quantities when required, delivery of ourproducts could be delayed, resulting in customer dissatisfaction and decreasedrevenues.

 

**We depend on third-partysubcontractors for most of our semiconductor assembly and testing requirementsand any unexpected interruption in their services could cause us to missscheduled shipments to customers and to lose revenues.**

 

Semiconductor assembly and testing are complex processes, which involvesignificant technological expertise and specialized equipment.  As a result of our reliance on third-partysubcontractors for assembly and testing of our products, we cannot directly controlproduct delivery schedules, which has in the past, and could in the future,result in product shortages or quality assurance problems that could increasethe costs of manufacture, assembly or testing of our products.  Almost all of our products are assembled andtested by one of five subcontractors: AMBIT Microsystems Corporation in Taiwan,Amkor Technology, Inc. in the Philippines, ASE in Korea, Malaysia and Taiwan,SGS in China, and ST Assembly Test Services Ltd. in Singapore.  We do not have long-term agreements with anyof these suppliers and retain their services on a per order basis.  The availability of assembly and testingservices from these subcontractors could be adversely affected in the event asubcontractor suffers any damage or destruction to their respective facilities,or in the event of any other disruption of assembly and testing capacity.  Due to the amount of time normally requiredto qualify assemblers and testers, if we are required to find alternativemanufacturing assemblers or testers of our components, shipments could bedelayed.  Any problems associated withthe delivery, quality or cost of our products could seriously harm ourbusiness.

 

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**Failure to transition our products tomore effective and/or increasingly smaller semiconductor chip sizes andpackaging could cause us to lose our competitive advantage and reduce our grossmargins.**

 

We evaluate the benefits, on a product-by-product basis, of migratingto smaller semiconductor process technologies in order to reduce costs and havecommenced migration of some products to smaller semiconductor processes.  We believe that the transition of ourproducts to increasingly smaller semiconductor processes will be important forus to reduce manufacturing costs and to remain competitive. Moreover, we aredependent on our relationships with our foundries to migrate to smallersemiconductor processes successfully. We cannot be sure that our future process migrations will be achievedwithout difficulties, delays or increased expenses.  Our gross margins would be seriously harmed if any suchtransition is substantially delayed or inefficiently implemented.

 

**Our international operations subjectus to risks inherent in doing business on an international level that couldharm our operating results.**

 

We currently obtain almost all of our manufacturing, assembly and testservices from suppliers located outside the United States and may expand ourmanufacturing activities abroad. Approximately 61% of our total revenue for the year ended December 31,2002 was derived from sales to end customers based outside the UnitedStates.  In 2001 and 2000, 72% and 71%,respectively, of our total revenue was derived from sales to end customersbased outside of the United States.  Inaddition, we often ship products to our domestic customers’ internationalmanufacturing divisions and subcontractors.

 

Accordingly, we are subject to risks inherent in internationaloperations, which include:

 

**•**      political, social and economicinstability;

 

**•**      trade restrictions and tariffs;

 

**•**      the imposition of governmental controls;

 

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

 

**•**      import and export license requirements;

 

**•**      unexpected changes in regulatoryrequirements;

 

**•**      difficulties in collecting receivables;and

 

**•**      potentially adverse tax consequences.

 

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All of our international sales to date have been denominated in U.S.dollars.  As a result, an increase inthe value of the U.S. dollar relative to foreign currencies could make ourproducts less competitive in international markets.  Conversely, a decrease in the value of the U.S. dollar relativeto foreign currencies would increase the cost of our overseas manufacturing, whichwould reduce our gross margins.

 

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**RisksRelated to Our Product Lines**

 

**Our ability to achieve revenue growthwill be harmed if we are unable to persuade electronic systems manufacturers toadopt our new amplifier technology.**

 

We face difficulties in persuading manufacturers to adopt our productsusing our new amplifier technology. Traditional amplifiers use designapproaches developed in the 1930s. These approaches are still used in most amplifiers and engineers arefamiliar with these design approaches. To adopt our products, manufacturers and engineers must understand andaccept our new technology.  To takeadvantage of our products, manufacturers must redesign their systems,particularly components such as the power supply and heat sinks.  Manufacturers must work with their suppliersto obtain modified components and they often must complete lengthy evaluationand testing.  In addition, ouramplifiers are often more expensive as components than traditional amplifiers.For these reasons, prospective customers may be reluctant to adopt ourtechnology.

 

**We currently depend on consumer audiomarkets that are typically characterized by aggressive pricing, frequent newproduct introductions and intense competition.**

 

A substantial portion of our current revenue is generated from sales ofproducts that address the consumer audio markets, including home theater,computer audio and the automotive audio markets.  These markets are characterized by frequent new productintroductions, declining prices and intense competition. Pricing in thesemarkets is aggressive, and we expect pricing pressure to continue.  In the computer audio segment, our successdepends on consumer awareness and acceptance of existing and new products byour customers and consumers, in particular, the elimination ofexternally-powered speakers.  In theautomotive audio segment, we face pressure from our customers to deliverincreasingly higher-powered solutions under significant engineering limitationsdue to the size constraints in car dashboards. In addition, our ability to obtain prices higher than the prices oftraditional amplifiers will depend on our ability to educate manufacturers andtheir customers about the benefits of our products.  Failure of our customers and consumers to accept our existing ornew products will seriously harm our operating results.

 

**If we are not successful indeveloping and marketing new and enhanced products for the DSL high speedcommunications markets that keep pace with technology and our customers’ needs,our operating results will suffer.**

 

The market for our DSL products is new and emerging, and ischaracterized by rapid technological advances, intense competition and arelatively small number of potential customers. This will likely result inprice erosion on existing products and pressure for cost-reduced futureversions. We recently started to ship our TA4012 DSL line driver and expect tocommence the testing phase of our dual channel line driver in the next coupleof months. Implementation of our products require manufacturers to accept ourtechnology and redesign their products. If potential customers do not accept our technology or 

 

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experience problems implementing our devices in their products, ourproducts could be rendered obsolete and our business would be harmed.  If we are unsuccessful in introducing futureproducts with enhanced performance, our ability to achieve revenue growth willbe seriously harmed.

 

**We may experience difficulties in thedevelopment and introduction of a new amplifier product for use in the cellularphone market, which could result in significant expenses or delay in itslaunch.**

 

We are currently developing an amplifier product for use in thecellular phone market.  We currentlyhave no design wins or customers for this product. We may not introduce ouramplifier product for the cellular phone market on time, and this product maynever achieve market acceptance. Furthermore, competition in this market is likely to result in pricereductions, shorter product life cycles, reduced gross margins and longer salescycles compared with what we have experienced to date with our other products.

 

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**Intense competition in thesemiconductor industry and in the consumer audio and communications marketscould prevent us from achieving or sustaining profitability.**

 

The semiconductor industry and the consumer audio and communicationsmarkets are highly competitive.  Wecompete with a number of major domestic and international suppliers ofsemiconductors 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 emergingtechnologies and changes in customer requirements or devote greater resourcesto the promotion and sale of their products than us.  Current and potential competitors have established or mayestablish financial or strategic relationships among themselves or withexisting or potential customers, resellers or other third parties.  Accordingly, it is possible that new competitorsor alliances among competitors could emerge and rapidly acquire significantmarket share.  In addition, existing ornew competitors may in the future develop technologies that more effectivelyaddress the transmission of digital information through existing analoginfrastructures at a lower cost or develop new technologies that may render ourtechnology obsolete.  There can be noassurance that we will be able to compete successfully in the future againstour existing or potential competitors, or that our business will not be harmedby increased competition.

 

**Our products are complex and may haveerrors and defects that are detected only after deployment in customers’products, which may harm our business.**

 

Products such as those that we offer may contain errors and defectswhen first introduced or as new versions are released.  We have in the past experienced such errorsand defects, in particular in the development stage of a new product.  Delivery of products with production defectsor reliability, quality or compatibility problems could significantly delay orhinder market acceptance of such products, which could damage our reputationand seriously harm our ability to retain our existing customers and to attractnew customers.  Moreover, such errorsand defects could cause problems, interruptions, delays or a cessation of salesto our customers.  Alleviating suchproblems may require substantial redesign, manufacturing and testing whichwould result in significant expenditures of capital and resources.  Despite testing conducted by us, oursuppliers and our customers, we cannot be sure that errors and defects will notbe found in new products after commencement of commercial production.  Such errors and defects could result inadditional development costs, loss of, or delays in, market acceptance,diversion of technical and other resources from our other development efforts,product repair or replacement costs, claims by our customers or others againstus or the loss of credibility with our current and prospective customers.  Any such event could result in the delay orloss of market acceptance of our products and would likely harm our business.

 

35

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**Downturns in the highly cyclicalsemiconductor industry and rapid technological change could result insubstantial period-to-period fluctuations in wafer supply, pricing and averageselling prices, which make it difficult to predict our future performance.**

 

We provide semiconductor devices to the audio, personal computer andcommunications markets.  Thesemiconductor industry is highly cyclical and subject to rapid technologicalchange and has been subject to significant economic downturns at various times,characterized by diminished product demand, accelerated erosion of averageselling prices and production overcapacity. The semiconductor industry also periodically experiences increaseddemand and production capacity constraints. As a result, we have experienced and may experience in the futuresubstantial period-to-period fluctuations in our results of operations due togeneral semiconductor industry conditions, overall economic conditions or otherfactors, many of which are outside our control.  Due to these risks, you should not rely on period-to-period comparisonsto predict our future performance.

 

36

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**RisksRelated to Our Intellectual Property**

 

**Our intellectual property andproprietary rights may be insufficient to protect our competitive position**.

 

Our business depends, in part, on our ability to protect ourintellectual property.  We relyprimarily on patent, copyright, trademark and trade secret laws to protect ourproprietary technologies.  We cannot besure that such measures will provide meaningful protection for our proprietarytechnologies and processes. As of December 31, 2002, we have 20 issued UnitedStates patents, and 21 additional United States patent applications which arepending. In addition, we have 13 international patents issued and an additional63 international patents pending. We cannot be sure that any patent will issueas a result of these applications or future applications or, if issued, thatany claims allowed will be sufficient to protect our technology.  In addition, we cannot be sure that anyexisting or future patents will not be challenged, invalidated or circumvented,or that any right granted thereunder would provide us meaningfulprotection.  The failure of any patentsto provide protection to our technology would make it easier for ourcompetitors 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 into confidentiality agreements with ouremployees and strategic partners, and generally control access to anddistribution of our documentation and other proprietary information.  Despite these precautions, it may bepossible for a third party to copy or otherwise obtain and use our products,services or technology without authorization, develop similar technologyindependently or design around our patents. In addition, effective copyright, trademark and trade secret protectionmay be unavailable or limited in certain foreign countries.  Some of our customers have entered intoagreements with us pursuant to which such customers have the right to use ourproprietary technology in the event we default in our contractual obligations,including product supply obligations, and fail to cure the default within aspecified period of time.

 

**We may be subject to intellectualproperty rights disputes that could divert management’s attention and could becostly.**

 

The semiconductor industry is characterized by vigorous protection andpursuit of intellectual property rights. From time to time, we may receive in the future notices of claims ofinfringement, misappropriation or misuse of other parties’ proprietaryrights.  We cannot be sure that we willprevail in these actions, or that other actions alleging infringement by us ofthird-party patents, misappropriation or misuse by us of third-party tradesecrets or the invalidity of one or more patents held by us will not beasserted or prosecuted against us, or that any assertions of infringement,misappropriation or misuse or prosecutions seeking to establish the invalidityof our patents will not seriously harm our business.  For example, in a patent or trade secret action, an injunctioncould be 

 

37

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issued against us requiring that we withdraw particular products fromthe market or necessitating that specific products offered for sale or underdevelopment be redesigned.  We have alsoentered into certain indemnification obligations in favor of our customers andstrategic partners that could be triggered upon an allegation or finding of ourinfringement, misappropriation or misuse of other parties’ proprietaryrights.  Irrespective of the validity orsuccessful assertion of such claims, we would likely incur significant costsand diversion of our management and personnel resources with respect to thedefense of such claims, which could also seriously harm our business.  If any claims or actions are assertedagainst us, we may seek to obtain a license under a third party’s intellectualproperty rights.  We cannot be sure thatunder such circumstances a license would be available on commerciallyreasonable terms, if at all.  Moreover,we often incorporate the intellectual property of our strategic customers intoour designs, and we have certain obligations with respect to the non-use andnon-disclosure of such intellectual property.

 

We cannot be sure that the steps taken by us to prevent our, or ourcustomers’, misappropriation or infringement of intellectual property will besuccessful.

 

38

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**PART II**

 

 

**ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

 

**INDEX TO CONSOLIDATED FINANCIAL 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                     |

 

39

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**REPORT OF INDEPENDENT ACCOUNTANTS**

 

To the Board of Directorsand Stockholders of

Tripath Technology Inc.

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of operations, of stockholders’ equity (deficit) and of cash flowspresent fairly, in all material respects, the financial position of TripathTechnology Inc. and its subsidiary at December 31, 2002 and 2001, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2002 in conformity with accounting principlesgenerally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 1 to thefinancial statements, the Company has suffered recurring losses from operationsand has an accumulated deficit that raise substantial doubt about its abilityto continue as a going concern. Management's plans in regard to these mattersare also described in Note 1. The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

PricewaterhouseCoopersLLP

San Jose, California

January 30, 2003, exceptas to the fourth, fifth, sixth and seventh paragraphs of Note 1, which are asof April 1, 2003

 

40

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**TRIPATH TECHNOLOGY INC.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share 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 notesare an integral part of these consolidated financial statements.

 

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**TRIPATH TECHNOLOGY INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per 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 notesare an integral part of these consolidated financial statements.

 

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**TRIPATH TECHNOLOGY INC.**

**CONSOLIDATED STATEMENTS 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 notesare an integral part of these consolidated financial statements.

 

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**TRIPATH TECHNOLOGY INC.**

**CONSOLIDATED STATEMENTS 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 notesare an integral part of these consolidated financial statements.

 

44

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**TRIPATH TECHNOLOGY INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1—THE COMPANY AND BASIS OFPRESENTATION:**

 

***The Company***

 

TripathTechnology Inc. (the “Company” or “Tripath”) was incorporated in California inJuly 1995. The Company was reincorporated in Delaware in July 2000.The Company designs, develops and markets integrated circuit devices for theConsumer Electronics,  DSL and Wirelessmarkets.

 

***Basis ofPresentation***

 

Theconsolidated financial statements include the accounts of Tripath and itswholly owned subsidiary, Tripath Technology Japan Ltd.. All significantintercompany accounts and transactions have been eliminated. Accountsdenominated in foreign currency have been remeasured using the U.S. dollar asthe functional currency.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates, and such differencescould affect the results of operations reported in future periods and suchdifferences could be material.

 

***Liquidity***

 

The Company’sconsolidated financial statements have been prepared on the basis of a goingconcern, which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. The Company has incurredsubstantial losses and has experienced negative cash flow since inception andhas an accumulated deficit of $172.3 million at December 31, 2002.  This raises substantial doubt about itsability to continue as a going concern.

 

To conserve cash, theCompany has implemented cost cutting measures, and in August 2001, implementeda restructuring program. In addition, on January 24, 2002, the Companycompleted a financing in which it raised $21 million in gross proceeds througha private equity placement and in July 2002, the Company entered into a creditagreement with a financial institution that provides for a one-year revolvingcredit facility of up to $10 million, subject to certain restrictions in theborrowing base based on eligibility of receivables.

 

If liquidity problemsshould arise, the Company will, as a last resort, take measures to reduceoperating expenses such as reducing headcount or canceling research anddevelopment projects. However, the Company may need to raise additional fundsto finance its activities next year and beyond through public or private equityor debt financings, the formation of strategic partnerships or alliances withother companies or through bank borrowings with existing or new banks. TheCompany may not be able to obtain additional funds on terms that would befavorable to its stockholders and the Company, or at all.

 

The Company believes, basedon its ability to implement the aforementioned measures, if needed, that itwill have liquidity sufficient to meet its operating, working capital andfinancing needs for the next twelve months and perhaps beyond. The Company hasnot made any adjustment to its consolidated financial statements as a result ofthe outcome of the uncertainty described above.

 

***Initial PublicOffering***

 

OnAugust 1, 2000, the Company completed its initial public offering of 5million shares of common stock at $10.00 per share. Net proceeds to the Companyas a result of the initial public offering, plus the proceeds relating to theexercise of the underwriters’ over-allotment option to purchase 100,000 sharesof common stock, were approximately $45.4 million.

 

***Foreign Currency Translation***

TheU.S. dollar is the functional currency for the Company’s Japanese wholly-ownedsubsidiary. Assets and liabilities that are not denominated in the functionalcurrency are remeasured into U.S. dollars and the resulting gains or losses areincluded in “Interest and other income, net." Such gains or losses havenot been material for any period presented.

 

45

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**NOTE 2—SUMMARY OF SIGNIFICANTACCOUNTING POLICIES:**

 

***Revenue recognition***

 

TheCompany recognizes revenue from product sales upon shipment to originalequipment manufacturers and end users, net of sales returns and allowances. TheCompany’s sales to distributors are made under arrangements allowing limitedrights of return, generally under product warranty provisions, stock rotationrights and price protection on products unsold by the distributor. In addition,the distributor may request special pricing and allowances which may be grantedsubject to approval by the Company. As a result of these returns rights andpotential pricing adjustments, the Company defers recognition on sales todistributors until products are resold by the distributor to the end user.

 

***Cash and cashequivalents, short-term investments and restricted cash***

 

The Company considers allhighly liquid investments with a maturity of three months or less from the dateof purchase to be cash equivalents. Cash and cash equivalents consist of cashon deposit with banks, money market funds and commercial paper, bonds andnotes, the fair value of which approximates cost.

 

The Company categorizesshort-term investments as available-for-sale. Accordingly, theseinvestments are carried at fair value. The fair value of such securitiesapproximates cost, and there were no material unrealized gains or losses as ofDecember 31, 2002 and 2001. Short-term investments generally havematurities of less than one year from the date of purchase. The following tablesummarizes the Company’s cash and cash equivalents and short-terminvestments (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 creditfacility with a financial institution that has certain restrictions in theborrowing base. The amount by which the aggregate face amount of alloutstanding stand-by letters of credit exceeds the borrowing base, asdetermined by eligible receivables, represents the amount of restricted cashnecessary to secure the letters of credit. At December 31, 2002, the Companyhad $486,000 in restricted cash.

 

***Concentration of creditrisk and significant customers***

 

Financial instrumentsthat potentially subject the Company to concentrations of credit risk consistprimarily of cash, cash equivalents and short-term investments. Substantiallyall of the Company’s cash and cash equivalents are invested in highly-liquidmoney market funds and commercial securities with major financial institutions.Short-term investments consist of U.S. government and commercial bondsand notes. The Company sells its products principally to original equipmentmanufacturers. The Company performs ongoing credit evaluations of its customersand maintains an allowance for potential credit losses, as considered necessaryby management. Credit losses to date have been consistent with management’sestimates. During the year ended December 31, 2002, the Company wrote-off baddebts totaling approximately $700,000. The Company had no significantwrite-offs or recoveries during the years ended December 31, 2001 and 2000.

 

46

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The following table summarizes sales to end customerscomprising 10% or more of the Company’s total revenue for the periods indicated:

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

 

The Company’s accounts receivable were concentratedwith five customers at December 31, 2002 representing 17%, 16%, 14%, 14% and14% of aggregate gross receivables, five customers at December 31, 2001representing 15%, 15%, 13%, 12% and 12% of aggregate gross receivables, and twocustomers at December 31, 2000 representing 58% and 33% of aggregate grossreceivables.

 

***Fair value offinancial instruments***

 

Carryingamounts of certain of the Company’s financial instruments, including cash andcash equivalents, short-term investments, accounts receivable and accountspayable, approximate their fair value due to their relative short maturitiesand based upon comparable market information available at the respectivebalance sheet dates. The Company does not hold or issue financial instrumentsfor trading purposes.

 

***Inventories***

 

Inventories are stated atthe lower of cost or market. This policy requires the Company to make estimatesregarding the market value of the Company’s inventory, including an assessmentof excess or obsolete inventory. The Company determines excess and obsoleteinventory based on an estimate of the future demand and estimated selling pricesfor the Company’s products within a specified time horizon, generally 12months. The estimates the Company uses for expected demand are also used fornear-term capacity planning and inventory purchasing and are consistent withthe Company’s revenue forecasts. Actual demand and market conditions may bedifferent from those projected by the Company’s management. If the Company’sunit demand forecast is less than the Company’s current inventory levels andpurchase commitments, during the specified time horizon, or if the estimatedselling price is less than the Company’s inventory value, the Company will berequired to take additional excess inventory charges or write-downs to netrealizable value which will decrease the Company’s gross margin and net operatingresults in the future. During the quarter ended March 31, 2002, the Companyrecorded a provision for excess inventory of approximately $5 million relatedto excess inventory for the Company’s TA2022 product as a result of a decreasein forecasted sales for this product.

 

47

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***Inventory purchasecommitments***

 

TheCompany accrues for estimated losses on non-cancelable purchase orders.The estimated losses result from anticipated future sale of products for salesprices less than the estimated cost to manufacture. Inventory purchasecommitment losses accrued at December 31, 2002, 2001 and 2000 were $38,000,$190,000 and $821,000, respectively.

 

***Research anddevelopment expenses***

 

Researchand development costs are charged to expense as incurred.

 

***Property andequipment***

 

Propertyand equipment, including leasehold improvements, are stated at historical cost,less accumulated depreciation and amortization. Property and equipment undercapital leases are stated at the present value of minimum lease payments.Amortization of leasehold improvements is computed using the straight-linemethod over the shorter of the estimated useful lives of the assets or the termof the lease. Depreciation is computed using the straight-line method over theestimated useful lives of the assets as follows:

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

 

Upondisposal, the assets and related accumulated depreciation and amortization areremoved from the Company’s accounts, and the resulting gains or losses arereflected in the statement of operations.

 

Long-lived assets heldand used by the Company are reviewed for impairment whenever events or changesin circumstances indicate that their net book value may not be recoverable. Animpairment loss is recognized if the sum of the expected future cash flows(undiscounted and before interest) from the use of the assets is less than thenet book value of the asset. The amount of the impairment loss, if any, willgenerally be measured as the difference between net book value of the assetsand their estimated fair values.

 

***Comprehensiveincome***

 

Statementof Financial Accounting Standards No. 130, “Reporting ComprehensiveIncome,”  establishes standards forreporting and displaying comprehensive income and its components in a full setof general-purposes financial statements. There was no difference between theCompany’s net loss and its total comprehensive loss for the years ended December31, 2002, 2001 and 2000.

 

48

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***Accounting forstock-based compensation***

 

AtDecember 31, 2002, the Company has two stock-based employee compensation plans,which are described more fully in Note 7. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,*”* and relatedInterpretations.  No stock-basedemployee compensation cost is reflected in net income for the years endedDecember 31, 2002 and 2001, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate 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  included in the net loss, determined under the recognition and measurement  principles of APB Opinion No. 25, net of related tax effects |   | (284                        | )          | 260 |   | 14,793 |   |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects                                                     |   | (1,527                      | )          | (5,625 | ) | (26,765 | ) |
| Proforma net loss applicable to common stockholders                                                                                                                                       |   | $                           | (36,077    | ) | $ | (32,346 | ) | $ | (53,239 | ) |
|                                                                                                                                                                                      |   |                        |       |   |   |   |   |
| As reported                                                                                                                                                                               |   | $                           | (0.88      | ) | $ | (1.00 | ) | $ | (2.34 | ) |
|                                                                                                                                                                                      |   |                        |       |   |   |   |   |
| Pro forma                                                                                                                                                                                 |   | $                           | (0.93      | ) | $ | (1.20 | ) | $ | (3.02 | ) |

 

***Segment andgeographic information***

 

The Company has determined that it has one reportablebusiness segment: the design, license and marketing of integrated circuits.

 

The following is a geographic breakdown of theCompany’s sales by shipping destination for the 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***

*** ***

Certain amounts reported in previous years havebeen reclassified to conform to the 2002 presentation.

 

49

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**Recent Accounting Pronouncements**

 

In April 2002, theFinancial 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. The Company does not anticipate that adoption of thisstatement will have a material impact on its consolidated financial statements.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”).SFAS 146 addresses significant issues regarding the recognition, measurementand reporting of costs that are associated with exit and disposal activities,including restructuring activities that are currently accounted for under EITFNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).” 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. The Company does notanticipate that adoption of this statement will have a material impact on itsconsolidated financial statements.

 

In November 2002, theFASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”). FIN 45 requires that a liability be recorded in theguarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45requires disclosures about the guarantees that an entity has issued, includinga reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002, irrespective of the guarantor’s fiscal year-end.  Thedisclosure requirements of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002. The Company did nothave significant warranty expense for the year ended December 31, 2002.The Company does not anticipate that adoption of this standard will have amaterial impact on its consolidated financial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transitionand Disclosure- an amendment of FASB Statement No. 123.” SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. SFAS No. 148also requires that disclosures of the pro forma effect of using the fair valuemethod of accounting for stock-based employee compensation be displayed moreprominently and in a tabular format. Additionally, SFAS No. 148 requiresdisclosure of the pro forma effect in interim financial statements. Thetransition and annual disclosure requirements of SFAS No. 148 are effective forfiscal years ended after December 15, 2002.  The interim disclosurerequirements are effective for interim periods ending after December 15, 2002. The Company will provide disclosures to comply with the requirements ofSFAS No. 148.

 

In January 2003, the FASBissued FASB Interpretation No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51” (“FIN 46”).  FIN 46 requirescertain 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.   The Company doesnot anticipate that adoption of this standard will have a material impact onits consolidated financial statements.

 

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# **Net loss per share**

 

Basic net loss per shareis computed by dividing the net loss available to common stockholders for theperiod by the weighted average number of common stock outstanding during theperiod. Diluted net loss per share is computed based on the weighted averagenumber of common stock and dilutive potential common stock outstanding. Thecalculation of diluted net loss per share excludes potential common stock ifthe effect is anti-dilutive. Potential common stock consist of incrementalcommon stock issuable upon the exercise of stock options, shares issuable uponconversion of convertible preferred stock and common stock issuable upon theexercise of common stock warrants.

 

Thefollowing table sets forth the computation of basic and diluted net loss pershare 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 | ) |

 

Thefollowing table sets forth potential shares of common stock that are notincluded in the diluted net loss per share calculation above because to do sowould be anti-dilutive for the periods presented (in thousands):

 
|                                             |   | **December 31,** |       |
|--------------------------------------------------|--------|------------------|------------|
|                                             |   | **2002**         | ** ** | **2001** | ** ** | **2000** | ** ** |
| Common stock options                             |   | 7,535            |       | 7,117 |   | 7,315 |   |
| Common stock under  Employee Stock Purchase Plan |   | 349              |       | 413 |   | 500 |   |
| Common stock warrants                            |   | 3,329            |       | 25 |   | 127 |   |

 

**NOTE 3—RESTRUCTURING AND OTHERCHARGES:**

 

On August 3, 2001, the Company announced arestructuring and cost reduction plan which included a workforce reduction andwrite-off of abandoned assets. As a result of the restructuring and costreduction plan, the Company recorded restructuring and other charges of$684,000 during the quarter ended September 30, 2001.

 

Under the restructuring and cost reduction plan, theCompany reduced its workforce by approximately 40 employees across allfunctions and mostly located at its former headquarters facility in SantaClara, California. The workforce reduction resulted in a $164,000 charge relatingprimarily to severance and fringe benefits. The Company also abandoned assetsresulting in a charge of  $520,000.

 

A summary of the restructuring and other charges is asfollows:

 
|                           |   | **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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**NOTE 4—BALANCE SHEET COMPONENTS (inthousands):**

 
|                                             |   | **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 |   |

 

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

 

**Accrued expenses:**
| 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 OFCREDIT:**

 

On July 12, 2002, the Company entered into acredit agreement with a financial institution that provides for a one-yearrevolving credit facility in an amount of up to $10 million, subject tocertain restrictions in the borrowing base based on eligibility of receivables.Any advances under the credit agreement will be secured by the Company’spersonal property and will bear interest at the prime rate plus 0.875% perannum. The Company has agreed to provide a security interest in itsintellectual property solely, in the event that a judicial authority holds thatthis is necessary, to enable the financial institution to perfect the financialinstitution’s security interest in the rights to payment and proceeds from saleof the Company’s personal property. The Company has also agreed not to pledgeits intellectual property to a third party. The credit agreement contains certain financial and reporting covenants.Covenants relating to meeting minimum quarterly revenues, minimum tangible networth and meeting the deadline for submission of reporting items were violatedduring the year ended December 31, 2002. Waivers were obtained from the financial institution for the covenantsthat were violated.

 

The credit agreement wasused to issue stand-by letters of credit totaling $1.7 million tocollateralize the Company’s obligations to a third party for the purchase ofinventory and to provide a security deposit for the lease of new office space.At December 31, 2002, there was up to $8.3 million available underthe credit facility, subject to certain restrictions in the borrowing base. Theamount by which the aggregate face amount of all outstanding stand-by lettersof credit exceeds the borrowing base, as determined by eligible receivables,represents the amount of restricted cash necessary to secure the letters ofcredit. At December 31, 2002, the Company had outstanding stand-by letters ofcredit of $1.7 million.

 

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**NOTE 6—COMMON STOCK:**

 

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

 

TheCompany has reserved the following number of shares of common stock for futureissuance (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 |   | 7,535            |       | 7,117 |   | 7,315 |   |
|                                                     |   | 11,213           |       | 7,555 |   | 7,942 |   |

 

On January 24, 2002,the Company completed a financing in which it raised $21 million in grossproceeds through a private placement of non-voting Series A PreferredStock and warrants, at $30 per unit to a group of investors, which wasconvertible into 13,999,000 shares of common stock and warrants to purchase3,303,760 shares of common stock. Each share of Series A Preferred Stockwas convertible into 20 shares of Common Stock (or an effective Common Stockprice of $1.50 per share). Investors also received warrants to purchase up toan additional 20 percent of shares of Series A Preferred Stock. Thewarrants have a term of three years and an exercise price equal to $39.00 pershare (or an effective Common Stock exercise price of $1.95 per share). If thecommon stock trades at $5.85 per share or greater for a period of 20 out of 30trading days, the Company can require the holders to exercise the warrants.

 

At a Special Meeting ofStockholders held on March 7, 2002, the stockholders approved the issuanceand sale of 699,950 shares of Series A Preferred Stock and warrants. As aresult, the Preferred Stock and warrants automatically converted into13,999,000 shares of common stock and warrants to purchase 3,303,760 shares ofcommon stock.

 

As a result of thefavorable conversion price of the preferred shares at the date of issuance, theCompany recorded accretion of approximately $15 million (thus increasingthe “net loss applicable to common stockholders” for the year endedDecember 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’s commonstock on the date of grant.

 

***Stock RepurchaseProgram***

 

In August 2002, theCompany’s Board of Directors approved a Stock Repurchase Program and authorizedthe repurchase of up to one million shares of the Company’s common stock in theopen market over the next year. No shares have been repurchased since theauthorization of the Stock Repurchase Program.

 

53

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***Common stockwarrants***

 

InAugust 1997, in connection with a co-operation agreement with Intel Corporation,a shareholder of the Company, the Company issued a fully vested, immediatelyexercisable and non-forfeitable warrant to purchase 102,250 shares of commonstock at $1.00 per share.  The Companydetermined the value of the warrant to be $187,000, based on the Black-Scholesoption pricing model, and was recognized as selling, general and administrativeexpense during the year ended December 31, 1997. During March, 2001, Intelexercised its warrant on a net share basis and the Company issued 90,122 sharesof common stock.

 

In March 1998, inconnection with the extension of the Company’s facility lease, and for servicesprovided by consultants to the Company, the Company issued fully vested,immediately exercisable and non-forfeitable warrants to purchase 7,500 and20,000 shares of common stock, respectively, at $1.50 per share. The warrantsexpire in March 2008. In March 2000, the Company issued 17,500 shares ofcommon stock upon exercise of 17,500 warrants. The warrants include certainregistration rights and provide for exercise on a “net share” basis. TheCompany determined the value of the warrants to be $264,000, based on the Black-Scholesoption pricing model. The value attributable to the warrants for the lease of$79,000 is being recognized as selling, general and administrative expense overthe term of the lease, which commenced in March 1998. The valueattributable to the warrants for consulting services of $185,000 was recognizedas selling, general and administrative expense during the year ended December31, 1998.

 

In July 1999, inconnection with a marketing agreement, the Company issued a fully vested,immediately exercisable and non-forfeitable warrant to purchase 9,000 shares ofcommon stock at $1.50 per share. The warrant expires in July 2009. Thewarrant includes certain registration rights and provides for exercise on a“net share” basis. The Company determined the value of the warrant to be$140,000, based on the Black-Scholes option pricing model. The related chargewas recognized in selling, general and administrative expenses during the yearended December 31, 1999.

 

InJuly 2000, in connection with services provided to the Company, theCompany issued a fully vested, immediately exercisable and non forfeitablewarrant to purchase 6,000 shares of common stock at $12.00 per share. Thewarrant expires in July 2010. The warrant includes certain registrationrights and provides for exercise on a “net share” basis. The Company determinedthe value of the warrant to be $58,000, based on the Black-Scholes optionpricing model. The related charge was recognized in selling, general andadministrative expenses during the year ended December 31, 2000.

 

***Notes receivable from shareholder for the exercise of stockoptions***

 

InJanuary 1997 and March 1998, the President of the Company exercisedstock options by issuing the Company notes totaling $223,000 and $413,000 (the“Notes”), respectively. The Notes were non-recourse, and bore fixed interest at6.01% and 5.51%, respectively, compounded semi-annually. The Notes wereaccounted for in accordance with EITF 95-16 “Accounting for Stock CompensationArrangements with Employer Loan Features Under APB Opinion No. 25.” Due tocertain terms of the Notes, the options were accounted for as variable options,with compensation costs associated with shares purchased with non-recoursenotes being recorded at each period end. On April 14, 2000, the notes andrelated interest were forgiven by the Board of Directors and compensationexpense of $738,000 was recorded by the Company.

 

**NOTE 7—EMPLOYEE BENEFIT PLANS:**

 

***Stock Option Plans***

 

InApril 2000, the Company adopted the 2000 Stock Option Plan (the “2000Plan”). Upon adoption of the 2000 Plan, shares reserved for issuance under the1995 Stock Option Plan relating to ungranted options were cancelled, andoutstanding options under the 1995 Plan became subject to the 2000 Plan. The2000 Plan authorizes the Board of Directors to grant incentive stock options(“ISOs”) and nonstatutory stock options (“NSOs”) to employees, directors andconsultants for up to 17,300,000 shares of common stock. ISOs may be grantedonly to employees of the Company (including officers and directors who are alsoemployees). NSOs may be granted to employees and consultants of the Company. Noperson will be eligible to receive more than 200,000 shares in any fiscal yearpursuant to awards under the 2000 Plan other than a new employee of the Companywho will be eligible to receive no more than 700,000 shares in the fiscal yearin which such employee commences employment.

 

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Underthe 2000 Plan, ISOs and NSOs are granted at a price that is not to be less than100% of the fair market value of the common stock on the date of grant, asdetermined by the Board of Directors. Options generally vest at 25% on thefirst anniversary of the date of grant and vest in equal monthly installmentsover the remaining 36 months. Options granted to shareholders who own more than10% of the outstanding stock of the Company at the time of grant must be issuedat prices not less than 110% of the estimated fair value of the stock on thedate of grant. Options under the 2000 Plan may be granted for periods up to 10years.

 

Thefollowing table summarizes stock option activity under the Company’s StockOption Plans (in thousands, except per share data):

 
|                          |   |                               |       | **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                       |   | (5,574                             | )          | 5,574                   |       | $ | 10.08 |   |
| Canceled                      |   | 899                                |       | (899                    | )          | $ | 6.78 |   |
| Exercised                     |   | —                             |       | (1,127                  | )          | $ | 0.89 |   |
| Balance at December 31,  2000 |   | 4,008                              |       | 7,315                   |       | $ | 7.36 |   |
| Granted                       |   | (5,515                             | )          | 5,515                   |       | $ | 2.77 |   |
| Additional shares  reserved   |   | 1,300                              |       | —                  |       | $ | — |   |
| Canceled                      |   | 4,848                              |       | (4,848                  | )          | $ | 7.67 |   |
| Exercised                     |   | —                             |       | (865                    | )          | $ | 1.47 |   |
| Balance at December 31,  2001 |   | 4,641                              |       | 7,117                   |       | $ | 4.30 |   |
| Granted                       |   | (3,282                             | )          | 3,282                   |       | $ | 0.19 |   |
| Additional shares  reserved   |   | 2,000                              |       | —                  |       | $ | — |   |
| Canceled                      |   | 2,860                              |       | (2,860                  | )          | $ | 3.33 |   |
| Exercised                     |   | —                             |       | (4                      | )          | $ | 1.50 |   |
| Balance at December 31, 2002  |   | 6,219                              |       | 7,535                   |       | $ | 2.88 |   |

 

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Significantoptions groups outstanding at December 31, 2002 and related weighted averageexercise prices and contractual life 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 |   | 3,074,625                |   | 8.7                                               |   | $ | 0.15 |   | 347,605 |   | $ | 0.14 |
| $    0.50-$   1.00 |   | 1,759,499                |   | 7.8                                               |   | $ | 0.54 |   | 1,692,200 |   | $ | 0.54 |
| $    1.45-$   2.50 |   | 733,387                  |   | 5.7                                               |   | $ | 1.54 |   | 733,387 |   | $ | 1.54 |
| $    4.50-$   8.00 |   | 735,149                  |   | 5.7                                               |   | $ | 5.22 |   | 710,148 |   | $ | 5.23 |
| $   8.25-$  12.00            |   | 925,187                  |   | 7.1                                               |   | $ | 11.84 |   | 925,187 |   | $ | 11.84 |
| $ 12.06-$ 19.88                        |   | 272,500                  |   | 3.8                                               |   | $ | 13.46 |   | 272,500 |   | $ | 13.46 |
| $ 20.00-$ 21.75                        |   | 35,000                   |   | 7.7                                               |   | $ | 20.36 |   | 35,000 |   | $ | 20.36 |
|                                   |   | 7,535,347                |   |                                              |   |   |   | 4,716,027 |   |   |

 

***2000 Employee StockPurchase Plan***

 

In April 2000 theCompany adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”)under which 500,000 shares of common stock have been reserved for issuance.Eligible employees may elect to withhold up to 10% of their salary to purchaseshares of the Company’s common stock at a price equal to 85% of the marketvalue of the stock at the beginning or ending of a six month offering period,whichever is lower. No more than 2,000 shares may be purchased by an eligibleemployee during any calendar year. The Purchase Plan will terminate in 2010.Under the Purchase Plan, 64,606, 86,566 and 0 shares were issued during theyears ended December 31, 2002, 2001 and 2000.

 

TheCompany did not recognize compensation expense related to employee purchaserights in 2002, 2001 or 2000.

 

***401(k) Plan***

 

The Company sponsors a401(k) Plan (the “401(k) Plan”) which provides tax-deferred salary deductionsfor eligible employees. Employees may contribute up to 15% of their annualcompensation to the 401(k) Plan, limited to a maximum annual amount as setperiodically by the Internal Revenue Service. The 401(k) Plan permits, but doesnot require, the Company to make matching contributions. To date, no suchmatching contributions have been made.

 

***Fair value disclosures***

 

Pro forma informationregarding net loss and net loss per share is required by SFAS No. 123, whichalso requires that the information be determined as if the Company hadaccounted for its employee stock options under the fair value method. The fairvalue for these options was estimated using the Black-Scholes option pricingmodel.

 

The Black-Scholes optionpricing model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Optionpricing models require the input of highly subjective assumptions, includingthe expected stock price volatility. Accordingly, option pricing models may notnecessarily provide a reliable single measure of the fair value of options.

 

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The fair value of optionsat the date of grant was estimated on the date of grant based on the methodprescribed by SFAS No. 123. The following table summarizes the estimated fairvalue of options and assumptions used in the SFAS No. 123 calculations forstock option plans:

 
|                       |   | **Year Ended December 31,** |       |
|----------------------------|--------|-----------------------------|------------|
|                       |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** |
| Estimated fair value       |   | $                           | 0.14       |   | $ | 2.21 |   | $ | 5.57 |   |
| 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 tablesummarizes the estimated fair value of employees’ purchase rights andassumptions 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             |   | —                      |       | — |   | — |   |
|                            |        |                             |            |  |  |  |  |  |  |  |

 

**NOTE 8—DEFERRED STOCK-BASEDCOMPENSATION:**

 

***Employee optionsand restricted stock***

 

In connection withcertain employee stock option grants and issuance of restricted stock to aformer officer made since January 1998, the Company recognized deferredstock-based compensation, which is being amortized over the vesting periods ofthe related options and stock, generally four years, using an acceleratedbasis. 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.

 

Thefollowing tables sets forth, for each of the periods presented, deferredstock-based compensation recorded and the amortization of deferred stock-basedcompensation (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 | ) | — |   |
|                                                                    |        |                             |            |  |  |  |  |  |  |  |

 

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***Non-employee options***

 

During the period from January 1997 throughDecember 2000, the Company granted options to purchase 657,375 shares ofcommon stock to consultants in exchange for services at exercise prices rangingfrom $0.20 to $12.06 per share.

 

The Company determined the value of the options grantedto consultants based on the Black-Scholes option pricing model. The fair valueof options granted to consultants was determined using the followingassumptions: expected lives of 10 years, risk free interest rates ranging from4.45% to 6.80%, dividend yield of 0.00% and volatility of 70.00%. The followingtable summarizes, for each of the periods presented, the fair values of theoptions granted, deferred stock-based compensation recorded and the relatedamortization recorded (in thousands, 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 |   |
|                                                                                             |        |                              |        |  |  |  |  |  |

 

Unamortized deferred stock-based compensation atDecember 31, 2002 and December 31, 2001 was 91,000 and $1,272,000,respectively.

 

Stock-based compensation attributable to individualsthat worked in the following functions is 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 December 31, 2002, the Company had net operatingloss carryforwards for federal and state income tax purposes of approximately$100,000,000 and $42,000,000 respectively, which expire in varying amountsbeginning in 2004 through 2020. In addition, the Company has creditcarryforwards of approximately $5,000,000 for federal and state purposes. Thefederal and state carryforwards expire in varying amounts through 2020. Underthe Tax Reform Act of 1986, the amounts of and benefits from net operating lossand tax credit carryforwards may be impaired or limited in certaincircumstances. Events which could cause limitations in the amount of netoperating loss and tax credit carryforwards that the Company may utilize in anyone year include, but are not limited to, a cumulative ownership change of morethan 50%, as defined, over a three-year period.

 

Deferred taxes comprise 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              |   | —            |   | — |   |
|                                       |        |                   |        |  |  |  |  |

 

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The Company believes that, based on number of factors,the available objective evidence creates sufficient uncertainty regarding therealizability of the deferred tax assets such that a full valuation allowancehas been recorded. These factors include the Company’s history of losses, andrelatively high expense levels, the fact that the market in which the Companycompetes is intensely competitive and characterized by rapidly changingtechnology, the lack of carryback capacity to realize deferred tax assets andthe uncertainty regarding market acceptance of the Company’s products. TheCompany will continue to assess the realizability of the deferred tax assetsbased on actual and forecasted operating results.

 

**NOTE 10—COMMITMENTS AND CONTINGENCIES:**

 

***Lease commitments***

 

The Company leases office space and equipment undernon-cancelable operating leases with various expiration dates through 2007.Rent expense for operating leases was as follows (in thousands):

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

 

On July 18, 2002, the Company entered into asublease agreement for the lease of new office space. Under the terms of thesublease agreement, commencing September 1, 2002 the Company became entitled to free rent untilJune 30, 2003. Subsequently, the Company will make monthly payments ranging from $0.65 per square foot to$1.35 per square foot until the sublease expires on March 31, 2007. As aresult, the Company had $195,000 of accrued rent at December 31, 2002.TheCompany’s lease for the old office space expired on November 30, 2002.

 

On September 26, 2002, the Company renegotiatedits existing capital lease for research and development related software toextend the term and defer a portion of the payments beyond the term of theoriginal lease. The remaining values of the asset and obligation of the originallease prior to the renegotiation were $328,000 and $349,000 respectively. Thevalue of the asset and obligation recorded under the new lease as of December31, 2002 is $1,005,000 and $1,026,000 respectively.

 

Future minimum lease payments under non-cancelable operatingleases and the capital lease are as follows (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 to time, in the normal course of business,various claims are made against the Company. In the opinion of the Company’smanagement, there are no pending claims, the outcome of which is expected toresult in a material adverse effect on the financial position or results ofoperations of the Company.

 

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**PART III**

 

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

 

The following is abrief biography of each director of Tripath Technology Inc. (“Tripath” or the“Company”). Information regarding executive officers of the Company is includedin Part I of this Annual Report under a separate item captioned "ExecutiveOfficers of the Registrant."
| **Name**              |   | **Age** |   | **Principal  Occupation/ Position Held With the Company**     |   |
|-----------------------|--------|---------|--------|---------------------------------------------------------------|--------|
| Dr. Adya S.  Tripathi |   | 50      |   | President and Chief Executive  Officer, Chairman of the Board |   |
| Mr. A.K. Acharya      |   | 46      |   | President of HTL Co. Japan Ltd.                               |   |
| Mr. Andy Jasuja       |   | 52      |   | Founder and Chairman of Sigma Systems Group                   |   |
| Mr. Y.S. Fu           |   | 54      |   | President of Wyse Technology (Taiwan Ltd.)                    |   |

 

*                Dr. Adya S. Tripathi,*founded Tripath and has served as our President,Chief Executive Officer and Chairman since our inception in 1995. Beforefounding Tripath, Dr. Tripathi held a variety of senior management and engineeringpositions with Advanced Micro Devices, Hewlett-Packard, InternationalBusiness Machines (“IBM”), International Microelectronic Products (“IMP”),National Semiconductor and Vitel Communications. Dr. Tripathi holdsBachelor of Science and Master of Science degrees in Electrical Engineeringfrom Banaras Hindu University in India. He pursued graduate work at theUniversity of Nevada-Reno and the University of California-Berkeley,receiving his doctorate of philosophy in Electrical Engineering from the formerin 1984. Dr. Tripathi has also taught at the University of California-BerkeleyExtension.

*Mr.A.K. Acharya*, has served as a director of our company sinceAugust 2002. Mr. Acharya is President of HTL Co. Japan Ltd, a softwaredevelopment company for semiconductor capital equipment, a position he has heldsince 1994. Mr. Acharya holds a Bachelor of Technology in ElectricalEngineering from the Indian Institute of Technology in  India and a Masters of Technology degree inElectrical Engineering-Control System and Instrumentation from the Institute ofTechnology, Banaras Hindu University in India.

*Mr.Andy Jasuja*, has served as a director of our company sinceSeptember 2002. Mr. Jasuja is the founder and Chief Executive Officer of SigmaSoftware Solutions, a provider of service management software for cablecompanies. Between 1994 and 2002, Mr. Jasuja served as Chairman of SigmaSystems Group. Mr. Jasuja is an information technology professional with 27years of experience in the software industry. Prior to founding Sigma, Mr.Jasuja spent several years in the banking and telecommunications industries insenior management and consulting roles. Mr. Jasuja holds a Bachelor of Sciencedegree in Electrical Engineering from the Institute of Technology in Varansi,India and a Master of Science degree in Systems Design Engineering from theUniversity of Waterloo in Ontario, Canada.

*Mr.Y.S. Fu*, has served as a director of our company since May2002. Mr. Fu is President of Wyse Technology (Taiwan) Ltd., a server-centriccomputing company, a position he has held since 1998. He was previouslyPresident of WK Technology Investment Co., a technology investment firm basedin Taiwan.  Mr. Fu has also heldpositions with Logitech Far East Ltd., Qume and Texas Instruments. Mr. Fu has aBachelor of Science degree in Mechanical Engineering from Chung-Yuan ChristianUniversity in Taiwan and a Masters of Business Administration from West CoastUniversity in California, U.S.A.

** Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) of the Securities Exchange Act of1934, as amended (the “Exchange Act”) requires the Company’s executive officersand directors and persons who own more than ten percent of a registered classof the 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 Commissionregulation to furnish the Company with copies of all Section 16(a) forms theyfile. The Company believes that all Executive Officers and Directors of theCompany complied with all applicable filing requirements during the fiscal yearended December 31, 2002,

 

 

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except that Form 4s which were related to a single stock option grantmade by the Company in October 2002 to each of A. K. Acharya, Y. S. Fu, AndyJasuja, Naresh Sharma and Adya Tripathi were not filed on a timely basis. Allsuch Form 4s have since been filed with the Commission.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

### **COMPENSATION OF DIRECTORS**

Our directors did not receive any cash compensationfor their services as directors during fiscal year 2002.  Our 2000 Stock Plan provides for grants ofoptions to purchase common stock to our directors who are not employees. Ournon-employee directors each received a grant of options to purchase 100,000shares of our common stock for their service during fiscal year 2002.  Our non-employee directors did not receiveany options to purchase shares of our common stock for participation on anycommittee of the board of directors on which they served during fiscal year2002. In addition, our directors are reimbursed for expenses incurred inconnection with attending board and committee meetings.

### **SUMMARY OF COMPENSATION**

As of December 31,2002, our directors and Named Executive Officers as a group held options topurchase a total of 1,234,270 shares of common stock, at exercise pricesranging from $0.14 to $13.20 per share. These options are scheduled to expireon various dates between January 27, 2007 and October 2, 2012.

****SUMMARY COMPENSATION TABLE****

The following table sets forth all compensationawarded to, earned by, or paid to our Chief Executive Officer and the otherfour most highly paid executive officers, each of whose total cash compensationexceeded $100,000 during the years ended December 31, 2002, 2001 and 2000. 
|                                           |   |             |   | **Annual  Compensation** |                      | **Long-Term  Compensation** |   |
|------------------------------------------------|--------|------------------|--------|--------------------------|---------------------------|----------------------------------|--------|
| **Name and  Principal Position**               |   | **Year**         |   | **Salary**               |                      | **Bonus**                        |   | **Securities  Underlying Options** |   |
| Adya S. Tripathi  (1)  Chief Executive Officer |   | 2002  2001  2000 |   | $  $$                    | 348,000  360,000  358,875 |                             | $  $$  | 0  61,182  1,335,401 | (1)  (1) |   | 200,000  200,000200,000 |   |
| John DiPietro  (2)  Chief Financial Officer    |   | 2002  2001  2000 |   | $  $$                    | 132,081  175,000  155,152 |                             | $  $$  | 0  4,300  25,000 |   |   | 0  200,000  200,000 |   |
| Naresh Sharma  Vice President of Operations    |   | 2002  2001  2000 |   | $  $$                    | 137,500  140,346  125,000 |                             | $  $$  | 0  0  0 |   |   | 100,000  170,000  45,000 |   |
| Alan J. Soucy  (2)  Vice President of Sales    |   | 2002  2001  2000 |   | $  $$                    | 128,631  200,000  198,875 |                             | $  $$  | 0  0  5,000 |   |   | 0  200,000  200,000 |   |

 

 

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(1)                                  On April 14, 2000, the board of directorsforgave notes and related interest totaling $738,000. Including the gross-upfor taxes, total compensation to the Chief Executive Officer related to theforgiveness of indebtedness was $1,335,401. Additional gross-up for taxesyielded $61,182 supplemental compensation in 2001. 

                In fiscal 2000, 2001 and 2002, Dr. Tripathi wasgranted options to purchase 1 million, 500,000 and 2.5 million shares of theCompany’s common stock, respectively. The Company’s 2000 Stock Option Plan includes a 200,000 share annuallimitation on grants.  As a result,stock option grants covering an aggregate of 3.4 million shares exceeded theannual limitation under the Company’s 2000 Stock Option Plan, and such grantsare invalid. On April 28, 2003, in consideration of the invalid grants and inorder to fairly compensate Dr. Tripathi with respect to such invalid grants,the Compensation Committee of the Board of Directors approved a grant ofoptions to purchase 200,000 shares and 1.8 million shares of restricted stock,pursuant to the 2000 Stock Option Plan. Such grants will vest as to 50% onApril 28, 2004 and as to the remainder on April 28, 2005.

(2)                                  As of December 31, 2002, theseindividuals are no longer Tripath employees.

**OPTIONGRANTS IN LAST FISCAL YEAR**

The following table setsforth information with respect to stock options granted during fiscal year 2002to each of our executive officers named in the summary compensation table (the“Named Executive Officers”). The percentage of total options granted to ouremployees in the last fiscal year is based on options granted to purchase anaggregate of 3,282,500 shares of common stock during fiscal year 2002. We havenever granted any stock appreciation rights.

The exercise pricespresent our board of directors’ estimate of the fair market value of our commonstock on the grant date. In establishing these prices, our board of directorsconsidered many factors, including our financial condition and operatingresults, transactions involving the issuances of shares of our preferred stock,the senior rights and preferences accorded issued shares of preferred stock andthe market for comparable stock.

The amounts shown aspotential realizable value represent hypothetical gain that could be achievedfor the respective options if exercised at the end of the option term. Theseamounts represent assumed rates of appreciation in the value of our commonstock from the fair market value at the date of grant. The 5% and 10% assumedannual rates of compounded stock price appreciation are mandated by rules ofthe Commission and do not represent our estimate of projection of the futureprice of our common stock. Actual gains, if any, on stock option exercisesdepend on the future performance of the trading price of our common stock. Theamounts reflected in the table may not necessarily be achieved. 
|               |   | **Individual  Grants**                                      |   | **Potential  Realizable Value at Assumed Annual Rates of Stock  Price Appreciation for Options Term** |   |
|--------------------|--------|-------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|
| **Name**           |   | **Number  of  Securities Underlying Options  Granted** |   | **Percent of  Total Options Granted to Employees in Fiscal 2002**                                          |   | **Exercise  Price  Per Share** |   | **Expiration  Date** |   | **5%** |   | **10%** |   |
| Adya Tripathi  (1) |   | 200,000                                                     |   | 6.09                                                                                                       | %      | $ | 0.154 |   | 10/02/07 |   | $ | 4,936 |   | $ | 14,294 |   |
| John DiPietro      |   | —                                                      |   | —                                                                                                     |   | $ | — |   | — |   | $ | — |   | $ | — |   |
| Alan Soucy         |   | —                                                      |   | —                                                                                                     |   | $ | — |   | — |   | $ | — |   | $ | — |   |
| Naresh Sharma      |   | 100,000                                                     |   | 3.05                                                                                                       | %      | $ | 0.140 |   | 10/02/12 |   | $ | 8,805 |   | $ | 22,312 |   |

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(1)           In fiscal 2002, Dr.Tripathi was granted options to purchase 2.5 million shares of the Company’scommon stock.  The Company’s 2000 StockOption Plan includes a 200,000 share annual limitation on grants.  As a result, stock option grants covering2.3 million shares exceeded the annual limitation under the Company’s 2000Stock Option Plan, and such grants are invalid.

 

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**YEAR-END OPTION VALUES**

The following tableprovides information for the Named Executive Officers concerning the number andvalue of securities underlying exercisable and unexercisable options held as ofDecember 31, 2002.  No options wereexercised during the year ended December 31, 2002 by any of the NamedExecutive Officers.

 
|                  |   | **Number of  Securities Underlying  Unexercised Options at  December 31, 2002 (#)** |   | **Value of  Unexercised  In-the-Money Options at  December 31, 2002 ($)** |   |
|-----------------------|--------|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                  |   | **Exercisable**                                                                     |   | **Unexercisable**                                                         |   | **Exercisable** |   | **Unexercisable** |   |
| Adya S. Tripathi  (1) |   | 391,665                                                                             |   | 208,335                                                                   |   | $ | 2,100 |   | $ | 23,100 |   |
| John DiPietro         |   | —                                                                              |   | —                                                                    |   | $ | — |   | $ | — |   |
| Alan J. Soucy         |   | —                                                                              |   | —                                                                    |   | $ | — |   | $ | — |   |
| Naresh Sharma         |   | 100,827                                                                             |   | 228,443                                                                   |   | $ | 583 |   | $ | 13,417 |   |

----

(1)           In fiscal 2000, 2001 and 2002, Dr.Tripathi was granted options to purchase 1 million, 500,000 and 2.5 millionshares of the Company’s common stock, respectively.  The Company’s 2000 Stock Option Plan includes a 200,000 shareannual limitation on grants.  As aresult, stock option grants covering an aggregate of 3.4 million shares exceededthe annual limitation under the Company’s 2000 Stock Option Plan, and suchgrants are invalid.

 

The values shown for in-the-money options represent the differencebetween the respective exercise price of outstanding stock options, and $0.28,which is the fair market value of our common stock as of December 31,2002.

 

 

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**ITEM 12.  SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

**EQUITY COMPENSATION PLAN INFORMATION**

Thefollowing table provides certain information with respect to the Company’sequity compensation plans in effect as of December 31, 2002.  
| **Plan  Category**                                              |   | **Number of  securities to be issued upon exercise of outstanding options, warrants and  rights (a)** |       | **Weighted-average  exercise price of outstanding options, warrants and rights (b)** |       | **Number of  securities remaining available for issuance under equity compensation plans  (excluding securities reflected in column (a)) (c)** |       |
|-----------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Equity  compensation plans approved by stockholders:**        |   |                                                                                                  |       |                                                                                 |       |                                                                                                                                           |       |
| 2000 Stock  Option Plan                                         |   | 7,535,347                                                                                             |       | $                                                                                    | 2.88       |                                                                                                                                           | 6,219,000  |   |
| 2000 Employee  Stock Purchase Plan                              |   | —                                                                                                |       | —                                                                               |       | 349,000                                                                                                                                        |       |
| **Equity  compensation plans not approved by security holders** |   | **—**                                                                                            | ** ** | **—**                                                                           | ** ** | **—**                                                                                                                                     | ** ** |
| **Total**                                                       |   | 7,535,347                                                                                             |       | $                                                                                    | 2.88       |                                                                                                                                           | 6,568,000  | ** ** |

 

The above equitycompensation plans of the Company that were in effect as of December 31, 2002were adopted with the approval of the Company’s stockholders.

 

 

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****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT****

The following table setsforth as of March 31, 2003, certain information as known to the Company withrespect to the beneficial ownership of our common stock by (i) any person(including any group as that term is used in Section 13(d)(3) of the SecuritiesExchange Act), known by the Company to be the beneficial owner of more than 5%of the Company’s voting securities, (ii) each director and each nominee fordirector to the Company, (iii) each of the executive officers named in the SummaryCompensation Table appearing herein, and (iv) all current executive officersand directors of the Company as a group.

**BeneficialOwnership**+
| **Beneficial  Owner and Address***                           |   | **Number of  Shares**** |   | **Percent of  Total** |   |
|--------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| Adya S. Tripathi  (1)                                        |   | 10,558,333              |   | 25.53                 | %      |
| Manchester  Management Company, LLC (2)                      |   | 2,602,200               |   | 6.29                  | %      |
| Pequot entities  (3)                                         |   | 2,400,000               |   | 5.80                  | %      |
| David P. Eichler                                             |   | —                  |   | —                |   |
| Naresh Sharma  (4)                                           |   | 187,800                 |   | ***                   |   |
| Graham Wright                                                |   | —                  |   | —                |   |
| Andy Jasuja                                                  |   | 34,166                  |   | ***                   |   |
| A.K. Acharya (5)                                             |   | 50,566                  |   | ***                   |   |
| Y.S. Fu (6)                                                  |   | 29,166                  |   | ***                   |   |
| Directors and  executive officers as a group (7 persons) (7) |   | 10,860,031              |   | 26.26                 | %      |

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*                     Unlessotherwise indicated above, the address for each stockholder on this table isc/o Tripath Technology Inc., 2560 Orchard Parkway, San Jose, CA 95131.

**              Unless otherwiseindicated below, the persons and entities named in the table have sole votingor investment power with respect to all shares beneficially owned, subject tocommunity property laws where applicable.

***          Less than one percent(1%).

(1) Includes 458,333shares issuable upon exercise of stock options held by Dr. Tripathi andincludes 900,000 shares held in trust for the benefit of Dr. Tripathi’s minorchildren over which Dr. Tripathi holds sole voting and dispositive power. Infiscal 2000, 2001 and 2002, Dr. Tripathi was granted options to purchase 1million, 500,000 and 2.5 million shares of the Company’s common stock,respectively.  The Company’s 2000 StockOption Plan includes a 200,000 share annual limitation on grants.  As a result, stock option grants covering anaggregate of 3.4 million shares exceeded the annual limitation under theCompany’s 2000 Stock Option Plan, and such grants are invalid.

(2) Based on a Schedule13G filed with the Securities and Exchange Commission on March 15, 2002,Manchester Management Company, LLC has entities have sole voting and soledispositive power over 2,602,200 shares.

(3) Includes 1,500,000shares and warrants to purchase 300,000 shares held by Pequot Scout Fund, L.P.and 500,000 shares and warrants to purchase 100,000 shares held by PequotNavigator Offshore Fund Inc.

(4) Includes 133,642shares issuable upon the exercise of stock options held by Mr. Sharma.

(5) Includes 29,166 shares issuable upon the exerciseof stock options held by Mr. Acharya and 20,000 shares held by HTL Co. JapanLtd.

(6) Includes29,166 shares issuable upon the exercise of stock options held by Mr. Fu.

(7) Includes 684,473 shares issuable upon the exerciseof stock options held by the Company’s executive officers and directors.

+This table is based upon information supplied byofficers, directors and principal stockholders, and Schedules 13D and 13G filedwith the Commission. The number and percentage of shares beneficially owned arebased on the aggregate of 41,357,145 shares of our common stock outstanding asof March 31, 2003, adjusted as required by the rules promulgated by theCommission.

 

 

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**ITEM13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

In the Company’s lastfiscal year, there has not been nor is there currently proposed any transactionor series of similar transactions to which the Company was or is to be a partyin which the amount involved exceeds $60,000 and in which any director,executive officer, holder of more than 5% of our common stock or any member ofthe immediate family of any of the foregoing persons had or will have a director indirect material interest.

****INDEMNIFICATION AGREEMENTS****

Our bylaws provide thatwe shall indemnify our directors and officers and may indemnify our employeesand other agents to the fullest extent permitted by Delaware law. Our bylawsalso permit us to secure insurance on behalf of any officer, director, employeeor other agent for any liability arising out of his or her actions in suchcapacity, regardless of whether the Delaware General Corporation Law expresslypermits indemnification.

We have entered intoagreements to indemnify our directors and executive officers, in addition tothe indemnification provided for in our bylaws. These agreements, among otherthings, indemnify our directors and executive officers for certain expensesincluding attorneys’ fees, judgments, fines and settlement amounts incurred byany director or executive officer in any action or proceeding, including anyaction by or in our right arising out of that person’s services as a director,officer, employee, agent or fiduciary for us, any subsidiary of ours or anyother company or enterprise to which the person provides services at our request.The agreements do not provide for indemnification in cases where

•                  the claim isbrought by the indemnified party;

•                  the indemnifiedparty has not acted in good faith;

•                  the expenseshave been paid directly to the indemnified party under a policy of officers’and directors’ insurance maintained by us; or

•                  the claim arisesunder Section 16(b) of the Securities Exchange Act.

We believe that theseprovisions and agreements are necessary to attract and retain qualified personsas directors and executive officers. It is the position of the Securities andExchange Commission that indemnification for liabilities arising under federalor state securities laws is against public policy and not enforceable.

At present, there is nopending litigation or proceeding involving any of our directors or officers inwhich indemnification is required or permitted, and we are not aware of anythreatened litigation or proceeding that may result in a claim for suchindemnification.

**ITEM14.  CONTROLS AND PROCEDURES**

 

***Evaluation of disclosure controls and procedures.***  Based on their evaluation as of adate within 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 internal controls.*** On April 21, 2003, the Company revisedits internal controls and procedures to include a requirement that, where asigned document must be filed with or furnished to the Commission, the Companywill receive a manually signed signature page or other document authenticating,acknowledging or otherwise adopting the signature that appears in the filing.  Such document will be executed and receivedby the Company before or at the time the filing is made and will be retained bythe Company for a period of five years after the date of filing.  Except as described above, there have beenno significant changes in the Company’s internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theirevaluation, nor were there any significant deficiencies or material weaknessesin the Company’s internal controls. Accordingly, no additional corrective actions were required orundertaken.

 

***Limitations on the effectiveness of controls.***The Company’s management, including thechief executive officer and chief financial officer, does not expect that ourdisclosure controls and procedures or our internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of the control. The design of anysystem of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, control may become inadequate because of changes in conditions, orthe degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

** **

 

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**SIGNATURES**

 

                Pursuant to therequirements 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:  April 30, 2003 |                        |   |

 

 

**POWER OFATTORNEY**

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Signature**                  |   | **Title**                                                                                        |   | **Date**                            |
|--------------------------------|--------|--------------------------------------------------------------------------------------------------|--------|-------------------------------------|
|                           |   |                                                                                             |   |                                |
| /s/  DR. ADYA S. TRIPATHI |   | President  and Chief Executive Officer (Principal Executive Officer)                             |   | April 30, 2003                 |
| Dr.  Adya S. Tripathi          |   |                                                                                             |   |                                |
|                           |   |                                                                                             |   |                                |
| /s/  DAVID P. EICHLER     |   | Chief  Financial Officer (Principal Financial and Accounting Officer) Vice President  of Finance |   | April 30, 2003                 |
| David  P. Eichler              |   |                                                                                             |   |                                |
|                           |   |                                                                                             |   |                                |
| *                              |   | Director                                                                                         |   | April    , 2003 |
| A.K.  Acharya                  |   |                                                                                             |   |                                |
|                           |   |                                                                                             |   |                                |
| *                              |   | Director                                                                                         |   | April    , 2003 |
| Y.S.  Fu                       |   |                                                                                             |   |                                |
|                           |   |                                                                                             |   |                                |
| *                              |   | Director                                                                                         |   | April    , 2003 |
| Andy  Jasuja                   |   |                                                                                             |   |                                |

 
| *  By: /s/ | DAVID  P. EICHLER                     |   |
|------------|---------------------------------------|--------|
|       | David  P. Eichler  (Attorney-In-Fact) |   |

 

 

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**CERTIFICATIONS**

 

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

 

1.   Ihave reviewed this annual report on Form 10-K/A 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 controls andprocedures 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, thatinvolves 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: April  30, 2003

 

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

 

 

 

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**CERTIFICATIONS**

 

I, David P. Eichler, certify that:

 

1.  Ihave reviewed this annual report on Form 10-K/A 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 controls andprocedures 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, thatinvolves 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 the dateof our most recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: April  30, 2003

 

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

 

 

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** **

**EXHIBITINDEX**

 
| **Number**    |   | **Description  of Document**                                                                                                                                              |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)        |   | Restated Certificate of Incorporation of Tripath  Technology Inc.                                                                                                         |
| 3.2(1)        |   | Bylaws of Tripath Technology Inc.                                                                                                                                         |
| 3.3(2)        |   | Certificate of Designation of Preferences and Rights  of Series A Preferred Stock                                                                                         |
| 4.1(1)        |   | Specimen common stock certificate                                                                                                                                         |
| 4.2(1)        |   | Second Amended and Restated Shareholder Rights  Agreement, dated September 15, 1998, between Tripath Technology Inc. and  Certain Stockholders of Tripath Technology Inc. |
| 4.3(2)        |   | Registration Rights Agreement, dated January 22,  2002, by and among Tripath Technology Inc. and Certain Stockholders of  Tripath Technology Inc.                         |
| 4.4(2)        |   | Form of Certificate for Warrants to Purchase Tripath  Technology Inc.’s Series A Preferred Stock, dated January 24, 2002                                             |
| 10.1(1)† |   | Form of Indemnification Agreement, between Tripath  Technology Inc. and each of its directors and officers                                                                |
| 10.2(1)       |   | License and Supply Agreement, dated July 9, 1999,  between STMicroelectronics, Inc. and Tripath Technology Inc.                                                           |
| 10.3(1)       |   | Lease Agreement, by and between Tripath Technology  Inc. and Peery/Arrillaga dated October 16, 1997                                                                       |
| 10.4(1)† |   | 2000 Stock Plan and form of option agreement                                                                                                                              |
| 10.5(1)† |   | 2000 Employee Stock Purchase Plan                                                                                                                                         |
| 10.6(2)       |   | Securities Purchase Agreement, dated January 22,  2002, by and among Tripath Technology Inc. and certain purchasers of its  capital stock                                 |
| 10.7(3)       |   | Loan and Security Agreement, dated July 12, 2002,  between Comerica Bank-California and Tripath Technology Inc.                                                           |
| 10.8(3)       |   | 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(3)      |   | Intellectual Property Agreement, dated July 12,  2002, between Comerica Bank-California and Tripath Technology Inc.                                                       |
| 10.11(3)      |   | 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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† Represents a management contractor compensatory plan or arrangement

*   Previously filed.

**  This certification accompaniesthis Annual Report on Form 10-K and shall not be deemed “filed” by TripathTechnology Inc. for purposes of Section 18 of the Securities Exchange Act of1934, as amended.

(1)  Incorporated by reference toTripath Technology Inc.’s registration statement on Form S-1, registrationnumber 333-35028, as amended.

(2)  Incorporated by reference toTripath Technology Inc.’s Form 8-K filed on January 30, 2002.

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

 

 

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