**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

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** **

**FORM 10-KSB**

** **

**(MarkOne)**

**x****  ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

** **

**For the fiscal year ended September 30,2007**

** **

**o****  TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

** **

**For the transition period from**              **to**           .

 

**CommissionFile No**. **000-31081**

 

**TRIPATH TECHNOLOGY INC.**

(Name of small business issuer in itscharter)

 

| **Delaware**                                                    | ** ** | **77-0407364**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **46560  Fremont Blvd., Suite 109****Fremont, CA**         | ** ** | **94538**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

Issuer’s telephonenumber:**510-979-0848**

 

Securities registered under Section 12(b) ofthe Exchange Act:

 

**None.**

 

Securities registered under Section 12(g) ofthe Exchange Act:

 

**CommonStock, Par Value $0.001** (Title of class)

 

Check whether the issuer (1) filedall reports required to be filed Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period for which theregistrant was required to file reports), and (2) has been subject to suchfiling requirements for the past 90 days.  o Yes    x  No

 

Check if there is no disclosureof delinquent filers in response to Item 405 of Regulation S-B contained inthis form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB:  x

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes x No o

 

Issuer’s revenues for thefiscal year ending September 30, 2007 were $5,783,000.

 

The aggregate market value of the voting andnon-voting common equity on September 30, 2007 held by non-affiliates ofthe registrant (based on the average bid and asked price of such stock on suchdate) was approximately $0.  For purposesof this calculation, we have included 70,164,582 shares of voting stock held byall shareholders other than officers, directors and beneficial owners of 10% ormore of voting stock.  (See definition ofaffiliate in Rule 12b-2 of the Exchange Act.)

 

At September 30, 2007, there were 70,164,582 sharesoutstanding of the issuer’s common stock, the only class of common equitycurrently outstanding.

 

Transitional Small Business Disclosure Format (Checkone)  Yes o No x

 

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**TABLE OF CONTENTS**

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| ** **                                            | ** **                                                                                                                                            | **Page**   |
|-------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS** | **1**                                                                                                                                                 |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 1.**                                           | **DESCRIPTION OF BUSINESS**                                                                                                                           | **1**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 2.**                                           | **DESCRIPTION OF PROPERTY**                                                                                                                           | **3**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM  3.**                                          | **LEGAL  PROCEEDINGS**                                                                                                                                | **4**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 4.**                                           | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                                               | **4**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 5.**                                           | **MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**                                                                                          | **4**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 6.**                                           | **MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**                                                                                    | **5**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 7.**                                           | **FINANCIAL STATEMENTS**                                                                                                                              | **8**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 8.**                                           | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE**                                                             | **8**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 8A.**                                          | **CONTROLS AND PROCEDURES**                                                                                                                           | **8**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM  8B.**                                         | **OTHER INFORMATION**                                                                                                                                 | **8**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 9.**                                           | **DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,  CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH  SECTION 16(a) OF THE EXCHANGE ACT** | **9**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 10.**                                          | **EXECUTIVE COMPENSATION**                                                                                                                            | **9**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 11.**                                          | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT**                                                                                   | **9**      |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 12.**                                          | **CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS, AND DIRECTOR INDEPENDENCE**                                                                        | **11**     |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 13.**                                          | **EXHIBITS**                                                                                                                                          | **11**     |
| ** **                                            | ** **                                                                                                                                            | ** ** |
| **ITEM 14.**                                          | **PRINCIPAL ACCOUNTING FEES AND SERVICES**                                                                                                            | **13**     |
|                                                       |                                                                                                                                                       |            |  |

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**PART     I**

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# **SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

# ** **

Thisreport contains forward-looking statements. These forward-looking statements are subject to certain risks and uncertaintiesthat could cause actual results to differ materially from historical results oranticipated results, including those set forth under “ITEM 1. DESCRIPTION OFBUSINESS—Risk Factors,” below, and elsewhere in this report.  In some cases, you can identify forwardlooking statements by terms such as “may,” “intend,” “might,” “should,” “could,”“would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “potential,”or the negative of these terms, and similar expressions which are intended toidentify forward-looking statements. Such statements are subject to certain risks and uncertainties, whichcould cause actual results to differ materially from those projected.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.  We undertake no obligation topublicly release the result of any revisions to these forward-lookingstatements, which may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  The forward-looking statements in this reportare based upon management’s current expectations and beliefs, which managementbelieves are reasonable.

 

Inthis report, unless the context indicates otherwise, the terms “Tripath,” “Company,”“we,” “us,” and “our” refer to Tripath Technology Inc., a Delaware corporation.

 

## **ITEM 1.**                                                     DESCRIPTION OF BUSINESS.

## ** **

**Status ofOperations**

** **

ThisAnnual Report on Form 10-KSB describes our operations through the yearended September 30, 2007.  We havebeen a “debtor in possession” since we filed a voluntary petition for reliefunder Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Courtfor the Northern District of California, Case No. 07-50358, on February 8,2007.  Set forth below is a brief summaryof our recent history:

 

·                                          Inour Quarterly Report on Form 10-Q for the fiscal quarter and nine monthsended June 30, 2006, we reported that we did not have sufficient funds tofinance our operations through the end of the month of August 2006 andthat our future depended on our ability to secure additional sources offinancing during the month of August 2006. For a period of time, we approached parties to discuss a sale of all orpart of our assets and/or a financing plan for the company.  Based upon negotiations with third parties,we reported that it was highly likely that any sales or financing transactionwould require concessions from a number of our significant creditors, a largeportion of our existing debt obligations would not be paid in full, and theholders of our common stock would receive no value. Due to the possibility of ashortfall in proceeds to creditors and potential litigation, any potentialbuyer of the assets would likely require that we conclude such a sale under theprotection of the Federal bankruptcy statutes. We also stated that the holdersof our 6% convertible debentures held a first priority security interest in allof our assets and any agreement with a potential buyer would require theconsent of such debenture holders.

 

·                                          Inour Current Report on 8-K filed on January 2, 2007, we reported that wehad not made principal and interest payments on our 6% convertible debenturessince September 1, 2006, and that such debenture holders informed us thatdue to the nonpayment of the required principal and interest payments that theholders can demand immediate payment of all principal and interest amounts dueat a 130% default rate with 18% interest since September 1, 2006.  Such a demand would result in an amount dueto the holders of approximately $4.7 million as of December 29, 2006. Inaddition, the debenture holders informed us, that pursuant to the securityagreement dated November 5, 2005, that we entered into with such holders,upon an event of default, that they have a right to enter company premises andtake possession of the collateral, the right to operate our business using thecollateral, and the right to sell the collateral to satisfy our obligations tothem.

 

·                                          OnFebruary 8, 2007, we filed a voluntary petition for relief under Chapter11 of the Bankruptcy Code with the United States Bankruptcy Court for theNorthern District of California, Case No. 07-50358.  As of that date, we had approximately $8million in debt, with approximately $4.8 million in secured claims and $3.25million in unsecured claims.

 

·                                          OnMarch 19, 2007, the bankruptcy court granted our motion to sellsubstantially all of our assets.  On May 3,2007, the bankruptcy court conducted an auction that resulted in the high bidof $3.25 million by Cirrus Logic, Inc. for all of our intellectualproperty.  Cirrus Logic, Inc. alsoagreed to purchase our office equipment and furnishings for $25,000. The saleto Cirrus Logic, Inc. closed on June 26, 2007.  We had three other lots of assets that didnot draw qualifying bids at the auction: inventory, lab equipment and fourtesters used in the manufacture of our products. At the close of the auction,the bankruptcy court authorized us to solicit further bids for those lots, andto proceed to close sales of those assets, subject to certain guidelines imposedby the bankruptcy court. On June 12, 2007, the lab equipment was soldpursuant to a joint offer from BidItUp Auction & Appraisals andBaySide Test Equipment for a total of $110,000, and on June 22, 2007, thetesters were sold to Winbond Electronics Corporation for $340,000. We continueto liquidate our remaining inventory and have generated $491,388 through September 30,2007.

 

·                                          OnDecember 20, 2007, the Company and Enable Growth Partners LP filed withthe bankruptcy court the “Third Amended Disclosure Statement Accompanying ThirdAmended Plan of Reorganization dated December 20, 2007 Proposed by TripathTechnology Inc. and Enable Growth Partners LP, for itself and as agent forthe Secured Parties” (the “**Plan of Reorganization**”),which included the proposed merger of Etelos, Incorporated, a Washingtoncorporation (“**Etelos**”), with and into theCompany.

 

·                                          OnFebruary 1, 2008, the bankruptcy court issued an order confirming approvalof the Plan of Reorganization, including the merger and the transfer of all of theCompany’s existing assets into a separate bankruptcy estate and the dischargeof all of the Company’s liabilities.  The overall impact of the confirmed Plan of Reorganization is for theCompany to emerge from the bankruptcy proceeding with no assets and noliabilities. As of the effective date of the merger, we are required to issue5,000,000 shares in the aggregate of our common stock to our secured 

 

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creditors and10,000 shares in the aggregate to our unsecured creditors, and all other issuedand outstanding securities of and interests in the Company, including our debentures,stock options (including, but not limited to, all stock options granted to ouremployees), warrants and other shares of common stock will be canceled andextinguished.  In addition, on theeffective date of the merger; any instrument evidencing or creating anyindebtedness or obligation of the Company, will be canceled and extinguished.

 

·              On April 22,2008, we entered into an agreement and plan of merger with Etelos (the “**Merger Agreement**”) pursuant to which Etelos has merged withand into the Company, at which time the separate corporate existence of Etelosceased and the Company continued after the merger as the surviving corporationand changed its name to Etelos, Inc. Under the terms of the Merger Agreement, the shareholders of Etelos willreceive common stock of the surviving corporation in exchange for their sharesof capital stock of Etelos.  In connectionwith the Merger, the Company, as the surviving corporation, has succeeded toall of the assets and liabilities of Etelos. The surviving corporation will conduct the business that was previouslyconducted by Etelos.

 

Theinformation in this Annual Report on Form 10-KSB relates to the operations ofthe Company through September 30, 2007. It does not address the operations of the surviving corporationfollowing the merger.

 

**History**

** **

Untilwe ceased operations, we were a fabless semiconductor company that focused ondeveloping highly efficient power amplification to the digital media andelectronics markets, and developed and owned patented technology called DigitalPower Processing (DPP®). DPP® combined modern advances in digital signalprocessing and power processing, the Company developed a family of highlyefficient, switching power amplifiers for the audio market, and its productswere used in a wide range of audio and video products, including home stereoand home theater systems, Web-based digital audio systems and gaming systems,audio systems, high-speed networking and wireless communication, the Companyalso provided technology for speakers in computers and automotive audiosystems, as well as digital subscriber line, or DSL, drivers to allow serviceproviders to increase the number, reach and signal speed of subscriber lineswithout modification to existing infrastructure. The Company claimedapproximately 80 issued and pending patents, and at its peak in 2002, hadapproximately 200 employees in the U.S., a Japanese subsidiary, and offices inEurope.

 

TheCompany’s products were technologically advanced and generally ahead of theindustry, but the Company overestimated the market and demand for its productsfailed to develop as quickly as the Company anticipated. The result was anaccumulation of unsold inventory that gradually became obsolete as microchiptechnology progressed.  For the threeyear period ending September 30, 2005, the Company had net revenues inexcess of $32.6 million, but net losses from operations of approximately $30million. In the first six months of its 2006 fiscal year. The Company lost anadditional $9.25 million. In mid-2006, the Company began to cut expenses,reduced its payroll and made other efforts to cut its losses and becomeprofitable, but to no avail. During the month of August, 2006, the Companyexperienced a 100% turnover in its accounting department, including the chieffinancial officer and the controller, further contributing to its financialinstability. Beginning in late August, the Company contracted with a temporaryemployment agency for the services of an interim chief financial officer andfor an accounting supervisor, to assist the interim CFO. In the fall and earlywinter of 2006, management considered several offers to purchase the company,but none of those discussions came to fruition.

 

On February 8,2007, the Company filed a voluntary petition for relief under Chapter 11 of theBankruptcy Code with the United States Bankruptcy Court for the NorthernDistrict of California.  The interim CFO,later appointed the Designated Responsible Person in the bankruptcy proceeding,continues to wind up the Company’s business affairs in the bankruptcyproceeding.

 

Wewere incorporated in California in July 1995, and reincorporated inDelaware in July 2000. We became a public reporting company in August 2000.On November 14, 2004, we changed our fiscal year-end from December 31to September 30, effective as of September 30, 2004.

 

**Markets andProducts**

** **

Untilwe ceased operations, we designed and sold digital amplifiers for three primarymarkets: (i) consumer and PC convergence, (ii) DSL, and (iii) wireless.  Within the consumer and PC convergencemarket, we targeted the home-theater, television, professional and automotiveaudio market segments. Within the DSL market, we offered single and dualchannel line driver products. Within the wireless market, we had a research anddevelopment program aimed at developing a family of amplifier products for usein wireless handsets, also known as Radio Frequency, or RF, Power Amplifiers.

 

**Research andDevelopment**

** **

Untilwe ceased operations, our research and development efforts were focused ondeveloping products based on our DPP® technology for high growth markets, suchas the consumer audio, DSL, and wireless communications markets.

 

**Sales andMarketing**

** **

Untilwe ceased operations, our sales and marketing objective was to target existingand potential customers who were industry leaders in the consumer electronics,DSL communications, and wireless communications markets.  Our sales and marketing effort was primarilyfocused on market segments, divided among integrated audio products andmodule-based driver products, and separately divided among the flat panel TV,home theater, gaming, professional, and automotive audio.  We relied on our direct sales force anddistributors to sell our products in our target markets.

 

Untilwe ceased operations, our sales headquarters was located in San Jose,California. In addition, we marketed and sold our products through our regionaloffices located in Japan and Hong Kong, as well as through independentdistributors in Asia, Europe and the United States.

 

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**Customers**

** **

Untilwe ceased operations, we marketed and sold our products and services in theUnited States and Canada.  Our customersincluded primarily school districts, law enforcement, and air qualitymanagement districts.

 

**Competition**

** **

Wecompeted with a number of larger companies in the consumer audio amplifiermarket. While we believed that our technology offered distinct advantages overthe analog approach, a small percentage of the market had converted to digitalaudio amplifiers.  The primary analogamplifier competitors in our market were National Semiconductor, PhilipsElectronics, ST Microelectronics and Texas Instruments.  Philips, ST Microelectronics and TexasInstruments were also our major competitors in the digital audio amplifiermarket. Several other smaller companies also offered digital amplifier productsincluding: D2, Ice Power and Wolfson Microelectronics plc. In addition, anumber of companies, such as Cirrus Logic Inc., had announced their intentionto enter this market.

 

In theDSL line driver market, our principal competitors were Analog Devices, Inc.,Intersil Corporation, Linear Technology Corporation and Texas InstrumentsIncorporated.  This was a new market forus in which many of our competitors had longer operating histories.

 

**Research andDevelopment**

** **

Researchand development expenses include payroll, employee benefit, and otherheadcount-related costs associated with product development.  Such expenses were $826,000 and $6,649,000during 2007 and 2006, respectively.

 

**Employees**

** **

As of September 30,2007, we had no employees.

 

**IntellectualProperty**

** **

Werelied primarily on a combination of patent, copyright, trademark, trade secretand other intellectual property laws, nondisclosure agreements and otherprotective measures to protect our proprietary technologies and processes. In abankruptcy court conducted auction, we sold all of our intellectual propertyfor $3.25 million to Cirrus Logic, Inc. See “—Status of Operations,” above.

 

**RISK FACTORS**

** **

Thisreport includes forward-looking statements about our business and results ofoperations that are subject to risks and uncertainties.  See “SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS,” above.  Factors that couldcause or contribute to such differences include those discussed below.  In addition to the risk factors discussedbelow, we are also subject to additional risks and uncertainties not presentlyknown to us or that we currently deem immaterial.  If any of these known or unknown risks oruncertainties actually occur, our business could be harmed substantially.

 

***We filedfor reorganization under Chapter 11 of the Bankruptcy Code on February 8,2007, and are subject to the risks and uncertainties associated with Chapter 11proceedings.***

* *

Forthe duration of our Chapter 11 proceedings, our operations, including ourability to execute our business plan, are subject to the risks anduncertainties associated with bankruptcy. Risks and uncertainties associated withour Chapter 11 proceedings include our ability to consummate our proposed Planof Reorganization.  These risks anduncertainties could affect our business and operations in various ways. Forexample, negative events or publicity associated with our Chapter 11proceedings could adversely affect our future revenues and the futurerelationship with our customers, as well as with vendors and employees, whichin turn could adversely affect our operations and financial condition. Becauseof the risks and uncertainties associated with our Chapter 11 proceedings, theultimate impact that events that occur during these proceedings will have onour business, financial condition and results of operations cannot beaccurately predicted or quantified.

 

***Under theterms of the Plan of Reorganization, upon consummation of the mergercontemplated by the Merger Agreement and the effectiveness of the Plan ofReorganization, all of our existing outstanding common stock, warrants, andoptions will be cancelled without consideration.***

* *

**The Plan of Reorganization providesthat it will become effective upon the consummation of our merger with Etelosunder the terms of the Merger Agreement. Under the Plan of Reorganization, certain administrative expenses willbe paid in cash and our creditors will be entitled to receive shares of commonstock issued by the surviving corporation in connection with the merger.  Under the terms of the Merger Agreement, eachoutstanding share of our common stock, and any outstanding option or warrant topurchase our common stock will be cancelled and of no further force oreffect.  The Plan of Reorganization doesnot provide for the payment of any value to holders of our outstanding commonstock.**

** **

## **ITEM 2.**                                                     DESCRIPTION OF PROPERTY.

## ** **

At September 30,2007, we leased office space at 46560 Fremont Blvd., Suite 109, Fremont,California 94538.

 

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## **ITEM 3.**                                                     LEGAL PROCEEDINGS

## ** **

Fromtime to time, we become subject to various legal proceedings and claims, bothasserted and unasserted, that arise in the ordinary course of business.Litigation in general, and securities litigation in particular, can beexpensive and disruptive to normal business operations. Moreover, the resultsof legal proceedings are difficult to predict. An unfavorable resolution of oneor more of these lawsuits would materially adversely affect our business,results of operations, or financial condition. We cannot estimate the loss orrange of loss that may be reasonably possible for any of the contingenciesdescribed and accordingly have not recorded any associated liabilities in ourconsolidated balance sheets. We accrue legal costs when incurred.

 

*BankruptcyProceeding*

 

On February 8,2007, we filed a voluntary petition for relief under Chapter 11 of theBankruptcy Code with the United States Bankruptcy Court for the NorthernDistrict of California, Case No. 07-50358. On December 20, 2007, the Company and Enable Growth Partners LPfiled with the bankruptcy court the Plan of Reorganization, which included theproposed merger of Etelos with and into the Company.  On February 1, 2008, the bankruptcycourt issued an order confirming approval of the Plan of Reorganization,including the merger and the transfer of all of the Company’s existing assetsinto a separate bankruptcy estate and the discharge of all of the Company’sliabilities.  See “ITEM 1—Description ofBusiness.”

 

## **ITEM 4.**                                                     SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

## ** **

Therewere no matters submitted to a vote of security holders during the fourthquarter ended September 30, 2007.

 

**PART II**

** **

## **ITEM 5.**                                                     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS

## ** **

Ourcommon stock was de-listed from the OTC Bulletin Board and has been trading onthe “Pink Sheets.” We intend to list our common stock on the OTC BulletinBoard, but we cannot assure that we will be able to do so.  SEE “ITEM—Risk Factors.”

 

Untilour common stock was de-listed, it was quoted on the OTC Bulletin Board underthe symbol “TRPH.”  The OTC BulletinBoard is a regulated quotation service that displays real-time quotes,last-sale prices and volume information in over-the-counter equitysecurities.  The OTC Bulletin Boardsecurities are traded by a community of market makers that enter quotes andtrade reports.  This market is extremelylimited and any prices quoted may not be a reliable indication of the value ofour common stock.

 

Thefollowing table sets forth the high and low bid prices per share of our commonstock by the OTC Bulletin Board for the periods indicated as reported on theOTC Bulletin Board:

 
| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| **Year Ended September 30, 2007** |       |     |       |    |       |
| Fourth Quarter                         |       | $        | .01        |    | $          | .01 |   |
| Third Quarter                          |       | $        | .01        |    | $          | .01 |   |
| Second Quarter                         |       | $        | .01        |    | $          | .01 |   |
| First Quarter                          |       | $        | .18        |    | $          | .05 |   |
| **Year Ended September 30, 2006** |       |     |       |    |       |
| Fourth Quarter                         |       | $        | 0.30       |    | $          | 0.07 |   |
| Third Quarter                          |       | $        | 0.42       |    | $          | 0.30 |   |
| Second Quarter                         |       | $        | 0.51       |    | $          | 0.36 |   |
| First Quarter                          |       | $        | 0.68       |    | $          | 0.26 |   |

 

Thequotes represent inter-dealer prices, without adjustment for retail mark-up,markdown or commission and may not represent actual transactions.  The trading volume of our securitiesfluctuates and may be limited during certain periods.  As a result of these volume fluctuations, theliquidity of an investment in our securities may be adversely affected.

 

**Holders**

** **

As of September 30,2007, there were 70,164,582 shares of our common stock outstanding, held byapproximately 145 holders of record.

 

**Dividends**

** **

Wehave never paid a dividend on our common stock. We do not anticipate that we will pay cash dividends on our common stockin the foreseeable future.

 

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**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

** **

Thetable below sets forth information as of September 30, 2007, with respectto compensation plans under which our common stock is authorized forissuance.  The figures related to equitycompensation plans approved by security holders relate to options granted underour 1999 plan and our 2007 Plan.  As ofthe effective date of the merger, all securities issued under these equitycompensation plans were cancelled and extinguished in accordance with our Planof Reorganization.  See “ITEM1—Description of Business.”

 
| **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 future  issuance under equity  compensation plans (excluding  securities reflected in column a)  (c)** | ** **                |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------|
| Equity compensation plans approved by  security holders     |       | •   NONE                                                                                                                                    |       | $                                                                                                                    |      0    • |                                                                                                                                                                                                               | 0 •   |   |
| Equity compensation plans not approved by  security holders |       | •  NONE                                                                                                                                     |       | $                                                                                                                    |      0    • |                                                                                                                                                                                                               | 0 •   |   |
| Total                                                       |       | •  NONE                                                                                                                                     |       | $                                                                                                                    |      0    • |                                                                                                                                                                                                               | 0 •   |   |

 

## **ITEM 6.**                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION

## ** **

**Overview**

** **

Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operation summarizes the significant factors affecting ourconsolidated operating results, financial condition, liquidity and cash flowduring the two-year period ended September 30, 2007.  This discussion and analysis should be readwith the consolidated financial statements and financial statement footnotesincluded in this report.

 

Forapproximately eight of the 12 months ended September 30, 2007, we were a “debtorin possession” as a result of the filing on February 8, 2007, of avoluntary petition for relief under Chapter 11 of the Bankruptcy Code with theUnited States Bankruptcy Court for the Northern District of California.  Subsequent to the year end period covered bythis report, on December 20, 2007, the Company and Enable Growth PartnersLP filed with the bankruptcy court the Plan of Reorganization, which includedthe proposed merger of Etelos with and into the Company.  On February 1, 2008, the bankruptcycourt issued an order confirming approval of the Plan of Reorganization,including the merger and the transfer of all of the Company’s existing assetsinto a separate bankruptcy estate and the discharge of all of the Company’s liabilities.

 

EffectiveApril 22, 2008, we entered into the Merger Agreement pursuant to which Etelos wasmerged with and into the Company, at which time the separate corporateexistence of Etelos ceased and the Company continued after the merger as the survivingcorporation and changed its name to Etelos, Inc.  The surviving corporation will conduct thebusiness that was previously conducted by Etelos.  See “ITEM 1—Description of Business.”

 

Accordingly,this Management’s Discussion and Analysis of Financial Condition and Results ofOperation will not be a reliable indicator of future performance and historicaltrends should not be used to anticipate results or trends in future periods.This discussion and analysis contains forward-looking statements that involverisks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in theseforward-looking statements due to many factors, including but not limited tothose set forth under “Risk Factors,” below and “SPECIAL NOTE REGARDINGFORWARD-LOOKING STATEMENTS,” above.

 

**Business**

** **

Untilwe ceased operations, we designed and sold digital amplifiers based on ourproprietary Digital Power Processing (DPP®) technology.  We were incorporated in July 1995, beganshipping products in the first quarter of 1998 and became a public reportingcompany in August 2000.

 

Wesold our products to original equipment manufacturers and distributors. Werecognized revenue from product sales upon shipment to original equipmentmanufacturers, net of sales returns and allowances. Our sales to distributorswere made under arrangements allowing for returns or credits under certaincircumstances and we deferred recognition on sales to distributors untilproducts were resold by the distributor to the end user. All of our sales weremade in United States, or U.S., dollars.

 

As a “fabless”semiconductor company, we contracted with third party semiconductor fabricatorsto manufacture the silicon wafers based on our integrated circuit, or IC,designs. We also contracted with third party assembly and test houses toassemble and package our die and conduct final product testing.

 

Costof revenue included the cost of purchasing finished silicon wafers and the costof die manufactured by independent foundries, costs associated with assemblyand final product testing, as well as salaries and overhead costs associatedwith employees engaged in activities related to manufacturing. Research anddevelopment expense consisted primarily of salaries and related overhead costsassociated with employees engaged in research, design and developmentactivities, as well as the cost of wafers and other materials and relatedservices used in the development process. Selling, general and administrativeexpense consisted primarily of employee compensation and related overheadexpenses and advertising and marketing expenses.

 

5

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Stock-basedcompensation expense related both to stock-based employee and consultantcompensation arrangements. Employee-related stock-based compensation expensewas based on the difference between the estimated fair value of our commonstock on the date of grant and the exercise price of options to purchase thatstock and was recognized on an accelerated basis over the vesting periods ofthe related options, usually four years, or in the case of fully vestedoptions, in the period of grant.

 

**Material Weaknessof Internal Controls Over Financial Reporting**

** **

Inconnection with the audit of the Company’s consolidated financial statementsfor the fiscal year ended September 30, 2005, the Company’s independentauditor identified a number of material weaknesses in our internal controlsover financial reporting. Certain of these material weaknesses resulted inadjustments to the Company’s fiscal year 2005 annual consolidated financialstatements. If not remediated, such weaknesses could result in materialmisstatements to the Company’s future annual or interim financial statementsthat would not be prevented or detected. As a result, we have received anadverse attestation from our independent auditors regarding Sarbanes-Oxley Section 404compliance, as of September 30, 2005, our last independent audit or attestationon this matter.

 

**CriticalAccounting Policies**

** **

Theconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States of America.  As such, management is required to makejudgments, estimates and assumptions that affect the reported amounts of assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.  The significant accounting policies which aremost critical to aid in fully understanding and evaluating reported financialresults include the following:

 

*Use ofEstimates*: Management’s discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. On an ongoing basis, weevaluate our estimates, including those related to product returns, warrantyobligations, bad debts, inventory direct costing and valuation, accruals,valuation of stock options and warrants, income taxes (including the valuationallowance for deferred taxes), and restructuring costs. We base our estimateson historical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from the other sources. Actual results may materiallydiffer from these estimates under different assumptions or conditions. Materialdifferences may occur in our results of operations for any period if we madedifferent judgments or utilized different estimates.

 

*RevenueRecognition*: We recognize revenue in accordance withSecurities and Exchange Commission Staff Accounting Bulletin No. 104, orSAB 104, “*Revenue Recognition in Financial Statements*”.We recognize revenue when all of the following criteria are met: 1) there ispersuasive evidence that an arrangement exists, 2) delivery of goods hasoccurred, 3) the sales price is fixed or determinable, and 4) collectibility isreasonably assured. The following policies apply to our major categories ofrevenue transactions.

 

*Sales toOEM Customers*: Under our standard terms and conditions ofsale, title and risk of loss transfer to the customer at the time product isdelivered to the customer, FOB shipping point, and revenue is recognizedaccordingly. We accrue the estimated cost of post-sale obligations, includingproduct warranties or returns, based on historical experience. We haveexperienced minimal warranty or other returns to date.

 

*Sales toDistributors*: Sales to distributors are made underarrangements allowing limited rights of return, generally under productwarranty provisions, stock rotation rights and price protection on productsunsold by the distributor. In addition, the distributor may request specialpricing and allowances which may be granted subject to our approval. As aresult of these return rights and potential pricing adjustments, we generallydefer recognition of revenue until such time that the distributor sells productto its customer based upon receipt of point-of-sale reports from thedistributor.

 

*Allowancefor Doubtful Accounts*: We provide an allowance for doubtfulaccounts to ensure trade receivables are not overstated due toun-collectibility. The collectibility of our receivables is evaluated based ona variety of factors, including the length of time receivables are past due,indication of the customer’s willingness to pay, significant one-time events,and historical experience. An additional reserve for individual accounts isrecorded when we become aware of a customer’s inability to meet its financialobligations, such as in the case of bankruptcy filings or substantialdeterioration in the customer’s operating results or financial position. Ifcircumstances related to our customers change, estimates of the recoverabilityof receivables would be further adjusted.

 

*Inventories*:Inventories are stated at the lower of cost or market. This policy requires usto make estimates regarding the market value of our inventory, including anassessment of excess or obsolete inventory. We determine excess and obsoleteinventory based on an estimate of the future demand and estimated sellingprices for our products within a specified time horizon, generally 12 months.The estimates we use for expected demand are also used for near-term capacityplanning and inventory purchasing and are consistent with our revenueforecasts. Actual demand and market conditions may be different from thoseprojected by our management.

 

*Stock-BasedCompensation*: On December 16, 2004, the FASB issued SFASNo. 123 (revised 2004), “*Share-Based Payment*”(SFAS 123R). SFAS 123R eliminates the alternative of applying the intrinsicvalue measurement provisions of APB 25 to stock compensation awards issued toemployees. Rather, the new standard requires enterprises to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award. That cost will be recognized overthe period during which an employee is required to provide services in exchangefor the award, known as the requisite service period (usually the vestingperiod). On April 14, 2005, the SEC announced the adoption of a rule thatdefers the required effective date of SFAS 123R. The SEC rule providesthat SFAS 123R is now effective for registrants as of the beginning of thefirst fiscal year beginning after June 15, 2005.

 

6

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SFAS123R is effective for our fiscal quarter beginning October 1, 2005, andallows for the use of the Modified Prospective Application Method. Under thismethod, SFAS 123R is applied to new awards and to awards modified, repurchased,or cancelled after the effective date. Additionally, compensation cost for theportion of awards for which the requisite service has not been rendered (suchas unvested options) that are outstanding as of the date of adoption isrecognized as the remaining requisite services are rendered. The compensationcost relating to unvested awards at the date of adoption shall be based on thegrant-date fair value of those awards as calculated for pro forma disclosuresunder the original SFAS 123. In addition, companies may use the Modified RetrospectiveApplication Method. This method may be applied to all prior years for which theoriginal SFAS 123 was effective or only to prior interim periods in the year ofinitial adoption. If the Modified Retrospective Application Method is applied,financial statements for prior periods will be adjusted to give effect to thefair-value-based method of accounting for awards on a consistent basis with thepro forma disclosures required for those periods under the original SFAS 123.We have adopted SFAS 123R in our quarter ended June 30, 2006, using theModified Prospective Application Method.

 

*Change inYear End*: On November 14, 2004, our Board of Directorsapproved a change in our fiscal year end from December 31 to September 30,effective as of September 30, 2004.

 

**Results ofOperations**

** **

***Year ended September 30,2007, Compared with Year ended September 30, 2006***

** **

***Revenues***

** **

Revenueswere $5,783,000 and $12,305,000 for fiscal 2007 and 2006, respectively.  Revenues decreased by $6,522,000 or 53% infiscal 2007 compared to fiscal 2006.  Wesubstantially discontinued our operations following our filing for voluntarybankruptcy on February 8, 2007.

 

***Gross Profit***

** **

Grossprofit for fiscal year 2007 was $1,578,000 or 27%, compared with a gross profitof $1,180,000 or 10% for fiscal year 2006.

 

***Research and Development***

** **

Researchand development expenses were $826,000 and $6,649,000 for fiscal year 2007 and2006, respectively.

 

***Selling, General andAdministrative***

** **

Selling,general and administrative expenses were $2,205,000 and $5,822,000 for fiscalyear 2007 and 2006, respectively.  Statedas a percentage of revenue, selling, general and administrative expense forfiscal year 2007 and 2006 were 38% and 47%, respectively.

 

***Change in Fair Value onRevaluation of Warrant and Conversion Feature Liability.***

** **

We hada $207,000 change in the fair value on revaluation of warrant and conversionliability for the year ended September 30, 2007, compared to $10,163,000for the year ended September 30, 2006. The warrant and conversion feature liability represents the differencebetween the fair value of the warrants and conversion feature we issued inconnection with our March 3, 2005 private placement on their originalissue date and the fair value of those same warrants on September 30, 2007,using Black-Scholes.

 

***Other Income and Expense.***

** **

We hada gain on the sale of assets of $3,250,000 in connection with the sale of ourintellectual property assets to Cirrus Logic, Inc. and gains of $123,000on sales of other assets lots for the year ended September 30, 2007.  We did not have any similar gain in the priorfiscal year.  We had net interest expenseof $153,000 for the fiscal year ended September 30, 2007, as compared to anet interest expense of $5,809,000 in fiscal 2006.  We amortized $630,000 of debt discount forthe fiscal year ending September 30, 2007, as compared to $5,809,000 in fiscal2006.

 

***Income Taxes.***

** **

Wehave incurred only a minimal amount of statutory income tax expense to date. Wehave recorded a full valuation allowance against our deferred tax assets.Deferred tax assets will be recognized in future periods only as any taxableincome is realized and consistent profits are reported. Deferred tax assetsrelated to items effecting equity will be charged to equity when realized

 

**Liquidity andCapital Resources**

** **

On September 30,2007, we had $410,000 in cash and net inventories totaled $110,000.  Our working capital deficit at September 30,2007, was $2,265,000.  In connection withthe Plan of Reorganization, Etelos has agreed to pay $100,000 in connectionwith the transactions contemplated by the Merger Agreement and cause thesurviving corporation to issue an aggregate of 5,000,000 shares of its commonstock to our secured and unsecured creditors. We have no other sources of capital available to us.  We intend to use the remaining cash, togetherwith the additional cash and common stock received under the Merger Agreementto pay certain of our expenses and claims under the terms of the Plan ofReorganization.  In connection with thePlan of Reorganization all of our outstanding liabilities will be discharged.

** **

**Off-Balance SheetArrangements**

** **

As ofthe year ended September 30, 2007, we did not have any off-balance sheetarrangements.

 

7

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## ** **

## **ITEM 7.**                  FINANCIAL STATEMENTS

## ** **

See “Indexto Financial Statements” on at the end of this report.

 

## **ITEM 8.**                 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE

## ** **

Asreported in our Report on Form 8-K filed with the SEC on May 18,2007, on March 2, 2007, Stonefield Josephson, Inc. (“**Stonefield**”), our independent registered public accountingfirm ceased its relationship with us as a result of our failure to payStonefield’s outstanding invoices.

 

Theaudit reports of Stonefield on our consolidated financial statements as of September 30,2005 and 2004 and the related consolidated statements of operations,stockholders’ equity, and cash flows for the year ended September 30,2005, the nine month period ended September 30, 2004 and the year ended December 31,2003, did not contain any adverse opinion or disclaimer of opinion, nor werethey qualified or modified as to uncertainty, audit scope, or accountingprinciples.  September 30, 2005, hada going concern opinion.  In addition,the Company received an adverse opinion from its auditors regarding controlsand procedures under SOX 404.

 

Duringthe two most recent fiscal years ended September 30, 2006 and 2005 andfrom October 1, 2006, to the date of Stonefield’s cessation of itsrelationship with us, there were no disagreements with Stonefield on any matterof accounting principles or practices, financial statement disclosure, orauditing scope or procedure, which if not resolved to Stonefield’ssatisfaction, would have caused it to make reference to the subject matter ofthe disagreement in connection with its reports. During the same period, therehave been no reportable events, as that term is described in Item 304(a)(1)(iv) ofRegulation S-K.

 

Inconnection with the Plan of Reorganization, we reengaged Stonefield as ourindependent auditors effective in February 2008.

 

# **ITEM 8A.  CONTROLSAND PROCEDURES**

# ** **

Disclosurecontrols and procedures are designed to ensure (i) that informationrequired to be disclose in the reports an issuer files or submits under theExchange Act are recorded, processed, summarized, and reported within the timeperiods specified in the SEC’s rules and forms; and (ii) thatinformation required to be disclose in the reports an issuer files or submitsunder the Exchange Act is accumulated and communicated to its management,including its principal executive and principal financial officer, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

 

On February 8,2007, we filed a voluntary petition for relief under Chapter 11 of theBankruptcy Code with the United States Bankruptcy Court for the NorthernDistrict of California, Case No. 07-50358. Since that date we have not had any operations or employees.  As such, we do not maintain disclosurecontrols and procedures designed to ensure that material information related toour company is recorded, processed, summarized and reported within the timeperiods specified in the SEC rules and forms.

 

# **ITEM 8B.  OTHERINFORMATION**

# ** **

None.

 

8

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** **

**PART III**

** **

## **ITEM 9.**                                                 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROLPERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OFTHE EXCHANGE ACT

## ** **

**Current Directors and ExecutiveOfficers**

 

As of September 30, 2007, we had no directors orexecutive officers. Dr. Adya Tripathi, who served as our chairman andchief executive officer since our inception in 1995, resigned shortly after wefiled our voluntary petition for relief under Chapter 11 of the Bankruptcy Codewith the United States Bankruptcy Court for the Northern District of Californiaon February 8, 2007. Since that time Mr. Gary Sawka has served as theDesignated Responsible Individual for Debtor in Possession.

 

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

** **

Section 16(a) of the Exchange Act requiresour directors, executive officers and beneficial owners of more than 10% of aregistered class of our equity securities to file with the SEC initial reportsof ownership and reports of changes in ownership of our common stock and ourother equity securities. Directors, executive officers and greater than 10%beneficial owners are required by SEC regulations to furnish us with copies ofall Section 16(a) reports they file. Based solely on our review ofthe copies of such reports that were furnished to us, we believe that allreporting requirements under Section 16(a) for the fiscal year ended September 30,2007, were met in a timely manner by our directors, executive officers andgreater than 10% beneficial owners.

 

**Code of Ethics**

** **

The Company adopted a Code of Business Conduct andEthics (the “Code”). The Code satisfies SEC rules for a “code of ethics”required by Section 406 of the Sarbanes-Oxley Act of 2002, as well as theNASDAQ listing standards requirement for a “code of conduct.”

 

**Audit Committee**

 

We do not currently have an audit committeeor “audit committee financial expert.”

 

## **ITEM 10.**                                              EXECUTIVE COMPENSATION

## ** **

The following table sets forth all compensationawarded to, earned by, or paid to our named executive officers during the fiscalyear ended September 30, 2007. For purposes of this report, our namedexecutive officers include all individuals serving as our principal executiveofficer or acting in a similar capacity during the last completed fiscal year,regardless of compensation level; and our two most highly compensated executiveofficers other than our principal executive officer who were serving asexecutive officers at the end of the last completed fiscal year; and up to twoadditional individuals for whom disclosure would have been provided pursuant tothe preceding clause but for the fact that the individual was not serving asour executive officer at the end of the last completed fiscal year. Throughoutthis report, the individuals included in the Summary Compensation Table setforth below, are referred to as the named executive officers.

 
| **Summary Compensation Table**             | ** ** |
|------------------------------------------------------|------------|
| **Name and Principal Position**       | ** ** | **Year** | ** ** | **Salary ($)** | ** ** | **Option  Awards ($)** | ** ** | **All  Other  Compensation ($)** | ** ** | **Total ($)** | ** ** |
| Dr. Adya  Tripathi, Chief Executive Officer (1) |       | 2007 |   | 81,000 |   | 0.00 |   | 0.00 |   | 81,000 |   |

 

----

(1) Dr. Tripathi resigned shortly after we filed ourvoluntary petition for relief under Chapter 11 of the Bankruptcy Code onFebruary 8, 2007.

 

## **ITEM 11.**                                              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT

## ** **

As of September 30, 2007, we had 70,164,582 shares ofcommon stock issued and outstanding. The following table sets forth, as of September 30,2007, information regarding the beneficial ownership of our common stock withrespect to (i) our named executive officers and directors; (ii) byour named executive officers and directors as a group; and (iii) allpersons which we, pursuant to filings with the SEC and our stock transferrecord by each person or group, know to own more than 5% of the outstandingshares of our common stock. Under the rules of the SEC, a person (or groupof persons) is deemed to be a “beneficial owner” of a security if he or she,directly or indirectly, has or shares the power to vote or to direct the votingof such security, or the power to dispose of or to direct the disposition ofsuch security. Accordingly, more than one person may be deemed to be abeneficial owner of the same security. A person is also deemed to be abeneficial owner of any security, which that person has the right to acquirewithin 60 days, such as warrants or options to purchase shares of our commonstock. Unless otherwise noted, each person has sole voting and investment powerover the shares indicated below, subject to applicable community property law.

 

9

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| **Name and Address of Beneficial Owner***  | ** ** | **Amount and  Nature of Beneficial  Ownership** | ** ** | **Percentage  of Class Beneficially Owned** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Officers  and Directors**                                         |       |                                                           |       |                                                       |       |
| Adya S.  Tripathi (1)                                               |       | 12,937,499                                                     |       | 20.11                                                      | %          |
| All current  directors and executive officers as a group (1 person) |       |                                                           |       |                                                       |       |
| **5% Stockholders**(see also Dr. Adya S.  Tripathi above)      |       |                                                           |       |                                                       |       |
| Enable  Capital Management, LLC (2)                                 |       | 12,480,902                                                     |       | 17.15                                                      | %          |
| Gryphon  Master Fund, L.P. (3)                                      |       | 7,362,162                                                      |       | 10.70                                                      | %          |
| GSSF Master  Fund, L.P. (3)                                         |       | 3,681,081                                                      |       | 5.59                                                       | %          |
| Bushido  Capital Master Fund, LP (4)                                |       | 7,362,162                                                      |       | 10.70                                                      | %          |
| Gamma  Opportunity Capital Partners, LP (5)                         |       | 3,681,076                                                      |       | 5.59                                                       | %          |

 

----

| *   | Each stockholder may be contacted at our corporate offices unless  otherwise indicated in the footnotes below. The address of our corporate  offices is 46560 Fremont Blvd., Suite 109, Fremont, California 94538. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Dr. Tripathi  resigned as our director and chief executive officer shortly after we filed  our voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 8,  2007.                    |
| (2) | This  stockholders address is One Ferry Building, Suite 255, San Francisco, CA  94111                                                                                                                              |
| (3) | This  stockholders address is 100 Crescent Court, #490, Dallas, TX. 75201                                                                                                                                               |
| (4) | This  stockholders address is c/o Bushido Capital Partners, Ltd., 275 Seventh  Avenue, Suite 2000, New York, NY 10001                                                                                              |
| (5) | This  stockholders address is 1967 Longwood – Lake Mary Rd., Longwood, FL 32750                                                                                                                                    |

 

Note that under the terms of our Plan ofReorganization, all of our outstanding securities, including those set forth inthe table above, will be cancelled and extinguished. Following the effectivetime of the merger with Etelos, we will have 22,700,634 shares of common stockoutstanding, 5,010,000 shares of which in the aggregate are being issued to oursecured and unsecured creditors and 17,690,634 shares of which are being issuedto the former stockholders of Etelos in connection with the merger.

 

10

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## ** **

## **ITEM 12.**                                           CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE

## ** **

**Related Transactions**

** **

Since October 1, 2005, there has not been nor isthere currently proposed any transaction or series of similar transactions towhich the Company was or is to be a party in which the amount involved exceeds$120,000 and in which any director, executive officer, holder of more than 5%of our common stock or any member of the immediate family of any of theforegoing persons had or will have a direct or indirect material interest

 

**Parent Companies**

** **

We do not have a parent company.

 

**Director Independence**

** **

We currently do not have any directors.

 

## **ITEM 13.**                                           EXHIBITS

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                  |       | Specimen  common stock certificate (incorporated by reference to Exhibit 4.1 of  Tripath’s registration statement on Form S-1, registration number  333-35028, as amended)                                                                                                                                                                                                                                     |
| 4.2                  |       | Form of  Common Stock Purchase Warrant, dated March 2, 1998 (incorporated by  reference to Exhibit 4.2 of Tripath’s registration statement on  Form S-1, registration number 333-123551, as amended)                                                                                                                                                                                                 |
| 4.3                  |       | Second  Amended and Restated Shareholder Rights Agreement, dated September 15,  1998, between Tripath Technology Inc. and Certain Stockholders of Tripath  Technology Inc. (incorporated by reference to Exhibit 10.6 of Tripath’s  registration statement on Form S-1, registration number 333-35028, as  amended)                                                                                       |
| 4.4                  |       | Form of  Common Stock Purchase Warrant, dated July 28, 2000 (incorporated by  reference to Exhibit 4.4 of Tripath’s registration statement on  Form S-1, registration number 333-123551, as amended)                                                                                                                                                                                                 |
| 4.5                  |       | Registration  Rights Agreement, dated January 24, 2002, by and among Tripath  Technology Inc. and Certain Stockholders of Tripath Technology Inc.  (incorporated by reference to Exhibit 4.1 of Tripath’s current report on Form 8-K  filed on January 30, 2002)                                                                                                                                |
| 4.6                  |       | Registration  Rights Agreement, dated March 3, 2005, by and among Tripath Technology  Inc. and Certain Stockholders of Tripath Technology Inc. (incorporated by  reference to Exhibit 4.6 of Tripath’s registration statement on  Form S-1, registration number 333-123551, as amended)                                                                                                                   |
| 4.7                  |       | Form of  Common Stock Purchase Warrant issued in connection with Securities Purchase  Agreement, dated March 3, 2005, by and among Tripath Technology Inc. and  Certain Stockholders of Tripath Technology Inc. (incorporated by reference to  Exhibit 4.7 of Tripath’s registration statement on Form S-1,  registration number 333-123551, as amended)                                             |
| 4.8                  |       | Form of  6% Senior Secured Convertible Debenture, dated November 8, 2005, issued  in connection with Securities Purchase Agreement dated November 8, 2005,  by and among Tripath Technology Inc. and Certain Stockholders of Tripath  Technology Inc (incorporated by reference to Exhibit 4.1 of Tripath’s  current report on Form 8-K filed on November 9, 2005)                         |
| 4.9                  |       | Form of  Series A/Series B Common Stock Purchase Warrant, dated  November 8, 2005, issued in connection with Securities Purchase  Agreement dated November 8, 2005, by and among Tripath Technology Inc.  and Certain Stockholders of Tripath Technology Inc (incorporated by reference  to Exhibit 4.2 of Tripath’s current report on Form 8-K filed  on November 9, 2005) |
| 4.10                 |       | Registration  Rights Agreement, dated November 8, 2005, by and among Tripath  Technology Inc. and Certain Stockholders of Tripath Technology Inc.  (incorporated by reference to Exhibit 4.3 of Tripath’s current report on Form 8-K  filed on November 9, 2005)                                                                                                                                |
| 4.11                 |       | Form of  Common Stock Purchase Warrant, dated February 14, 2006, issued in  connection with the Warrant Issuance Agreement dated February 14, 2006,  by and among Tripath Technology Inc. and the Purchasers named therein  (incorporated by reference to Exhibit 4.11 of Tripath’s registration  statement on Form S-1, registration number 333-132125)                         |
| 9.1                  |       | Voting  Agreement dated November 8, 2005 by Dr. Adya S. Tripath  (incorporated by reference to Exhibit 9.1 of Tripath’s current report on  Form 8-K filed on November 9, 2005)                                                                                                                                                                                                                  |
| 10.1                 |       | Form of  Indemnification Agreement, between Tripath Technology Inc. and each of its  directors and officers (incorporated by reference to Exhibit 10.1 of  Tripath’s registration statement on Form S-1, registration number  333-35028, as amended)                                                                                                                                                      |
| 10.2                 |       | License  and Supply Agreement, dated July 9, 1999, between  STMicroelectronics, Inc. and Tripath Technology Inc. (incorporated by  reference to Exhibit 10.2 of Tripath’s registration statement on  Form S-1, registration number 333-35028, as amended)                                                                                                                                            |
| 10.3                 |       | 1995  Stock Plan and form of option agreement (incorporated by reference to  Exhibit 4.8 of Tripath’s registration statement on Form S-8,  registration number 333-108178)                                                                                                                                                                                                                                     |
| 10.4                 |       | 2000  Stock Plan and form of option agreement (incorporated by reference to  Exhibit 10.1 of Tripath’s current report on Form 8-K, dated  February 24, 2006, and filed with the SEC on February 28, 2006.)                                                                                                                                                                                           |
| 10.5                 |       | 2000  Employee Stock Purchase Plan, as amended (incorporated by reference to  Exhibit 10.2 of Tripath’s current report on Form 8-K, dated  February 24, 2006, and filed with the SEC on February 28, 2006.)                                                                                                                                                                                          |
| 10.6                 |       | Form of  Restricted Stock Purchase Agreement between Tripath Technology Inc. and an  Executive Officer. (incorporated by reference to Exhibit 10.6 of  Tripath’s annual report on Form 10-K for the year ended  December 31, 2003)                                                                                                                                                                   |
| 10.7                 |       | Sublease  Agreement, dated July 18, 2002, between Nortel Networks, Inc. and  Tripath Technology Inc. (incorporated by reference to Exhibit 10.11 of  Tripath’s quarterly report on Form 10-Q for the quarter ended  September 30, 2002)                                                                                                                                                         |

 

11

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| 10.8  |   | Distributor  Agreement, dated July 1, 1998, between Uniquest Corporation and Tripath  Technology Inc. (incorporated by reference to Exhibit 10.8 of Tripath’s  annual report on Form 10-K filed on March 9, 2004)                                                                           |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Distributor  Agreement, dated February 3, 1999, between Macnica, Inc and Tripath  Technology Inc. (incorporated by reference to Exhibit 10.9 of Tripath’s  annual report on Form 10-K filed on March 9, 2004)                                                                               |
| 10.10 |   | Security  Agreement dated March 8, 2004, between Tripath Technology Inc. and Union  Bank of California, N.A. (incorporated by reference to Exhibit 10.1 of  Tripath’s quarterly report on Form 10-Q filed on May 21, 2004)                                                                  |
| 10.11 |   | Form of  Stock Purchase Agreement dated August 1, 2004, between Tripath  Technology Inc. and certain investors of Tripath Technology Inc.  (incorporated by reference to Exhibit 10.11 of Tripath’s Transition  Report on Form 10-K/T for transition period ended September 30,  2004) |
| 10.12 |   | Securities  Purchase Agreement, dated March 3, 2005, by and among Tripath Technology  Inc. and Certain Stockholders of Tripath Technology Inc. (incorporated by  reference to Exhibit 10.12 of Tripath’s registration statement on  Form S-1, registration number 333-123551, as amended)        |
| 10.13 |   | Severance  Agreement and Release, dated March 2, 2005, between Tripath Technology  Inc. and Clarke Seniff (incorporated by reference to Exhibit 10.1 of  Tripath’s current report on Form 8-K filed on March 7, 2005)                                                                       |
| 10.14 |   | Securities  Purchase Agreement dated November 8, 2005, by and among Tripath  Technology Inc. and Certain Stockholders of Tripath Technology Inc.  (incorporated by reference to Exhibit 10.1 of Tripath’s current report  on Form 8-K filed on November 9, 2005)                            |
| 10.15 |   | Security  Agreement dated November 8, 2005, by and among Tripath Technology Inc.  and the Purchasers named in the Securities Purchase Agreement dated  November 8, 2005 (incorporated by reference to Exhibit 10.2 of  Tripath’s current report on Form 8-K filed on November 9, 2005) |
| 10.16 |   | Warrant  issuance Agreement dated February 14, 2006, by and among Tripath  Technology Inc. and the Purchasers named therein (incorporated by reference  to Exhibit 10.16 of Tripath’s registration statement on Form S-1,  registration number 333-132125)                                       |
| 11**  |   | Statement  Re: Computation of Earnings Per Share                                                                                                                                                                                                                                                                     |
| 21    |   | List  of subsidiaries of Tripath Technology Inc. (incorporated by reference to  Exhibit 21.1 of Tripath’s Transition Report on Form 10-K/T for  transition period ended September 30, 2004)                                                                                                      |
| 24.1  |   | Power  of Attorney (contained in the signature page of this report)                                                                                                                                                                                                                                                  |
| 31.1* |   | Certification  pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act by Chief  Executive Officer                                                                                                                                                                                                        |
| 31.2* |   | Certification  pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act by Chief  Financial Officer                                                                                                                                                                                                        |
| 32.1* |   | Certification  pursuant to 18 U.S.C. §1350 by Chief Executive Officer                                                                                                                                                                                                                                           |
| 32.2* |   | Certification  pursuant to 18 U.S.C. §1350 by Chief Financial Officer                                                                                                                                                                                                                                           |

 

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| #  Management contract or compensatory plan or arrangement        |
|-------------------------------------------------------------------|
| *  Filed as an exhibit to this report                             |
| **  Included within the financial statements filed in this report |

 

12

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## **ITEM 14.**                                              PRINCIPAL ACCOUNTING FEES AND SERVICES

## ** **

The following table sets forth the aggregate feesbilled by Stonefield Josephson, Inc. for the following services during thefiscal years ended September 30, 2007 and September 30, 2006:

 

| ** **                            | ** ** | **Year ended September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| **Description of Services** | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Audit Fees  (1)                       |       | $                                           | 0          |   | $ | 239,343 |   |
| Tax Fees (2)                          |       | 0                                           |       | 19,905 |   |
| All Other  Fees                       |       | 0                                           |       | 0 |   |
| Total                                 |       | $                                           | 0          |   | $ | 259,248 |   |
|                                       |            |                                             |            |  |  |  |  |  |  |

 

----

| (1) Represents the  aggregate fees billed for professional services rendered for the audit of our  years ended September 30, 2007, and September 30, 2006, and for the  review of the financial statements included in our annual, transition and  quarterly reports during such periods. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) Represents the  aggregate fees billed for the years ended September 30, 2007, and September 30,  2006, for professional services rendered for tax compliance.                                                                                                                         |

*** ***

***Audit Committee Pre-Approval Policies***

*** ***

We do not currently have an audit committee. See “ITEM9—DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATEGOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT—AuditCommittee,” above. However, when we did have an audit committee, its policy wasto pre-approve all audit and permissible non-audit services provided by theindependent auditors. These services may include audit services, audit-relatedservices, tax services and other services. Pre-approval is detailed as to theparticular service or category of services and is generally subject to aspecific budget. Each new engagement of Stonefield Josephson, Inc. wasapproved in advance by the audit committee, and none of those engagements madeuse of the *de minimus* exception to pre-approvalcontained in the SEC’s rules.

 

13

----

 

# **SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hascaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| April 23, 2008 |   | **TRIPATH  TECHNOLOGY INC.**               |
|---------------------|--------|--------------------------------------------|
|                |   |                                       |
|                |   |                                       |
|                | By:    | /s/ Jeffrey L. Garon                       |
|                |   | Jeffrey L. Garon, Chief  Executive Officer |

 

**POWER OF ATTORNEY**

 

KNOW ALL MEN BYTHESE PRESENTS , that each of the undersigned, being a director or officer ofTripath Technology Inc., a Delaware corporation, hereby constitutes andappoints Jeffrey L. Garon as his true and lawful attorney-in-fact and agent,with full power of substitution and resubstitution, for him and in his name,place and stead in any and all capacities, to sign any and all amendments tothis annual report on Form 10-KSB and to file the same, with all exhibitsthereto and all other documents in connection therewith, with the Securitiesand Exchange Commission, granting unto said attorney-in-fact and agent, fullpower and authority to do and perform each and every act and thing requisiteand necessary to be done that such annual report and its amendments shallcomply with the Exchange Act, and the applicable rules and regulations adoptedor issued pursuant thereto, as fully and to all intents and purposes as hemight or could do in person, hereby ratifying and confirming all that saidattorneys-in-fact and agent, or his substitute or resubstitute, may lawfully door cause to be done by virtue hereof.

 

In accordance withthe 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 thedate indicated.

 
| **Signature**              | ** ** | **Title**                                             | ** ** | **Date**            |
|----------------------------|------------|-------------------------------------------------------|------------|---------------------|
|                       |       |                                                  |       |                |
| /s/ Jeffrey L. Garon       |       | Director and Chief Executive Officer  (principal      |       | April 23, 2008 |
| Jeffrey L.  Garon          |       | executive officer)                                    |       |                |
|                       |       |                                                  |       |                |
| /s/ David S.  G. MacKenzie |       | Chief Financial Officer (principal  financial officer |       | April 23, 2008 |
| David S. G.  MacKenzie     |       | and principal accounting officer)                     |       |                |
|                       |       |                                                  |       |                |
| /s/ Daniel  J. A. Kolke    |       | Director                                              |       | April 23, 2008 |
| Daniel J. A.  Kolke        |       |                                                  |       |                |
|                       |       |                                                  |       |                |
| /s/ Ronald  A. Rudy        |       | Director                                              |       | April 23, 2008 |
| Ronald A.  Rudy            |       |                                                  |       |                |
|                       |       |                                                  |       |                |
| /s/ Gregory  Ruff          |       | Director                                              |       | April 23, 2008 |
| Gregory Ruff               |       |                                                  |       |                |

 

----

 

**INDEX TO FINANCIAL STATEMENTS**

** **
| ** **                                                      | **Page** |
|-----------------------------------------------------------------|----------|
| Reports of  Independent Registered Public Accounting Firm       | F-2      |
|                                                            |     |
| Consolidated  Balance Sheets                                    | F-3      |
|                                                            |     |
| Consolidated Statements of Operations                           | F-4      |
|                                                            |     |
| Consolidated Statements of Stockholders’ Deficit           | F-5      |
|                                                            |     |
| Consolidated Statements of Cash Flows                           | F-6      |
|                                                            |     |
| Notes  to Consolidated Financial Statements                     | F-7      |
|                                                            |     |
| Condensed Consolidated Balance Sheets                           | F-21     |
|                                                            |     |
| Condensed Consolidated Statements of Operations                 | F-22     |
|                                                            |     |
| Condensed Consolidated Statements of Cash Flows                 | F-23     |
|                                                            |     |
| Condensed Notes to Condensed Consolidated Financial  Statements | F-24     |

** **

**F-1**

----

 

Report of IndependentRegistered Public Accounting Firm

 

To the Board of Directors and Stockholders ofTripath Technology Inc.

 

We have audited the accompanying consolidatedbalance sheets of Tripath Technology Inc. and subsidiary (the “Company”) asof September 30, 2007, and September 30, 2006, and the relatedconsolidated statements of operations, stockholders’ deficit, and cash flowsfor each of the two years then ended These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Tripath Technology Inc. and subsidiary as of September 30,2007 and September 30, 2006, and the results of their operations and theircash flows for the two years then ended in conformity with accountingprinciples generally accepted in the United States of America.

 

The accompanying consolidated financialstatements have been prepared assuming the Company will continue as a goingconcern, which contemplates continuity of business, realization of assets, andliquidation of liabilities in the ordinary course of business. As discussed inNote 1 to the financial statements, the Company filed voluntary petitions forreorganization under Chapter 11 of the United states Bankruptcy Code. It iscurrently impossible to predict with any degree of certainty the impact of thisfiling on the continued operations of the Company. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 
| /s/ Stonefield Josephson, Inc. |
|-------------------------------------|
| San Francisco, California           |
| April 22, 2008                 |

 

F-2

----

 

**TRIPATH TECHNOLOGY INC.**

**(DEBTOR - IN - POSSESSION)**

**CONSOLIDATEDBALANCE SHEETS**

(in thousands, except share data)

 
| ** **                                                                                                                                                                 | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| ASSETS                                                                                                                                                                     |       |                         |       |                         |       |
| Current assets:                                                                                                                                                            |       |                         |       |                         |       |
| Cash and  cash equivalents                                                                                                                                                 |       | $                            | 410        |                         | $          | 752 |   |
| Restricted cash                                                                                                                                                            |       | —                       |       | 162                          |       |
| Accounts  receivable, net of allowance for doubtful accounts of $0 and $5 at  September 30, 2007 and 2006 respectively                                                |       | —                       |       | 953                          |       |
| Inventories,  net                                                                                                                                                          |       | 110                          |       | 2,449                        |       |
| Prepaid  expenses and other current assets                                                                                                                                 |       | 179                          |       | 401                          |       |
| Total  current assets                                                                                                                                                      |       | 699                          |       | 4,717                        |       |
|                                                                                                                                                                       |       |                         |       |                         |       |
| Property and  equipment, net                                                                                                                                               |       | —                       |       | 615                          |       |
| Other assets                                                                                                                                                               |       | —                       |       | 117                          |       |
|                                                                                                                                                                       |       |                         |       |                         |       |
| **Total  assets**                                                                                                                                                          | ** ** | **$**                        | **699**    | ** **                   | **$**      | **5,449** | ** ** |
|                                                                                                                                                                       |       |                         |       |                         |       |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                                                                |       |                         |       |                         |       |
| Current  liabilities:                                                                                                                                                      |       |                         |       |                         |       |
| Liabilities  subject to compromise                                                                                                                                         |       | $                            | 2,822      |                         | $          | — |   |
| Accounts  payable                                                                                                                                                          |       | 15                           |       | 2,204                        |       |
| Customer  deposits                                                                                                                                                         |       | —                       |       | 3,066                        |       |
| Current  portion of capital lease obligations                                                                                                                              |       | —                       |       | 30                           |       |
| Current  portion of deferred rent                                                                                                                                          |       | —                       |       | 167                          |       |
| Current  portion of note payable                                                                                                                                           |       | —                       |       | 3,000                        |       |
| Current  portion of note payable discount                                                                                                                                  |       | —                       |       | (2,500                       | )          |
| Accrued  expenses                                                                                                                                                          |       | 127                          |       | 963                          |       |
| Warrant  liability                                                                                                                                                         |       | —                       |       | 444                          |       |
| Conversion  feature of convertible debt                                                                                                                                    |       | —                       |       | 235                          |       |
| Total  current liabilities                                                                                                                                                 |       | 2,964                        |       | 7,609                        |       |
|                                                                                                                                                                       |       |                         |       |                         |       |
| Long term  portion of capital lease obligations                                                                                                                            |       | —                       |       | 114                          |       |
| Long term  portion of notes payable                                                                                                                                        |       | —                       |       | 500                          |       |
| Long term  portion of note payable discount                                                                                                                                |       | —                       |       | (267                         | )          |
|                                                                                                                                                                       |       |                         |       |                         |       |
| Total  liabilities                                                                                                                                                         |       | 2,964                        |       | 7,956                        |       |
|                                                                                                                                                                       |       |                         |       |                         |       |
| Commitments  and contingencies (Note 9)                                                                                                                                    |       |                         |       |                         |       |
|                                                                                                                                                                       |       |                         |       |                         |       |
| Stockholders’  deficit:                                                                                                                                               |       |                         |       |                         |       |
| Common  stock, $0.001 par value, 100,000,000 shares authorized; 70,164,582 and  69,711,879 shares issued and outstanding at September 30, 2007 and 2006  respectively |       | 70                           |       | 70                           |       |
| Additional  paid-in capital                                                                                                                                                |       | 208,081                      |       | 207,865                      |       |
| Other  comprehensive expense                                                                                                                                               |       |                         |       | (9                           | )          |
| Accumulated  deficit                                                                                                                                                       |       | (210,416                     | )          | (210,433                     | )          |
| Total  stockholders’ deficit                                                                                                                                          |       | (2,265                       | )          | (2,507                       | )          |
|                                                                                                                                                                       |       |                         |       |                         |       |
| **Total  liabilities and stockholders’ deficit**                                                                                                                      | ** ** | **$**                        | **699**    | ** **                   | **$**      | **5,449** | ** ** |

 

The accompanying notes are an integral part of these financialstatements.

 

F-3

----

 

**TRIPATH TECHNOLOGY INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(DEBTOR - IN - POSSESSION)**

(in thousands, except per share data)

 
| ** **                                                                                                | ** ** | ** **       | ** ** | ** **        | ** ** | **Year Ended**    | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                | ** ** | ** **       | ** ** | ** **        | ** ** | **September 30,** | ** ** | **Year Ended**    | ** ** |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** **        | ** ** | **2007**               | ** ** | **September 30,** | ** ** |
| ** **                                                                                                | ** ** | **Pre-petition** | ** ** | **Post-petition** | ** ** | **Total**              | ** ** | **2006**               | ** ** |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **             | ** ** | ** **             | ** ** |
| Revenue                                                                                                   |       | $                | 3,873      |              | $          | 1,910                  |       | $                      | 5,783      |   | $ | 12,305 |   |
| Cost of revenue                                                                                           |       | 1,142            |       | 3,063             |       | 4,205                  |       | 11,125                 |       |
| Gross profit                                                                                              |       | 2,731            |       | (1,153            | )          | 1,578                  |       | 1,180                  |       |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Operating expenses:                                                                                       |       |             |       |              |       |                   |       |                   |       |
| Research and development                                                                                  |       | 826              |       | —            |       | 826                    |       | 6,649                  |       |
| Selling, general and administrative                                                                       |       | 1,049            |       | 1,156             |       | 2,205                  |       | 5,822                  |       |
| Total operating expenses                                                                                  |       | 1,875            |       | 1,156             |       | 3,031                  |       | 12,471                 |       |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Profit (Loss) from operations                                                                             |       | 856              |       | (2,309            | )          | (1,453                 | )          | (11,291                | )          |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Reorganization income (costs):                                                                            |       |             |       |              |       |                   |       |                   |       |
| Legal fees                                                                                                |       | —           |       | (317              | )          | (317                   | )          | —                 |       |
| Loss from Chapter 11 restructuring                                                                        |       | —           |       | (710              | )          | (710                   | )          | —                 |       |
| Gain from sale of intangible assets                                                                       |       | —           |       | 3,250             |       | 3,250                  |       | —                 |       |
| Change in fair value on revaluation of  warrant liability                                                 |       | 207              |       | —            |       | 207                    |       | 10,163                 |       |
| Gain (loss) on sale of assets                                                                             |       | 4                |       | 119               |       | 123                    |       | —                 |       |
| Interest and other expense, net                                                                           |       | (848             | )          | (59               | )          | (907                   | )          | (8,104                 | )          |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Income (loss) from continuing operations  before taxes                                                    |       | 219              |       | (26               | )          | 193                    |       | (9,232                 | )          |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Provision for income taxes                                                                                |       | —           |       | —            |       | —                 |       | —                 |       |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Income (loss) from continuing operations                                                                  |       | 219              |       | (26               | )          | 193                    |       | (9,232                 | )          |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Loss from discontinued operations, net of  taxes                                                          |       | (113             | )          | (63               | )          | (176                   | )          | —                 |       |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Net income (loss)                                                                                         |       | $                | 106        |              | $          | (89                    | )          | $                      | 17         |   | $ | (9,232 | ) |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Basic and diluted net profit per share for  continuing and non-continuing operations                      |       |             |       |              |       | $                      | 0.00       |                   | $          | — |   |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Basic and diluted net loss per share for  continuing and non-continuing operations                        |       |             |       |              |       | $                      | —     |                   | $          | (0.14 | ) |
|                                                                                                      |       |             |       |              |       |                   |       |                   |       |
| Weighted average number of common shares  used in computing basic and diluted net profit (loss) per share |       |             |       |              |       | 70,161                 |       | 65,215                 |       |
|                                                                                                           |            |                  |            |                   |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these financial statements

 

F-4

----

** **

**TRIPATH TECHNOLOGY INC.**

**(DEBTOR - IN - POSSESSION)**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ DEFICIT**

**(in thousands)**

 
| ** **                                                 | ** ** | ** **            | ** ** | ** **               | ** ** | ** **          | ** ** | **Other**       | ** ** | **Consolidated**       | ** ** | **Total**            | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|---------------------|------------|-----------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Additional Paid** | ** ** | **Comprehensive**   | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                 | ** ** | **Shares**            | ** ** | **Amount**               | ** ** | **in Capital** | ** ** | **Loss**        | ** ** | **Deficit**            | ** ** | **Equity/(Deficit)** | ** ** |
| ** **                                                 | ** ** | ** **            | ** ** | ** **               | ** ** | ** **          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **           | ** ** |
| **Balance at September 30, 2005**                     | ** ** | **55,411**            | ** ** | **$**                    | **55**     | ** **          | **$**      | **202,310**     | ** ** | **$**                  | **(3**     | **)**                | **$**      | **(201,201** | **)** | **$** | **1,161** | ** ** |
| ** **                                                 | ** ** | ** **            | ** ** | ** **               | ** ** | ** **          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **           | ** ** |
| Issuance of common stock for exercise of  stock options    |       | 61                    |       | 1                        |       | 10                  |       |            |       |                   |       | **11**               |       |
| Issuance of common stock upon warrant exercise             | ** ** | 7,290                 | ** ** | 7                        | ** ** | 2,351               | ** ** | ** **      | ** ** | ** **             | ** ** | **2,358**            | ** ** |
| Issuance of common stock for Employee Stock  Purchase Plan |       | 90                    |       | —                   |       | 35                  |       |            |       |                   |       | **35**               |       |
| Stock based compensation                                   |       |                  | ** ** | ** **               | ** ** | 1,690               | ** ** | ** **      | ** ** | ** **             | ** ** | **1,690**            | ** ** |
| Convertible debenture payments made with common stock      | ** ** | 3,608                 | ** ** | 4                        | ** ** | 1,111               | ** ** | ** **      | ** ** | ** **             | ** ** | **1,115**            | ** ** |
| Shareholder settlement                                     |       | 3,252                 |       | 3                        |       | 354                 | ** ** | ** **      | ** ** | ** **             | ** ** | **357**              | ** ** |
| Stock issuance costs                                       |       |                  | ** ** | ** **               | ** ** | 4                   | ** ** | ** **      | ** ** | ** **             | ** ** | **4**                | ** ** |
| Foreign currency translation adjustment                    |       |                  | ** ** | ** **               | ** ** | ** **          | ** ** | (6              | )          | ** **             | ** ** | **(6**               | **)**      |
| Net loss                                                   |       |                  | ** ** | ** **               | ** ** | ** **          | ** ** | ** **      | ** ** | (9,232                 | )          | **(9,232**           | **)**      |
|                                                       |       |                  |       |                     |       |                |       |            |       |                   |       |                 |       |
| **Balance at September 30, 2006**                     | ** ** | **69,712**            | ** ** | **$**                    | **70**     | ** **          | **$**      | **207,865**     | ** ** | **$**                  | **(9**     | **)**                | **$**      | **(210,433** | **)** | **$** | **(2,507** | **)** |
| ** **                                                 | ** ** | ** **            | ** ** | ** **               | ** ** | ** **          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **           | ** ** |
| Stock based compensation                                   |       |                  | ** ** | ** **               | ** ** | 177                 | ** ** | ** **      | ** ** | ** **             | ** ** | **177**              | ** ** |
| Convertible debenture payments made with common stock      | ** ** | 453                   | ** ** | —                   | ** ** | 39                  | ** ** | ** **      | ** ** | ** **             | ** ** | **39**               | ** ** |
| Foreign currency translation adjustment                    |       |                  | ** ** | ** **               | ** ** | ** **          | ** ** | 9               | ** ** | ** **             | ** ** | **9**                | ** ** |
| Net profit                                                 |       |                  | ** ** | ** **               | ** ** | ** **          | ** ** | ** **      | ** ** | 17                     | ** ** | **17**               | ** ** |
|                                                       |       |                  |       |                     |       |                |       |            |       |                   |       |                 |       |
| **Balance at September 30, 2007**                     | ** ** | **70,165**            | ** ** | **$**                    | **70**     | ** **          | **$**      | **208,081**     | ** ** | **$**                  | **—** | ** **           | **$**      | **(210,416** | **)** | **$** | **(2,265** | **)** |

 

Theaccompanying notes are an integral part of these financial statements

 

F-5

----

 

**TRIPATH TECHNOLOGY INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(DEBTOR - IN - POSSESSION)**

(in thousands)

 
| ** **                                                                            | ** ** | **Years Ended**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                            | ** ** | **September 30,** | ** ** |
| ** **                                                                            | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                                                                  |       |                   |       |   |   |
| Cash flows from operating activities:                                                 |       |                   |       |   |   |
| Net profit (loss)                                                                     |       | $                      | 17         |   | $ | (9,232 | ) |
| Adjustments to reconcile net profit (loss)  to net cash used in operating activities: |       |                   |       |   |   |
| Revaluation of warrant and conversion  feature liabilities                            |       | (207                   | )          | (10,163 | ) |
| Depreciation and amortization                                                         |       | 233                    |       | 409 |   |
| Deferred rent                                                                         |       | (167                   | )          | (305 | ) |
| Allowance for doubtful accounts                                                       |       | —                 |       | 48 |   |
| Provision for slow moving, excess and  obsolete inventory                             |       | 1,813                  |       | 1,001 |   |
| Stock-based compensation                                                              |       | 177                    |       | 1,690 |   |
| Excess value from conversion feature of  warrants                                     |       | —                 |       | 5,037 |   |
| Accretion of debt discount                                                            |       | 630                    |       | 2,233 |   |
| Change in value of unissued ESPP shares                                               |       | —                 |       | 12 |   |
| Gain from sale of intangible assets                                                   |       | (3,250                 | )          | — |   |
| Gain on sales of fixed assets                                                         |       | (123                   | )          | — |   |
| Loss from discontinued operations                                                     |       | 176                    |       | — |   |
| Changes in assets and liabilities:                                                    |       |                   |       |   |   |
| Accounts receivable                                                                   |       | 953                    |       | 9 |   |
| Inventories, net                                                                      |       | 2,339                  |       | 4,009 |   |
| Prepaid expenses and other assets                                                     |       | 337                    |       | 1,128 |   |
| Accounts payable                                                                      |       | (2,191                 | )          | (1,284 | ) |
| Liabilities subject to compromise                                                     |       | 2,822                  |       | — |   |
| Customer deposits                                                                     |       | (3,066                 | )          | 3,066 |   |
| Accrued expenses                                                                      |       | (836                   | )          | (1,936 | ) |
| Deferred distributor revenue                                                          |       | —                 |       | (1,202 | ) |
| Net cash used in operating activities                                                 |       | (343                   | )          | (5,480 | ) |
|                                                                                  |       |                   |       |   |   |
| Cash flows from investing activities:                                                 |       |                   |       |   |   |
| Changes in restricted cash                                                            |       | 162                    |       | — |   |
| Purchases of property and equipment                                                   |       | —                 |       | (149 | ) |
| Net cash provided by (used in) investing  activities                                  |       | 162                    |       | (149 | ) |
|                                                                                  |       |                   |       |   |   |
| Cash flows from financing activities:                                                 |       |                   |       |   |   |
| Offering costs                                                                        |       | —                 |       | (91 | ) |
| Proceeds from issuance of common stock upon  exercise of warrants                     |       | —                 |       | 2,763 |   |
| Proceeds from issuance of common stock  under ESPP and upon exercise of options       |       | —                 |       | 46 |   |
| Acquisition of capital lease                                                          |       | —                 |       | 123 |   |
| Principal payments on capital lease  obligations                                      |       | (170                   | )          | (215 | ) |
| Proceeds from issuance of 6% convertible  debentures and warrants                     |       | —                 |       | 3,885 |   |
| Principal payments on 6% convertible  debentures                                      |       | —                 |       | (385 | ) |
| Issuance of common stock to settle  shareholder claim                                 |       | —                 |       | (357 | ) |
| Debt issuance cost for Finders’ Fees                                             |       | —                 |       | (98 | ) |
| Net cash provided by (used in) financing  activities                                  |       | (170                   | )          | 5,671 |   |
|                                                                                  |       |                   |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                 |       | (351                   | )          | 42 |   |
| Effect of exchange rate changes on cash and  cash equivalents                         |       | 9                      |       | (6 | ) |
| Cash, and cash equivalents, beginning of year                                         |       | 752                    |       | 716 |   |
| Cash, and cash equivalents, end of year                                               |       | $                      | 410        |   | $ | 752 |   |
| Supplemental disclosure of cash flow  information:                                    |       |                   |       |   |   |
| Interest expense paid                                                                 |       | $                      | 153        |   | $ | 5,809 |   |
| Supplemental disclosure of noncash flow  investing and financing activities:          |       |                   |       |   |   |
| Issuance of common stock in lieu of  principal payments on note payable               |       | $                      | 39         |   | $ | 1,115 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-6

----

** **

**TRIPATHTECHNOLOGY INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1—THE COMPANY AND BASIS OF PRESENTATION:**

 

***The Company***

 

Tripath Technology Inc. (the “Company” or “Tripath”)was incorporated in California in July 1995. The Company wasreincorporated in Delaware in July 2000. The Company had designed,developed and marketed integrated circuit devices for the Consumer and PCConvergence, DSL, and Wireless markets prior to its bankruptcy on February 2,2007. The Company is now in bankruptcy and ceased business operation as of February 2,2007. It is liquidating its operations under the direction of the bankruptcytrustee.

 

***Basis of Presentation***

 

The consolidated financial statements include theaccounts of the Companyand its wholly 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.

 

On November 14, 2004, the Company’s Board of Directors approved a change inthe Company’s fiscal year end from December 31 to September 30,effective as of September 30, 2004.

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates, and such differences could affect theresults of operations reported in future periods and such differences could bematerial.

 

***Going Concern***

 

The Company’s consolidated financial statements havebeen prepared on the basis of a going concern. The Company has incurredsubstantial losses and has experienced negative cash flow since inception andhas an accumulated deficit of $210.4 million and $210.4 million at September 30,2007 and 2006 respectively. In addition, on February 2, 2007, the Companyfiled for protection under the under the provision of Chapter XI of thebankruptcy laws. These factors raise substantial doubt about the Company’sability to continue as a going concern.

 

**Bankruptcy**

 

The Company filed a voluntary plan for re-organization(the “Filing”) under chapter 11 of the United States Bankruptcy Code in theUnited Stated Bankruptcy for the Northern District of California. The Companyhas adopted Statements of Position 90-7 “*Financial Reporting by Entities in Bankruptcy under the Bankruptcy Code*” and accordingly has presented its financialstatements in the prescribed format.

 

***Foreign Currency Translations***

 

The U.S. dollar is the functional currency for theCompany’s Japanese wholly-owned subsidiary. Assets and liabilities that are notdenominated in the functional currency are remeasured into U.S. dollars and theresulting gains or losses are included in “Interest and other income, net.”Such gains or losses have not been material for any period presented.

 

***Summary of Operations***

 

During 2004, warrants were exercised which resultedin the Company receiving proceeds totaling approximately $2.3 million. Inaddition, in August 2004 the Company raised $5 million through a financingin which the Company sold 2,500,000 shares of common stock at a price of $2.00per share. In March 2005, the Company completed a private placement, whichresulted in gross proceeds of $4.4 million. In connection with thisprivate placement, the Company sold 4,833,335 shares of common stock at a priceof $0.90 per share and issued warrants to purchase up to 966,667 shares ofcommon stock with an exercise price of $1.25 per share.

 

In October 2005, the Company proposed amendingthe warrants issued as part of the March 2005 private placement to lowerthe exercise price to $0.50 per share, eliminate the cashless net exerciseprovision of the warrant, and advance the warrant termination date to October 14,2005. On October 14, 2005, the holders of warrants who exercised 533,333shares of the Company’s common stock agreed to the amendment and, as a result,the Company issued 533,333 shares of common stock upon the exercise of suchamended warrants on October 14, 2005, for aggregate proceeds of $0.3million. The remaining warrants to purchase 433,334 shares of common stock atan exercise price of $1.25 per share issued pursuant to the March 3, 2005,private placement are exercisable through September 4, 2008.

 

On November 8, 2005, the Company completed aprivate placement, which resulted in gross proceeds of $5.0 million. Inconnection with this private placement the Company sold $5.0 million inprincipal amount of 6% Senior Secured Convertible Debentures, convertible intocommon stock at a price of $0.37 per share (subject to certain adjustments),and issued Series A Warrants to purchase up to 6,756,755 shares of commonstock at an exercise price of $0.37 per share and Series B Warrants andFinders’ Fee Warrants to purchase up to 10,368,854 shares

 

F-7

----

 

ofcommon stock at an exercise price of $0.43 per share. The Series AWarrants are exercisable immediately upon issuance and were exercised on February 14,2006. The Series B Warrants are exercisable from May 8, 2006, until May 8,2011.

 

In February 2006, the Company proposed to theholders of the Series A Warrants that upon the exercise of the Series AWarrants, the Company would issue new warrants in exchange for the exercise ofthe Series A Warrants. On February 14, 2006, the holders of the Series AWarrants exercised their Series A Warrants and the Company issued6,756,755 shares of common stock for aggregate proceeds of $2.5 million and theCompany issued new warrants at a strike price of $0.315 per share on 6,081,079shares of the Company’s common stock; such new warrants terminate on July 1,2007.

 

**NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

***Revenue Recognition***

 

The Company recognizes revenue in accordance withSecurities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB104”), “*RevenueRecognition in Financial Statements*”. The Company recognizes revenue when all of the following criteria aremet: 1) there is persuasive evidence that an arrangement exists, 2) delivery ofgoods has occurred, 3) the sales price is fixed or determinable, and 4) collectibilityis reasonably assured. The following policies apply to the Company’s majorcategories of revenue transactions.

 

*Sales to OEM Customers*: Under the Company’s standard terms andconditions of sale, title, and risk of loss transfer to the customer at thetime product is delivered to the customer, FOB shipping point, and revenue isrecognized accordingly. The Company accrues the estimated cost of post-saleobligations, including basic product warranties or returns, based on historicalexperience. The Company has experienced minimal warranty or other returns todate.

 

*Sales to Distributors:* Sales to distributors are made underarrangements allowing limited rights of return, generally under productwarranty provisions, stock rotation rights, and price protection on productsunsold by the distributor. In addition, the distributor may request specialpricing and allowances which may be granted subject to the Company’s approval.As a result of these return rights and potential pricing adjustments, theCompany generally defers recognition of revenue until such time that thedistributor sells product to its customer based upon receipt of point-of-salereports from the distributor.

 

Costs related to shipping and handling are includedin cost of revenue for all periods presented.

 

***Allowance for Doubtful Accounts***

 

The Company provides an allowance for doubtfulaccounts to ensure trade receivables are not overstated due toun-collectibility. The collectibility of the Company’s receivables is evaluatedbased on a variety of factors, including the length of time receivables arepast due, indication of the customer’s willingness to pay, significant one-timeevents and historical experience. An additional reserve for individual accountsis recorded when the Company becomes aware of a customer’s inability to meetits financial obligations, such as in the case of bankruptcy filings orsubstantial deterioration in the customer’s operating results or financialposition. If circumstances related to the Company’s customers change, estimatesof the recoverability of receivables would be further adjusted.

 

***Cash and Cash Equivalents and RestrictedCash***

 

The Company considers all highly liquid investmentswith a maturity of three months or less from the date of purchase to be cash equivalents.Cash and cash equivalents consist of cash and money market funds, the fairvalue of which approximates cost.

 

The following table summarizes the Company’scash and cash equivalents (in thousands)

 
| ** **        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| *Cash*            |       | $        | 410        |     | $          | 752 |   |
|              |       |     |       |     |       |   |   |
| *Restricted Cash* |       | $        | —     |     | $          | 162 |   |

 

The restricted cash represents monies held in aseparate money market account that collateralize standby letters of credit thathave been issued (see Note 9).

 

***Fair value of Financial Instruments***

 

Carryingamounts of certain of the Company’s financial instruments, including cash andcash equivalents, accounts receivable and accounts payable, approximate theirfair values due to their relative short maturities and based upon comparablemarket information available at the respective balance sheet dates. The Companydoes not hold or issue financial instruments for trading purposes.

 

***Concentration of Credit Risk and SignificantCustomers***

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of cash, cash equivalents and short-term investments.Substantially all of the Company’s cash and cash equivalents are invested inhighly-liquid money market funds. The Company sells its products throughdistributors and directly to original equipment manufacturers. The Companyperforms ongoing credit evaluations of its customers and maintains an allowancefor potential credit losses, as considered necessary by management. Creditlosses to date have been consistent with management’s estimates. During theyears ended September 30, 2007, and 2006 the Company wrote-off bad debtswhich had previously been reserved totaling approximately $0 and $295,000,respectively.

 

F-8

----

** **

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

 
| ** ** | ** ** | **% of Revenue for  the  Year Ended  September 30,  2007** | ** ** | **% of Revenue for   the  Year Ended  September 30,  2006** | ** ** |
|------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| Customer A |       | 40                                                                                  | %          |                                                                                      | 24         | % |   |
| Customer B |       | 16                                                                                  | %          |                                                                                      | —     | % |   |
| Customer C |       | 12                                                                                  | %          |                                                                                      | 18         | % |   |
| Customer D |       | —                                                                              | %          |                                                                                      | 15         | % |   |

 

The Company’s accounts receivable were concentrated with 3 customers atSeptember 30, 2007, representing 40 percent, and 12 percent of aggregategross receivables, and 3 customers at September 30, 2006, representing 24percent, 18 percent and 15 percent of aggregate gross receivables.

 

***Inventories***

 

Inventories are stated at the lower of cost or market. This policyrequires the Company to make estimates regarding the market value of theCompany’s inventory, including an assessment of excess or obsolete inventory. TheCompany determines excess and obsolete inventory based on an estimate of thefuture demand and estimated selling prices for the Company’s products within aspecified time horizon, generally 12 months. The estimates the Company uses forexpected demand are also used for near-term capacity planning, inventorypurchasing and are consistent with the Company’s revenue forecasts. Actualdemand and market conditions, if different from those projected by the Company’smanagement, would result in a change to the estimate. 

 

The Company accrues for estimated losses on non-cancelable purchaseorders. The estimated losses result from anticipated future sale of productsfor sales prices less than the estimated cost to manufacture. Inventorypurchase commitment losses accrued at September 30, 2007, and September 30,2006, were $0.

 

***Research and Development Expenses***

 

Research and development costs are charged to expense as incurred.

 

***Property and Equipment***

 

Property and equipment, including leasehold improvements, are stated athistorical cost, less accumulated depreciation and amortization. Amortizationof leasehold improvements is computed using the straight-line method over theshorter of the estimated useful lives of the assets or the term of the lease.Depreciation is computed using the straight-line method over the estimateduseful lives of the assets as follows:

 
| Furniture and  fixtures |   | 5 years                                  |
|-------------------------|--------|------------------------------------------|
| Software                |   | Shorter of 3-5  years or term of license |
| Equipment               |   | 2-5 years                                |

 

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

 

***Comprehensive Income***

 

Statement of Financial Accounting Standards No. 130, “*Reporting Comprehensive Income,*” 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 September 30,2007, and 2006.

 

***Accounting for Stock-based Compensation***

 

On October 1, 2005, the Company has adopted SFAS No. 123 (revised2004), “*Share-Based Payment*”**(“FAS123R”), that addresses the accounting for share-based payment transactions inwhich an enterprise receives employee services in exchange for equityinstruments of the enterprise.  Thestatement eliminates the ability to account for share-based compensationtransactions, as the Company formerly did, using the intrinsic value method asprescribed by Accounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees,*” and generallyrequires that such transactions be accounted for using a fair-value based methodand recognized as expense in its consolidated statements of operations.

 

F-9

----

 

Under SFAS 123(R), the Company is required to select a valuationtechnique or option-pricing model that meets the criteria as stated in thestandard, which includes a lattice model and the Black-Scholes Mertonmodel.  For all new stock basedcompensation awards granted starting October 1, 2005, and for any modification,cancellation, or repurchase of awards granted prior to October 1, 2005, theCompany recorded compensation cost in the statement of operations based on thefair value of the award for the requisite service period.  The Company adopted the Black-Scholes Mertonmodel.  The adoption of SFAS 123(R),applying the “modified prospective method,” as selected by the Company,requires the Company to value stock options as of October 1, 2005, the firstday of the Company’s fiscal year 2006. SFAS 123(R) requires the Company to estimate forfeitures in calculatingthe expense relating to share-based compensation as opposed to only recognizingthese forfeitures and the corresponding reduction in expense as they occur.  This resulted in the Company expensing $177,000in fiscal 2007 and a total of $1,690,000 for fiscal 2006.  As of September 30, 2007, total unrecognizedcompensation costs related to unvested stock options was $0.  The Company adjusted for this cumulativeeffect and recognized an increase in stock-based compensation, which wasrecorded within the research & development and general and administrativeexpense on the Company’s statements of operations.

 

SFAS 123(R) requires the cash flows resulting from the tax benefitsresulting from tax deductions in excess of the compensation cost recognized forthose options to be classified as financing cash flows.  Due to the Company’s loss position, therewere no such tax benefits during the years ended September 30, 2007 and2006.  

 

The fair value for these options was estimated using the Black-Scholesoption pricing model.

 

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

 

The fair value of options at the date of grant was estimated on thedate of grant based on the method prescribed by SFAS No. 123. Allemployees had left the company and all options had been cancelled prior toSeptember 30, 2007. The following table summarizes the estimated fair value ofoptions and assumptions used in the SFAS No. 123 calculations for stockoption plans for fiscal year 2006:

 
| ** **                | ** ** | **Year Ended  September  30,  2007** | ** ** | **Year Ended  September  30,  2006** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Estimated fair value      |       | $                                         | —     |                                      | $          | 0.07 |   |
| Expected lives (in years) |       | —                                    |       | 4.4                                       |       |
| Volatility                |       | —                                    |       | 119                                       | %          |
| Risk-free interest rate   |       | —                                    |       | 4.97                                      | %          |
| Dividend yield            |       | —                                    |       | —                                    |       |
|                           |            |                                           |            |                                           |            |  |  |

 

The following table summarizes the estimated fair value of employees’purchase rights and assumptions used in the SFAS No. 123 calculations forthe fiscal year ending September 30, 2006.

 
| ** **                | ** ** | **Year Ended  September  30,  2007** | ** ** | **Year Ended  September  30,  2006** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Estimated fair value      |       | $                                         | —     |                                      | $          | 0.07 |   |
| Expected lives (in years) |       | —                                    |       | 4.4                                       |       |
| Volatility                |       | —                                    |       | 119                                       | %          |
| Risk-free interest rate   |       | —                                    |       | 4.97                                      | %          |
| Dividend yield            |       | —                                    |       | —                                    |       |
|                           |            |                                           |            |                                           |            |  |  |

 

F-10

----

 

Stock based component (in thousands) was $177and $1,690 for the years ended September 30, 2007 and 2006, respectively. Unamortized stock-based compensation at September 30,2007 and 2006 was $0 and $217,000, respectively.

 

Stock-based compensation attributable to individuals that worked in thefollowing functions is as follows (in thousands):

 
| ** **                           | ** ** | **Year Ended  September 30,  2007** | ** ** | **Year Ended  September 30,  2006** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| Research and development             |       | $                                        | —     |                                     | $          | 997 |   |
| Selling, general and  administrative |       | 177                                      |       | 693                                      |       |
|                                 |       |                                     |       |                                     |       |
| Total stock-based  compensation      |       | $                                        | 177        |                                     | $          | 1,690 |   |
|                                      |            |                                          |            |                                          |            |  |  |  |  |

 

***Segment and Geographic Information***

 

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

 

The following is a geographic breakdown of the Company’s sales byshipping destination for the following periods:

 
| ** **    | ** ** | **Year Ended  September 30,  2007** | ** ** | **Year Ended  September 30,  2006** | ** ** |
|---------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| United States |       | $                                        | 201        |                                     | $          | 427 |   |
| Japan         |       | 2,806                                    |       | 5,973                                    |       |
| Singapore     |       | 447                                      |       | 951                                      |       |
| Taiwan        |       | 1,314                                    |       | 2,796                                    |       |
| China         |       | 611                                      |       | 1,300                                    |       |
| Korea         |       | 367                                      |       | 780                                      |       |
| Rest of world |       | 37                                       |       | 78                                       |       |
|          |       |                                     |       |                                     |       |   |   |
|          |       | $                                        | 5,783      |                                     | $          | 12,305 |   |

 

Net property and equipment by country was as follows:

 
| ** **    | ** ** | **September  30,  2007** | ** ** | **September 30,  2006** | ** ** |
|---------------|------------|--------------------------|------------|------------------------------|------------|
| United States |       | $                        | —     |                         | $          | 615 |   |
|               |            |                          |            |                              |            |  |  |

 

F-11

----

 

**RecentAccounting Pronouncements**

 

In June 2006, the Financial Accounting Standards Board (FASB)issued FASB Interpretation (FIN) No. 48,*Accountingfor Uncertainty in Income Taxes*, which supplements Statement ofFinancial Accounting Standard No. 109,*Accounting for IncomeTaxes*, by defining the confidence level that a tax position mustmeet in order to be recognized in the financial statements. FIN 48 requires thetax effect of a position to be recognized only if it is “more-likely-than-not”to be sustained based solely on its technical merits as of the reporting date.If a tax position is not considered more-likely-than-not to be sustained basedsolely on its technical merits, no benefits of the position are recognized. Ifthe tax position is considered more likely than not to be sustained, the amountto record is measured at the largest amount of benefit that is grater than 50%likely of being realized upon ultimate settlement. This is a different standardfor recognition than was previously required. The more-likely-than-notthreshold must continue to be met in each reporting period to support continuedrecognition of a benefit. At adoption, companies must adjust their financialstatements to reflect only those tax positions that are more-likely-than-not tobe sustained as of the adoption date. Any necessary adjustment is recordeddirectly to opening retained earnings in the period of adoption and reported asa change in accounting principle. The Company adopted FIN 48 starting January 1,2007. The adoption of FIN 48 did not have a material effect on the Company’sfinancial statements.

 

In September 2006, the Securities and Exchange Commissionpublished Staff Accounting Bulletin No. 108, “Considering*the Effects of Prior Year Misstatements when Quantifying Misstatementsin Current Year Financial Statements* “ (SAB 108). Theinterpretations in SAB 108 are being issued to address diversity in practice inquantifying financial statement misstatements and the potential under currentpractice to build up improper amounts on the balance sheet. This guidanceapplies to fiscal years ending after November 15, 2006, and earlyapplication in interim periods is encouraged. The adoption of SAB 108 did nothave an effect on the Company’s financial statements.

 

In September 2006, the FASB issued SFAS No. 157 (“FAS 157”),“*Fair Value Measurements,*” which definesfair value, establishes guidelines for measuring fair value and expands disclosuresregarding fair value measurements. FAS 157 does not require any new fairvalue measurements but rather eliminates inconsistencies in guidance found invarious prior accounting pronouncements. FAS 157 is effective for fiscalyears beginning after November 15, 2007. Earlier adoption is permitted,provided the company has not yet issued financial statements, including forinterim periods, for that fiscal year. The Company is currently evaluating theimpact of FAS 157, but do not expect the adoption of FAS 157 to havea material impact on the financial position, results of operations or cashflows.

 

In February 2007, the FASB issued SFAS No. 159,**“*The Fair Value Option forFinancial Assets and Financial Liabilities*,” which permits entitiesto choose to measure many financial assets and financial liabilities at fairvalue. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The Company does not expect theadoption of FAS 159 to have a material impact.

 

***Net Income (loss) Per Share***

 

Basic net income (loss) per share is computed by dividing the net income(loss) available to common stockholders for the period by the weighted averagenumber of common stock outstanding during the period. Diluted net loss pershare is computed based on the weighted average number of common stock anddilutive potential common stock outstanding. The calculation of diluted net income(loss) per share excludes potential common stock if the effect isanti-dilutive. Potential common stock consists of incremental common stockissuable upon the exercise of stock options, shares issuable upon conversion ofconvertible preferred stock and common stock issuable upon the exercise ofcommon stock warrants. In addition, as there are no outstanding options at yearend, basic and diluted are the same.

 

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

 
| ** **                                           | ** ** | **Year Ended  September  30,  2007** | ** ** | **Year Ended  September 30,  2006** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|
|                                                 |       |                                      |       |                                          |       |
| Numerator:                                           |       |                                      |       |                                          |       |
| Net income (loss)  applicable to common stockholders |       | $                                         | 17         |                                          | $          | (9,232 | ) |
|                                                 |       |                                      |       |                                          |       |
| Denominator:                                         |       |                                      |       |                                          |       |
| Weighted average common  stock                       |       | 70,161                                    |       | 65,215                                        |       |
|                                                 |       |                                      |       |                                          |       |
| Net income (loss) per  share:                        |       |                                      |       |                                          |       |
| Basic and diluted                                    |       | $                                         | 0.0        |                                          | $          | (0.14 | ) |

 

The confirmed bankruptcy plan will require the additional issuance ofcommon stock or common stock equivalents, thereby substantially dilutingcurrent common shareholders interests.

 

F-12

----

 

The following table sets forth potential shares of common stock thatare not included in the diluted net loss per share calculation above because todo so would be anti-dilutive for the periods presented (in thousands):

 
| ** **                                       | ** ** | **Year Ended  September 30,  2007** | ** ** | **Year Ended  September 30,  2006** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
|                                             |       |                                          |       |                                          |       |
| Common stock options                             |       | 0                                             |       | 8,501                                         |       |
| Common stock under  Employee Stock Purchase Plan |       | 0                                             |       | 322                                           |       |
| Common stock warrants                            |       | 0                                             |       | 1,229                                         |       |
| Restricted Stock                                 |       | 0                                             |       | 1,800                                         |       |

 

**NOTE 3—BALANCE SHEET COMPONENTS (inthousands):**

** **
| ** **                                                    | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Accounts receivable, net:**                                 | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Accounts receivable                                           |       | $                            | —     |                         | $          | 957 |   |
| Less: allowance for sales  returns                            |       | —                       |       | (4                           | )          |
|                                                          |       |                         |       |                         |       |
|                                                          |       | $                            | —     |                         | $          | 953 |   |
|                                                          |       |                         |       |                         |       |
| **Inventories, net:**                                         | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Work-in-process                                               |       | $                            | —     |                         | $          | 455 |   |
| Finished goods                                                |       | 110                          |       | 6,165                        |       |
|                                                          |       |                         |       |                         |       |
|                                                          |       | 110                          |       | 6,620                        |       |
| Less: reserve for  slow-moving, excess and obsolete inventory |       | —                       |       | (4,171                       | )          |
|                                                          |       |                         |       |                         |       |
|                                                          |       | $                            | 110        |                         | $          | 2,449 |   |
|                                                          |       |                         |       |                         |       |
| **Property and equipment, net:**                              | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Furniture and fixtures                                        |       | $                            | —     |                         | $          | 101 |   |
| Software                                                      |       | —                       |       | 4,396                        |       |
| Equipment                                                     |       | —                       |       | 3,932                        |       |
| Leasehold improvements                                        |       | —                       |       | 152                          |       |
|                                                          |       |                         |       |                         |       |
|                                                          |       | —                       |       | 8,581                        |       |
| Less: accumulated  depreciation and amortization              |       | —                       |       | (7,966                       | )          |
|                                                          |       |                         |       |                         |       |
|                                                          |       | $                            | —     |                         | $          | 615 |   |

 

Property and equipment includes assets under capital leases andaccumulated amortization of assets under capital leases of $1,853,000 and$925,000, at September 30, 2007 and 2006, respectively.

 
| ** **                                 | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Accrued expenses:**                      | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Accrued compensation and  related benefits |       | $                            | —     |                         | $          | 511 |   |
| Accrued professional fees                  |       | 117                          |       | 126                          |       |
| Other accrued expenses                     |       | 10                           |       | 326                          |       |
|                                       |       |                         |       |                         |       |
|                                       |       | $                            | 127        |                         | $          | 963 |   |

 

F-13

----

 

**NOTE4—COMMON STOCK:**

 

The Company’s Amended and Restated Articles of Incorporation authorizethe Company to issue 100,000,000 shares of common stock. At September 30,2007,  and September 30, 2006, there were 70,164,582 and 69,711,879shares, respectively, of common stock issued and outstanding.

 

The Company has reserved the following number of shares of common stockfor future issuance (in thousands):

 
| ** **                                               | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Common stock warrants                                    |       | 0                            |       | 960                          |       |
| Common stock under  Employee Stock Purchase Plan         |       | 0                            |       | 125                          |       |
| Common stock upon exercise  of outstanding stock options |       | 0                            |       | 8,735                        |       |
|                                                     |       |                         |       |                         |       |
|                                                     |       | 0                            |       | 9,820                        |       |

 

In March 2005 the Company completed a financing through the saleof 4,833,335 shares of common stock at a price of $0.90 per share in a privateplacement. In connection with this private placement, the Company also issuedwarrants to purchase up to 966,667 shares of common stock with an exerciseprice of $1.25 per share.

 

During 2006 the Company issued 3,252,000 shares of common stock as partof the settlement agreement with Langley Partners, L.P

 

***Common Stock Warrants***

 

On March 3, 2005, the Company completed a private placement, whichresulted in gross proceeds of $4.4 million. In connection with thisprivate placement the Company sold 4,833,335 shares of common stock at a priceof $0.90 per share and issued warrants to purchase up to 966,667 shares ofcommon stock. The warrants have a term of 3.5 years and an exercise price equalto $1.25. Since the warrants are subject to certain registration rights, theCompany recorded a warrant liability, totaling $967,000, in accordance withEITF 00-19 “*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*”. Thewarrant liability has subsequently been recalculated using the closing price ofthe Company’s common stock as of September 30, 2005 of $0.68. Theregistration rights provide for the Company to file with the Securities andExchange Commission a Registration Statement covering the resale of all of thesecurities issued in connection with the private placement. The registrationstatement was filed with the Securities and Exchange Commission on March 24,2005. We were required to have received an effective registration no later than30 days after the Closing date. If the registration was not effective by thattime we incurred penalties. The registration became effective on September 12,2005, and we do not anticipate any future penalties associated with theregistration. In accordance with SFAS 133 “*Accounting for DerivativeInstruments and Hedging Activities*”, the Company revalued thewarrants as of September 30, 2006, using the Black-Scholes option pricingmodel. The Company valued the warrants using the Black-Sholes option pricingmodel, applying a life of 2.0 years, a risk free interest rate of 4.71%, anexpected dividend yield of 0%, a volatility of 154% and a deemed fair value ofcommon stock of $1.25, which was the closing price of the Company’s commonstock on September 30, 2006. The difference between the fair value of thewarrants as of September 30, 2006 and the previous valuation as of September 30,2005, has been recorded as a change in fair value on revaluation of warrantliability. All warrants had been cancelled as of September 30, 2007.

 

**NOTE5—EMPLOYEE BENEFIT PLANS:**

 

***Stock Option Plans***

 

In April 2000, the Company adopted the 2000 Stock Option Plan (the“2000 Plan”). Upon adoption of the 2000 Plan, shares reserved for issuanceunder the 1995 Stock Option Plan relating to un-granted options were cancelled,and outstanding options under the 1995 Plan became subject to the 2000 Plan.The 2000 Plan authorizes the Board of Directors to grant incentive stockoptions (“ISOs”) and non-statutory stock options (“NSOs”) to employees,directors and consultants for up to 19,300,000 shares of common stock. ISOs maybe granted only to employees of the Company (including officers and directorswho are also employees). NSOs may be granted to employees, non-employeedirectors and consultants of the Company. No person will be eligible to receivemore than 500,000 shares in any fiscal year pursuant to awards under the 2000Plan other than a new employee of the Company who will be eligible to receiveno more than 1,000,000 shares in the fiscal year in which such employeecommences employment.

 

F-14

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Under the 2000 Plan, ISOs and NSOs aregranted at a price that is not to be less than 100 percent of the fair marketvalue of the common stock on the date of grant, as determined by the Board ofDirectors. Initial hire-on stock options generally vest at 25 percent on thefirst anniversary date from the date of grant and then monthly thereafter overthe remaining 36 months. Subsequent discretionary stock options, generally vestequally each month over 48 months. Options granted to shareholders who own morethan 10 percent of the outstanding stock of the Company at the time of grantmust be issued at prices not less than 110 percent of the estimated fair valueof the stock on the date of grant. Options under the 2000 Plan may be grantedfor periods up to 10 years.

 

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

 
| **Options**                         | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price Per  Share** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------------------------------|------------|
| ** **                          |       |       |       |                                                           |       |
| **Outstanding  at October 1, 2005** | ** ** | **10,303** | ** ** | **$**                                                          | **2.20**   | ** ** |
|                                |       |       |       |                                                           |       |
| Granted                             |       | 320        |       | 0.35                                                           |       |
| Exercised                           |       | (61        | )          | 0.14                                                           |       |
| Cancelled                           |       | (1,827     | )          | 1.54                                                           |       |
|                                |       |       |       |                                                           |       |
| Outstanding  at September 30, 2006  |       | 8,735      |       | $                                                              | 1.54       |   |
|                                |       |       |       |                                                           |       |
| Granted                             |       | —     |       |                                                           |       |
| Exercised                           |       | —     |       |                                                           |       |
| Cancelled                           |       | (8,735     | )          | 2.26                                                           |       |
|                                |       |       |       |                                                           |       |
| Outstanding  at September 30, 2007  |       | —     |       |                                                           |       |

 

F-15

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There were no options granted during the yearended September 30, 2007, and all employees had left the Company and alloptions were cancelled by September 30, 2007. The weighted-average grant datefair value of options granted during the year ended September 30, 2006,was $0.35.

 

***2000 Employee Stock Purchase Plan***

 

In April 2000 the Company adopted the2000 Employee Stock Purchase Plan (the “Purchase Plan”) under which 500,000shares of common stock have been reserved for issuance. Eligible employees mayelect to withhold up to 15 percent of their salary to purchase shares of theCompany’s common stock at a price equal to 85 percent of the market value ofthe stock at the beginning or ending of a six month offering period, whicheveris lower. No more than 5,000 shares may be purchased by an eligible employeeduring any calendar year. The Purchase Plan will terminate in 2010. Under thePurchase Plan, 0 and 27,184 shares were issued during the years ended September 30,2007 and 2006, respectively.

 

***401(k) Plan***

 

The Company sponsors a 401(k) Plan (the “401(k) Plan”)which provides tax-deferred salary deductions for eligible employees. Employeesmay contribute up to 15 percent of their annual compensation to the 401(k) Plan,limited to a maximum annual amount as set periodically by the Internal RevenueService. The 401(k) Plan permits, but does not require, the Company tomake matching contributions. To date, no such matching contributions have beenmade.

 

**NOTE 6—INCOME TAXES:**

 

At September 30, 2007, the Company had netoperating loss carry-forwards for federal and state income tax purposes of approximately$127,770 and $28,933, respectively, which expire in varying amounts through2027. In addition, the Company has creditcarry forwards of approximately $2,694 for federal tax purposes and $2,322 forstate tax purposes, expiring in varying amounts through 2026. Under the Tax Reform Act of1986, the amounts of and benefits from net operating loss**and tax credit carry-forwards may be impaired orlimited in certain circumstances. Events which could cause limitations in the. use of netoperating loss**and tax credit carry-forwards thatthe Company may utilize in any one year include, but are not limited to,.a cumulativeownership change of more than 50percent, as defined, over a three-year period.

 
| ** **                                                       | ** ** | **September 30,  2007** | ** ** | **September  30,  2006** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
|                                                             | ** ** |                         |       |                     | ** ** |
| Deferred  taxes comprise the following (in thousands): | ** ** |                         |       |                     | ** ** |
| Net operating loss carry-forwards                 | ** ** | $                            | 45,178     |                     | $          | 45,184 | ** ** |
|                                                             | ** ** |                         |       |                     | ** ** |
| Credit carry-forwards                                            | ** ** | 5,016                        |       | 5,016                    | ** ** |
|                                                             | ** ** |                         |       |                     | ** ** |
| Net deferred tax assets                                          |       | 50,194                       |       | 50,200                   | ** ** |
| Less: Valuation allowance                                        | ** ** | (50,194                      | )          | (50,200                  | )          |
|                                                             | ** ** |                         |       |                     | ** ** |
| Net deferred tax assets                                          |       | $                            | —     |                     | $          | — |   |

 

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, and relativelyhigh expense levels, the fact that the market in which the Company competes is intenselycompetitive and characterized by rapidly changing technology, the lack ofcarry-back capacity to realize deferred tax assets and the uncertainty regarding marketacceptance of the Company’s products. The Company will continue to assess the realizability of the deferred taxassets based on**actual and forecasted operatingresults. Deferred tax assets related to items affecting equity will be chargedto equity when realized. The valuation allowance decreased by $6 in the period ended September30, 2007.

 

Income tax expense differed from the amountscomputed by applying thestatutory federal income tax rate of 34 percent to pretax income as a result of thefollowing (in thousands):

 
| ** **                     | ** ** | **September  30,  2007** | ** ** | **September  30,  2006** | ** ** |
|--------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Federal tax  at statutory rate |       | $                        | 5          |                     | $          | (3,138 | ) |
| State taxes                    |       | 1                        |       | (554                     | )          |
|                           |       |                     |       |                     |       |
| Valuation  allowance           |       | (6                       | )          | 3,692                    |       |
|                           |       |                     |       |                     |       |
| Total income  tax expense      |       | $                        | —     |                     | $          | — |   |

 

F-16

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The Company believes that, based on number offactors, the available objective evidence creates sufficient uncertaintyregarding the realizability of the deferred tax assets such that a fullvaluation allowance has been recorded. These factors include the Company’shistory of losses, and relatively high expense levels, the fact that the marketin which the Company competes is intensely competitive and characterized byrapidly changing technology, the lack of carry-back capacity to realizedeferred tax assets and the uncertainty regarding market acceptance of theCompany’s products. The Company will continue to assess the realizability ofthe deferred tax assets based on actual and forecasted operating results.Deferred tax assets related to items effecting equity will be charged to equitywhen realized.

 

Income tax expense differed from the amountscomputed by applying the statutory federal income tax rate of 34 percent topretax income as a result of the following (in thousands):

 
|                              |   | **September  30,  2007** |   | **September  30,  2006** |   |
|-----------------------------------|--------|--------------------------|--------|--------------------------|--------|
| Federal tax  at statutory rate    |   | $                        | (3,690 | )                        | $      | (4,282 | ) |
| Amortization  of intangibles      |   | 73                       |   | 83                       |   |
| Net  operating loss not benefited |   | 3,572                    |   | 4,147                    |   |
| Nondeductible  expenses           |   | 11                       |   | 8                        |   |
| Nondeductible  stock compensation |   | 34                       |   | 44                       |   |
|                              |   |                     |   |                     |   |
| Total income  tax expense         |   | $                        | — |                     | $      | — |   |

 

**NOTE 7 — CONVERTIBLE DEBT**

 

In November 2005, the Company enteredinto the Securities Purchase Agreement with the purchasers named therein (the“Purchasers”). The transaction closed on November 8, 2005. Pursuant to theSecurities Purchase Agreement, the Purchasers purchased 6% Senior SecuredConvertible Debentures (the “Debentures”) in the aggregate principal amount of$5,000,000 together with Series A Warrants and Series B Warrants. TheCompany used the proceeds of the financing to finance on-going operations. TheCompany also entered into a Security Agreement dated November 8, 2005, byand between the Company and the signatories thereto (the “Security Agreement”),pursuant to which the Debentures were secured by all of the assets of theCompany, including the Company’s intellectual property. Interest was payable onthe Debentures at a rate of 6% per annum. Monthly principal and interestpayments on the Debentures began on April 8, 2006. At the option of theCompany, interest payments on the Debentures were payable either in cash or inregistered Common Stock, subject to certain conditions as specified in theDebentures.

 

The Debentures had a term of two years andwere due on November 8, 2007. The Debentures were convertible at theoption of the holder at any time and from time to time into Common Stock of theCompany at a conversion price of $0.37 per share, subject to certainadjustments.  Upon an event of default,130% of the outstanding principal of the Debentures plus all accrued and unpaidinterest would become immediately due and payable to the holder of theDebentures. In addition, as part of the financing, the Company agreed to bebound by certain covenants regarding obtaining new financing, issuing new stock,or paying dividends.

 

Pursuant to the Securities Purchase Agreement,the Company also issued Series A Common Stock Warrants and Series BCommon Stock Warrants to the Purchasers. The Series A Common StockWarrants (the “Series A Warrants”) were exercisable from November 8,2005, until July 1, 2006, to purchase up to 6,756,755 shares of CommonStock (the “Series A Share Amount”) at an exercise price of $0.37 pershare (the “Series A Exercise Price”). The Series B Common StockWarrants (the “Series B Warrants” and together with the Series AWarrants, the “Warrants”) are exercisable from May 8, 2006, until May 8,2011, to purchase up to 10,135,133 shares of Common Stock (the “Series BShare Amount,” and together with the Series A Share Amount, the “WarrantShare Amount”) at an exercise price of $0.43 per share, (the “Series BExercise Price,” and together with the Series A Exercise Price, the“Warrant Exercise Price”). The Warrants also contained provisions to adjust theWarrant Exercise Price and the Warrant Share Amount under certaincircumstances.

 

In February 2006, the Company proposed tothe holders of the Series A Warrants that upon the exercise of Series AWarrants, the Company would issue new warrants in exchange for the exercise ofthe Series A Warrants. On February 14, 2006, the holders of the Series AWarrants exercised their Series A Warrants and the Company issued6,756,755 shares of common stock for aggregate proceeds of $2.5 million and theCompany issued new warrants at a strike price of $0.315 per share on 6,081,079shares of the Company’s common stock; new warrants would terminate on July 1,2007.

 

The financing was completed through a privateplacement to accredited investors and was exempt from registration pursuant to Section 4(2) ofthe Securities Act of 1933, as amended. Pursuant to the Registration RightsAgreement with the Purchasers dated November 8, 2005 (the “RegistrationRights Agreement”), the Company agreed to file a Resale Registration Statementcovering the resale of the shares issuable to the investors upon the conversionof the Debentures and the exercise of the Warrants within 30 days of theclosing of the financing. In addition, as long as the Debentures remainedoutstanding, the holders of the Debentures had the right to participate in theCompany’s future equity or equity-linked financings. In connection withconsummating the financing pursuant to the Securities Purchase Agreement, theCompany has paid fees to its financial advisor of $150,750 and issued warrantsto its financial advisor to purchase up to 233,721 shares of the Company’sCommon Stock on the same terms as the Series B Warrants (exercisable from May 8,2006 until May 8, 2011 at an exercise price of $0.43 per share).

 

The proceeds to the Company for the Debenturesand the Series A Warrants and Series B Warrants issued to theinvestors were $5.0 million. The Company paid legal expenses and a finders’ feeof $150,750 in commissions and Series B Common Stock Warrants to acquire233,721 shares of the Company’s common stock in connection with the financing.The Series B Common Stock Warrants issued were exercisable at $0.43 pershare. The Company ascribed the value of $95,826 to the finders’ fee warrantswhich is recorded along with the finders’ fee of $150,750 as a warrant liabilitycost in the balance sheet at December 31, 2005. The fair value ascribed tothe finders’ fee Series B Common Stock Warrants was estimated on thecommitment date using the Black-Scholes-Merton pricing model with the followingassumptions: risk-free interest rate of 4.51%; contractual term of 5 years;expected volatility of 145.04%; and expected dividend yield of 0%.

 

          Inaccordance with Statement of Financial Accounting Standards No. 133, ‘*Accounting for Derivative Instruments and Hedging Activities*’,(“FASB 133”), the Company determined that the conversion feature of theDebentures met the criteria of an embedded derivative and therefore theconversion feature of the debt needed to be bifurcated and accounted for as aderivative. Due to the reset provisions of the Debentures, the debt did notmeet the definition of “conventional convertible debt” because the number ofshares which might be issued upon the conversion of the debt was not fixed.Furthermore, there was no cap on the number of shares that could be issued inthe event that the Company was delisted from the Nasdaq or one of the otherreset provisions was triggered. Therefore, the conversion feature failed toqualify for equity classification under EITF 00-19, and had to beaccounted for as a derivative liability.

 

The Company determined the exercise price per share for the conversionfeature by computing the discounted net present value (DNPV) of the debt($5,000,000 plus interest at 6% over two years, discounted at 18.6%) anddividing the DNPV amount by the total number of shares the debt was convertibleinto. The 18.6% discount factor is the Company’s estimate of the appropriaterate of return that an investor would expect from a similar debenture nottaking into consideration the conversion feature or warrants. As a result, theCompany ascribed a value of $4,733,295 to the derivative at the date ofissuance. The fair value of the conversion feature was subsequently revalued to$235,473 at September 30, 2006, and $0 at September 30, 2007, with thechange in value reflected in the Company’s consolidated statement of operationsfor the years then ended.

 

The $5,000,000 face amount of the Debentureswas stripped of its conversion feature due to the accounting for the conversionfeature as a derivative, which was recorded using the residual proceeds method,whereby any remaining proceeds after allocating the proceeds to the Warrantsand conversion option was attributed to the debt. Since the combined fairvalues of the Warrants and the conversion option at issuance of $10,037,348 wasin excess of the total proceeds on the transaction, the debt was recorded at anet zero value. As a result, the Company recorded the amount of the valueascribed to the conversion feature and the Warrants that exceeded proceeds fromthe financing of $5,000,000 as interest expense in the Company’s consolidatedstatement of operations for the year ended September 30, 2006.  This resulted in a charge of $5.037 millionto interest expense left a net debt discount value of $5 million. The debtdiscount of $5 million was accreted and recognized as interest expense from thedate of issuance to the stated redemption date using the effective yield methoduntil bankruptcy.  As 

 

F-17

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part of the bankruptcy proceedings, see Note 11, the Court set asideany default penalty provisions, cancelled all applicable warrants and, paid theprincipal balance down to  $250,000, whichno longer bears interest. The balance will be paid upon completion of theproposed reverse merger transaction, see Note 12.

 

Thefollowing table reflects the Convertible Debt:

 
| ** **                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **2007**               | ** ** | **2006**               | ** ** |
| Convertible Debt                         |       | $                      | 250,000    |                   | $          | 3,500,000 |   |
| Less: Current portion of debt discount   |       | 0                      |       | (2,500,000             | )          |
| Less: Long-term portion of debt discount |       | 0                      |       | (267,123               | )          |
|                                     |       |                   |       |                   |       |
|                                     |       | $                      | 250,000    |                   | $          | 732,877 |   |

 

**NOTE 8 —WARRANT LIABILITY**

 

In conjunction with the issuance ofconvertible debt, the Company has issued various warrants that had registrationrights for the underlying shares. As the contracts must be settled by thedelivery of registered shares and the delivery of registered shares is notconsidered by the Company, pursuant to Emerging Issues Task Force (EITF) 00-19“*Accounting for Exercise Finance Instruments Indexedto, and Potentially Settled in a Company’s Own Stock*”, the net valueof the warrants at the date of issuance was recorded as a warrant liability onthe balance sheet and the change in fair value from the date of issuance to September 30,2006, has been included in change in fair value on revaluation of warrantliability.  The balance was $444 thousandas on September 30, 2006 and during the year ended September 30, 2007, asa result of the bankruptcy, the warrants were cancelled and no further liabilityremained.

 

**NOTE 9—COMMITMENTS AND CONTINGENCIES:**

 

***Lease Commitments***

 

The Company leases office space on a month-to-month basis.

 

***Inventory purchase commitments***

 

At September 30, 2007 and 2006, theCompany had open purchase orders for the purchase of inventory totalingapproximately $0 and $3.3 million respectively. These purchase orders may onlybe cancelled if the foundry has not yet started production of the wafers towhich the open purchase orders relate.

*** ***

***Contingencies***

 

From time to time, in the normal course ofbusiness, various claims are made against the Company, its directors orofficers. The Company has agreed to indemnify its officers and directors withrespect to such claims, except in limited circumstances. For more informationregarding the Company’s indemnification obligations and pending litigationplease see “Guarantees” below in this Note 7 and see Note 8 below.

 

***Guarantees***

 

In November 2002, the FASB issued FIN No. 45“*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, including Indirect Guarantees of Indebtedness of Others*”—aninterpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN34.” The following is a summary of the Company’s agreements that the Companyhas determined are within the scope of FIN 45.

 

The Company provides a limited warranty forup to one year for any defective products. During the years ended September 30,2007 and 2006, warranty expense was insignificant. 

 

For the year ended September 30, 2007, theletter of credit was no longer in place, but for the year ended September 30,2006, the letter of credit for $0.2 million remained in place.

 

Pursuant to its bylaws, the Company hasagreed to indemnify its officers and directors for certain events oroccurrences arising as a result of the officer or director serving in suchcapacity. The term of the indemnification period is for the officer’s ordirector’s lifetime. To date, the Company has not incurred any costs inconnection with these indemnification agreements. Accordingly, the Company hasno liabilities recorded for these agreements as of September 30, 2007. TheCompany is self-insured for these and similar claims. The lawsuits describedbelow in Note 8 involve claims that may be covered by these indemnificationagreements.

 

The Company enters into indemnificationprovisions under (i) its agreements with other companies in its ordinarycourse of business, typically with business partners, contractors andcustomers, its sub-landlord and (ii) its agreements with investors. Underthese provisions the Company has agreed to generally indemnify and holdharmless the indemnified party for losses suffered or incurred by theindemnified party as a result of the Company’s activities or, in some cases, asa result of the indemnified party’s activities under the agreement. Theseindemnification provisions often include indemnifications relating torepresentations made by the Company with regard to intellectual propertyrights. These indemnification provisions generally survive termination of theunderlying agreement. The maximum potential amount of future payments theCompany could be required to make under these indemnification provisions isunlimited. To date, the Company has not incurred any costs in connection withthese indemnification agreements. Accordingly, the Company has no liabilitiesrecorded for these agreements as of September 30, 2007.

 

**NOTE 10—LITIGATION:**

 

We are a party to lawsuits in the normalcourse of our business. Litigation in general, and securities litigation inparticular, can be expensive and disruptive to normal business operations.Moreover, the results of legal proceedings are difficult to predict. Anunfavorable resolution of one or more of these lawsuits would materiallyadversely affect our business, results of operations, or financial condition.In addition, given our financial condition and that we do not have insurance tooffset the cost of litigation, the costs of defending one or more of theselawsuits will likely adversely affect our financial condition. We cannot estimatethe loss or range of loss that may be reasonably possible for any of thecontingencies described and accordingly have not recorded any associatedliabilities in our consolidated balance sheets. We accrue legal costs whenincurred.

 

*Federal Securities Class Actions*

 

Beginning on November 4, 2004,plaintiffs filed four separate complaints purporting to be class actions in theUnited States District Court for the Northern District of California allegingthat we and certain of our present or former officers and/or directors, Dr. Adya S.Tripathi, David Eichler, and Graham Wright, violated Sections 10(b) and20(a) of the Exchange Act. Plaintiffs purported to represent a putativeclass of shareholders who purchased or otherwise acquired the Company’ssecurities between January 29, 2004, and October 22, 2004. Thecomplaints contained varying allegations, including that we and the individualdefendants made materially false and misleading statements with respect to ourfinancial results and with respect to our business, prospects and operations inthe our filings with the SEC, press releases and other disclosures. Thecomplaints saught unspecified compensatory damages, attorneys’ fees, expertwitness fees, costs and such other relief as may be awarded by the Court.

 

On December 22, 2004, the Court entereda stipulation and order consolidating all of these complaints and ordering thatthe defendants need not respond to any of these complaints until afterplaintiffs file a consolidated complaint. On January 4, 2005, plaintiffsfiled motions for the appointment of lead plaintiff. The Court, by Order dated January 28,2005, appointed Robert Poteet as the sole lead plaintiff and approved MilbergWeiss Bershad & Schulman LLP as lead counsel.

 

On July 11, 2005, the Company enteredinto a Stipulation and Settlement Agreement (the “Stipulation”) which was filedwith the Court on July 12, 2005. The settlement class consisted of allpersons who purchased the securities of the Company between January 29,2004, and June 13, 2005, inclusive. Under the terms of the Stipulation,the parties agreed that the class action will be dismissed in exchange for apayment of $200,000 in cash by the Company and the issuance of2.45 million shares of the Company common stock which shall be exempt fromregistration pursuant to Section 3(a)(10) of the Securities Act. TheStipulation remains subject to the satisfaction of various conditions,including without limitation final approval of the Stipulation by the Court,including a finding that the 2.45 million shares of the Company commonstock to be issued are exempt from registration pursuant to Section 3(a)(1) ofthe Securities Act. Following the April 11, 2006, hearing, the Courtentered an Order and Final Judgement on April 18, 2006, which finalyapproved the settlement, awarded attorney’s fees and authorized the reimbursementof expenses and entered judgement discussing all of the complaints on themerits and with prejudice in favour of the defendants.

* *

*Langley Securities Fraud Litigation*

 

On or about June 2, 2005, plaintiff Langley Partners, L.P.(“Langley”) filed a complaint in the United States District Court for theSouthern District of New York alleging claims against the Company,Dr. Adya Tripathi, the Company’s President and Chief Executive Officer,and David Eichler, the Company’s former Chief Financial Officer. Langleyalleges that it entered into a stock purchase agreement with the Company on orabout August 2, 2004, in which Langley purchased 1 million shares of theCompany’s common stock at a purchase price of $2.00 per share. Langley alsoalleges that it consented to the receipt of the Company’s Prospectus datedAugust 2, 2004, and the accompanying Prospectus dated June 1, 2004,which specifically incorporated certain of the Company’s filings with the SECfrom March through July 2004. The complaint generally alleges thatthe Company and the individual defendants made materially false and misleadingstatements with respect to the Company’s financial 

 

F-18

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results and with respect to its business, prospects, internalaccounting controls and design wins on Godzilla products in the Company’sfilings with the SEC, press releases and other documents. The complaint allegesclaims against the Company and the individual defendants for violations ofSections 10(b) and 20(a) of the Exchange Act, fraud, breach ofcontract, unjust enrichment and money had and received, rescission andviolations of Sections 11 and 15 of the Securities Act. On this basis, thecomplaint seeks unspecified compensatory damages and restitution in an amountin excess of $2 million, rescission of the purchase agreement and a returnof $2 million, unspecified punitive damages, costs and such other reliefas may be awarded by the Court.

 

On October 6, 2005, the Court entered anOrder granting the Company’s motion to transfer this action from the SouthernDistrict of New York to the United States District Court for the NorthernDistrict of California. On September 27, 2005, the Court also ordered thatshould the motion to transfer be granted, the Company and the individualdefendants need not respond to the Complaint until such time as the transfereeCourt should determine. On November 29, 2005, the Court entered astipulation and order establishing briefing and hearing schedule for theanticipated motion to dismiss the complaint to be filed by the Company, Dr. Tripathiand Mr. Eichler. During 2006 the Company issued 3,252,000 shares of commonstock as part of the settlement agreement with Langley Partners, L.P.

 

*Changes in and Disagreements with Accountants*

 

As previously disclosed in our current reporton Form 8-K dated October 18, 2004, and filed on October 22,2004, in October 2004, our former independent registered public accountants,BDO Seidman LLP, or BDO, provided our Audit Committee with a letter citingwhat BDO asserted are two “material weaknesses” over our internal financialcontrols: one regarding the lack of effectiveness of our Audit Committee andthe other regarding the lack of controls in place to estimate distributorreturns in accordance with SFAS No. 48. Following discussions with ouremployees, representatives of BDO further orally advised us that BDO hadconcerns regarding the appropriate accounting for approximately$1.3 million of product that, upon our inquiries, one of our distributors,Macnica, or the Distributor, reported had been returned to the Distributor bythe Distributor’s customers, or the Product Return. In response to both theletter and the verbal comments, the Audit Committee instructed our then-ChiefFinancial Officer to investigate this matter and report the findings to theAudit Committee. As a result of the litigation matters referenced above, weretained outside litigation counsel to represent us in responding to theaforementioned complaints. In addition, the Audit Committee and the then-ChiefFinancial Officer directed litigation counsel to further conduct an internalinvestigation into the verbal concerns raised by BDO regarding the Product Return.Separately, the Audit Committee, with the assistance of our then-ChiefFinancial Officer, investigated BDO’s assertion regarding the lack of controlsin place to estimate distributor returns.

 

The Audit Committee received an initialreport from our litigation counsel on findings of the internal investigation onJanuary 21, 2005, and requested additional investigation by litigationcounsel. On January 25, 2005, litigation counsel made a supplementalreport on the findings of the internal investigation to date. Following thepresentation of such report, including discussion of the findings of theforensic accountant hired by the litigation counsel with the approval of theAudit Committee, the Audit Committee concluded that our Country Manager for theJapan Sales Office (who is no longer employed with us) agreed in an arrangementoutside the formal paperwork of the transactions underlying the Product Returnthat the Distributor could return the products back to us at the Distributor’sdiscretion.

 

The Audit Committee investigation anddiscussion included a review of our compliance with Securities and ExchangeCommission Staff Accounting Bulletin No. 104 “*RevenueRecognition in Financial Statements*”, or SAB 104, as applied tothe circumstances surrounding the Product Return. Under SAB 104, arequirement for revenue recognition is that all of the following criteria mustbe met: (1) there is persuasive evidence that an arrangement exists, (2) deliveryof goods has occurred, (3) the sales price is fixed or determinable, and (4) collectibilityis reasonably assured. In addition, pursuant to our revenue recognition policy,for sales to distributors, we defer recognition of revenue until such time thatthe distributor sells products to its customers based upon receipt ofpoint-of-sales reports from the distributor. The internal investigationrevealed that approximately $1.4 million of a sale of our product to theDistributor did not meet the foregoing criteria because our former employee hadagreed that the Distributor could return the product at the Distributor’sdiscretion, which forms the basis of the Restatement. This former employee hadon this occasion agreed to a term of sale that was outside of our standardpractices and was not referenced in the documentation related to the salesubmitted to our finance department. Given the discovery of this arrangementfor the Distributor to return the product, the Audit Committee concluded on January 25,2005, that we should restate certain financial information that was previouslyreported in our Form 10-Q for the quarter ended June 30, 2004, filedwith the Securities and Exchange Commission on August 6, 2004. For moreinformation regarding the Restatement, please see Note 9 of Notes toConsolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.In addition, the Audit Committee approved certain changes to our internalcontrols over financial reporting as an additional remedial action in responseto the report of our litigation counsel and our forensic accountant and to thereport by our Chief Financial Officer.

 

As a result, the Audit Committee concluded on May 5, 2005, that weshould restate certain financial information (the “Additional Restatement”)that was previously reported in our Quarterly Reports on Form 10-Q for thefiscal quarters ended March 31, 2004, June 30, 2004, and December 31,2004, as well as certain financial information for the quarter and transitionperiod ended September 30, 2004, and that was previously reportedin our Transition Report. The Additional Restatement was based on theAudit Committee’s conclusion on such date that the Consolidated Balance Sheetsas of March 31, 2004, June 30, 2004, September 30, 2004, and December 31,2004 and the related Consolidated Statements of Operations for the three monthsended March 31, 2004, the three and six months ended June 30, 2004,the nine month transition period ended September 30, 2004, and the threemonths ended December 31, 2004, should no longer be relied upon because oferrors in such financial statements.

 

Following receipt of a final report on theinternal investigation, the Audit Committee determined that the internalinvestigation had been completed on June 15, 2005. The internalinvestigation revealed errors in the Company’s financial statements for 2002and 2003. Such errors included certain shipments between distributors ratherthan to end-customers which were not noted on applicable point-of-salesreports, inaccurate shipment dates on certain point-of-sales reports, andinaccurate quantities noted on certain point-of-sales reports. The Companyreviewed these errors with reference to the guidelines set forth in SAB99.Based upon such review, the Company concluded that such errors were immaterialand thus would not result in a restatement of the 2002 or 2003 financialstatements.

 

F-19

----

 

*SEC Investigation*

 

On or about November 9, 2004, the SECrequested that we voluntarily produce documents responsive to certain documentrequests in the investigation entitled*  In the Matter of Tripath Technology Inc*.. On or about January 25, 2004, February 14, 2005, and February 16,2005, the SEC made additional documents requests. On or about March 30,2005, the SEC issued a subpoena to the Company seeking additional documents. Wehave produced documents in response to the SEC’s voluntary requests fordocuments as well as the subpoena. We have cooperated with the SEC in itsreview of these matters.

 

On February 24, 2005, the SEC, pursuantto Section 20(a) of the Securities Act and Section 21(a) ofthe Exchange Act, issued a formal order of private investigation to determinewhether there have been any violations of Section 17(a) of theSecurities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13, 13a-14,13b2-1 and 13b2-2 thereunder.

 

In a letter dated December 15,2005, the SEC indicated that the formal investigation of the Company had beenterminated and that no enforcement action had been recommended to theCommission.

 

**NOTE 11—BANKRUPTCY**

 

OnFebruary 2, 2007, Tripath Technology Inc. (the “Debtor”) filedpetitions for relief under Chapter 11 of the federal bankruptcy laws in theUnited States Bankruptcy Court for the District of California.  Under Chapter 11, certain claims against theDebtor in existence prior to the filing of the petitions for relief under thefederal bankruptcy laws are stayed while the Debtor continues business operationsas Debtor-in-possession.  These claimsare reflected in the September 30, 2007, balance sheet as “liabilitiessubject ot compromise.”  Additionalclaims (liabilities subject ot compromise) may arise subsequent to the filingdate resulting from rejection of executory contracts, including leases, andfrom the determination by the court (or agreed to by parties in interest) ofallowed claims for contingencies and other disputed amounts.  Claims secured against the Debtor’s assets (“securedclaims”) also are stayed, although the holders of such claims have the right tomove the court for relief from the stay. Secured claims are secured primarily by liens on the Debtor’s property,plant and equipment.

 

The Debtor received approval fromthe Bankruptcy Court to pay or otherwise honor certain of its prepetitionobligations, including employee wages and product warranties.  The Debtor has determined that there issufficient collateral to cover an interest portion of scheduled payments on itsprepetition debt obligations.

 

The principal categoriesof claims subject to compromise are as follows:

 
| ** **                | ** ** | **Allowed** | ** ** | ** **   | ** ** | **September 30, 2007** | ** ** |
|---------------------------|------------|-------------|------------|--------------|------------|----------------------------------|------------|
| ** **                | ** ** | **Amounts** | ** ** | **Payments** | ** ** | **Balance**                      | ** ** |
| Unsecured Claims          |       | $           | 2,514      |         | $          | —                           |       | $ | 2,514 |   |
| Priority Unsecured Claims |       | 58          |       | —       |       | 58                               |       |
| Secured Claims            |       | 3,500       |       | (3,250       | )          | 250                              |       |
|                      |       | $           | 6,072      |         | $          | (3,250                           | )          | $ | 2,822 |   |

 

As a result of the foregoing,on April 22, 2008, we entered into an agreement and plan of merger with Etelos(the “Merger Agreement”) pursuant to which Etelos was merged with and intoTripath, at which time the separate corporate existence of Etelos ceased andTripath continued after the merger as the surviving corporation and changed itsname to Etelos, Inc.  Under the terms ofthe Merger Agreement the shareholders of Etelos received common stock of the survivingcorporation in exchange for their shares of capital stock of Etelos.  The surviving corporation will conduct thebusiness that was previously conducted by Etelos.

 

**NOTE 12—SUBSEQUENT EVENTS**

 

On December 20, 2007, thebankruptcy court issued an order approving the compromise and settlementpursuant to rule 9019 between Tripath and Nortel Networks, Inc. concerning theadministrative expense claim and the unsecured prepetition claim filed byNortel Networks.  The claim by Nortelconcerned the default by Tripath on its sublease agreement for its officefacility in San Jose and the Nortel claim for unpaid rent, operating expensesand late fees under the sublease agreement and lease termination charges torestore the facility to its prelease condition. 

 

Nortel originally claimedprepetition damages of $94,700 and an administrative expense claim of $401,809(later increased to $472,131) for payment of post-prepetition rent and otheramounts alleged due under the Sublease.

 

Tripath and Nortel agreed tocompromise and allow Nortel an administrative expense priority claim of $40,000and a portion of the remaining balance of the administrative expense claim tobe treated as an allowed prepetition unsecured claim, such that Nortel will beallowed a general unsecured prepetition claim in the total amount of $275,577.

 

On December 20, 2007, Tripathand Enable Growth Partners LP filed with the bankruptcy court the “ThirdAmended Disclosure Statement Accompanying Third Amended Plan of Reorganizationdated December 20, 2007 Proposed by Tripath Technology, Inc. and Enable GrowthPartners LP, for itself and as agent for the Secured Parties” (the “Plan ofReorganization”), which included the proposed merger of Etelos, Incorporated, aWashington corporation (“Etelos”), with and into Tripath.

 

On February 1, 2008, thebankruptcy court issued an order confirming approval of the Plan ofReorganization, including the merger and the transfer of all of Tripath’sexisting assets into a separate bankruptcy estate (the “Post Effective DateEstate” or “PEDE”) and the discharge of all of Tripath's liabilities fromTripath and their transfer into the PEDE. The overall impact of the confirmed Plan is for Tripath to emerge fromthe bankruptcy proceeding with (i) cash on hand, (ii) certain causes of action,(iii) miscellaneous other assets consisting primarily of remaining inventory, afew personal property assets, and $100,000 to be contributed by Etelos on theeffective date of the merger.  As of theeffective date of the merger, we will issue 5,000,000 shares in the aggregateof our common stock to our secured creditors and 10,000 shares in the aggregateto our unsecured creditors, and all other issued and outstanding securities ofand interests in Tripath, including our debentures, stock options (including,but not limited to, all stock options granted to our employees), warrants andother shares of common stock will be canceled and extinguished.  In addition, on the effective date of themerger; any instrument evidencing or creating any indebtedness or obligation ofTripath, will be canceled and extinguished on the books of Tripath andtransferred into the PEDE for treatment in accordance with the Plan.

 

               Asa result of the foregoing, on April 22, 2008, we entered into an agreement andplan of merger with Etelos (the “Merger Agreement”) pursuant to which Eteloswas merged with and into Tripath, at which time the separate corporateexistence of Etelos ceased and Tripath continued after the merger as thesurviving corporation and changed its name to Etelos, Inc.  Under the terms of the Merger Agreement theshareholders of Etelos received common stock of the surviving corporation inexchange for their shares of capital stock of Etelos.  The surviving corporation will conduct thebusiness that was previously conducted by Etelos.

 

 

F-20

----

 

**TRIPATH TECHNOLOGY INC.**

**(DEBTOR - IN - POSSESSION)**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(in thousands, except share data) 

(unaudited)

 
| ** **                                                                                                                                                       | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                       | ** ** | **2007**          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                       | ** ** | **Post-petition** | ** ** | **Post-petition**  | ** ** | **Pre-petition**      | ** ** |
| ASSETS                                                                                                                                                           |       |              |       |               |       |                  |       |
| Current  assets:                                                                                                                                                 |       |              |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                                       |       | $                 | 759        |               | $          | 154                   |       | $ | 245 |   |
| Restricted cash                                                                                                                                                  |       | —            |       | —             |       | 163                   |       |
| Accounts  receivable, net of allowance for doubtful accounts of $0 at June 30 and March  31, 2007 and $5 at December 31, 2006.                                   |       | 76                |       | 38                 |       | 534                   |       |
| Inventories,  net                                                                                                                                                |       | 617               |       | 943                |       | 2,161                 |       |
| Prepaid  expenses and other current assets                                                                                                                       |       | 159               |       | 175                |       | 512                   |       |
| Total  current assets                                                                                                                                            |       | 1,611             |       | 1,310              |       | 3,615                 |       |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| Property and  equipment, net                                                                                                                                     |       | —            |       | 452                |       | 533                   |       |
| Other assets                                                                                                                                                     |       | —            |       | —             |       | 107                   |       |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| **Total  assets**                                                                                                                                                | ** ** | **$**             | **1,611**  | ** **         | **$**      | **1,762**             | ** ** | **$** | **4,255** | ** ** |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                                                      |       |              |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                            |       |              |       |               |       |                  |       |
| Liabilities  subject to compromise                                                                                                                               |       | $                 | 2,822      |               | $          | 6,072                 |       | $ | — |   |
| Accounts  payable                                                                                                                                                |       | 31                |       | 6                  |       | 1,937                 |       |
| Customer  deposits                                                                                                                                               |       | —            |       | —             |       | 1,542                 |       |
| Current  portion of capital lease obligations                                                                                                                    |       | —            |       | —             |       | 15                    |       |
| Deferred  rent                                                                                                                                                   |       | —            |       | —             |       | 83                    |       |
| Note payable                                                                                                                                                     |       | —            |       | —             |       | 3,461                 |       |
| Note payable  discount                                                                                                                                           |       | —            |       | —             |       | (2,137                | )          |
| Accrued  expenses                                                                                                                                                |       | 360               |       | 209                |       | 959                   |       |
| Warrant  liability                                                                                                                                               |       | —            |       | —             |       | 338                   |       |
| Conversion  feature of convertible debt                                                                                                                          |       | —            |       | —             |       | 134                   |       |
| Total  current liabilities                                                                                                                                       |       | 3,213             |       | 6,287              |       | 6,332                 |       |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| Long term  portion of capital lease obligations                                                                                                                  |       | —            |       | —             |       | 108                   |       |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| Total  liabilities                                                                                                                                               |       | 3,213             |       | 6,287              |       | 6,440                 |       |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| Commitments  and contingencies                                                                                                                                   |       |              |       |               |       |                  |       |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| Stockholders’  deficit:                                                                                                                                     |       |              |       |               |       |                  |       |
| Common  stock, $0.001 par value, 100,000,000 shares authorized; 70,164,582 shares  issued and outstanding at June 30 and March 31, 2007 and at December 31, 2006 |       | 70                |       | 70                 |       | 70                    |       |
| Additional  paid-in capital                                                                                                                                      |       | 208,081           |       | 208,081            |       | 208,021               |       |
| Other  comprehensive expense                                                                                                                                     |       | —            |       | (9                 | )          | (9                    | )          |
| Accumulated  deficit                                                                                                                                             |       | (209,753          | )          | (212,667           | )          | (210,267              | )          |
| Total  stockholders’ deficit                                                                                                                                |       | (1,602            | )          | (4,525             | )          | (2,185                | )          |
|                                                                                                                                                             |       |              |       |               |       |                  |       |
| **Total  liabilities and stockholders’ deficit**                                                                                                            | ** ** | **$**             | **1,611**  | ** **         | **$**      | **1,762**             | ** ** | **$** | **4,255** | ** ** |

 

The accompanyingnotes are an integral part of these financial statements. 

 

F-21

----

 

**TRIPATH TECHNOLOGY INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(DEBTOR - IN - POSSESSION)**

(in thousands, except per share data) 

(unaudited)

 
| ** **                                                                                                 | ** ** | **Year to Date Ending** | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                 | ** ** | **June 30,**                      | ** ** | **March 31,**               | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                 | ** ** | **2007**                               | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                 | ** ** | **Post-petition**                      | ** ** | **Post-petition**                | ** ** | **Pre-petition** | ** ** | **Post-petition** | ** ** | **Post-petition** | ** ** | **Pre-petition** | ** ** |
| ** **                                                                                                 | ** ** | ** **                             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                                    |       | $                                      | 5,628      |                             | $          | 4,591 |   | $ | 3,405 |   | $ | 1,037 |   | $ | 1,186 |   | $ | 3,405 |   |
| Cost of  revenue                                                                                           |       | 3,478                                  |       | 2,509                            |       | 961 |   | 969 |   | 1,548 |   | 961 |   |
| Gross profit                                                                                               |       | 2,150                                  |       | 2,082                            |       | 2,444 |   | 68 |   | (362 | ) | 2,444 |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Research and  development                                                                                  |       | 826                                    |       | 826                              |       | 826 |   | — |   | — |   | 826 |   |
| Selling,  general and administrative                                                                       |       | 2,223                                  |       | 1,651                            |       | 723 |   | 572 |   | 928 |   | 723 |   |
| Total  operating expenses                                                                                  |       | 3,049                                  |       | 2,477                            |       | 1,549 |   | 572 |   | 928 |   | 1,549 |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Profit  (Loss) from operations                                                                             |       | (899                                   | )          | (395                             | )          | 895 |   | (504 | ) | (1,290 | ) | 895 |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Reorganization  income (costs):                                                                            |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Gain (loss)  from Chapter 11 restructuring                                                                 |       | (911                                   | )          | (1,476                           | )          | — |   | 565 |   | (1,476 | ) | — |   |
| Gain from  sale of intangible assets                                                                       |       | 3,250                                  |       | —                           |       | — |   | 3,250 |   | — |   | — |   |
| Change in  fair value on revaluation of warrant liability                                                  |       | 207                                    |       | 207                              |       | 207 |   | — |   | — |   | 207 |   |
| Gain on sale  of assets                                                                                    |       | 107                                    |       | 18                               |       | — |   | 89 |   | 18 |   | — |   |
| Interest and  other expense, net                                                                           |       | (898                                   | )          | (412                             | )          | (823 | ) | (486 | ) | 411 |   | (823 | ) |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations before taxes                                                     |       | 856                                    |       | (2,058                           | )          | 279 |   | 2,914 |   | (2,337 | ) | 279 |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Provision  for income taxes                                                                                |       | —                                 |       | —                           |       | — |   | — |   | — |   | — |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations                                                                  |       | 856                                    |       | (2,058                           | )          | 279 |   | 2,914 |   | (2,337 | ) | 279 |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Loss from  discontinued operations, net of taxes                                                           |       | (176                                   | )          | (176                             | )          | (113 | ) | — |   | (63 | ) | (113 | ) |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Net income  (loss)                                                                                         |       | 680                                    |       | (2,234                           | )          | 166 |   | 2,914 |   | (2,400 | ) | 166 |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Basic and  diluted net profit per share for continuing and non-continuing operations                       |       | $                                      | 0.01       |                             | $          | — |   | $ | 0.00 |   | $ | 0.04 |   | $ | — |   | $ | 0.00 |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Basic and  diluted net (loss) per share for continuing and non-continuing operations                       |       | $                                      | —     |                             | $          | (0.03 | ) | $ | — |   | $ | — |   | $ | (0.03 | ) | $ | — |   |
|                                                                                                       |       |                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Weighted  average number of common shares used in computing basic and diluted net  profit (loss) per share |       | 70,047                                 |       | 69,934                           |       | 69,822 |   | 70,165 |   | 70,165 |   | 69,822 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-22

----

 

**TRIPATH TECHNOLOGY INC.**

** CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(DEBTOR - IN - POSSESSION)**

(in thousands)

(unaudited)

 
| ** **                                                                            | ** ** | **Year to Date for Quarters Ending** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **June 30,**                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **2007**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                            | ** ** | **Post-petition**                                             | ** ** | **Post-petition** | ** ** | **Pre-petition** | ** ** |
| ** **                                                                            | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows  from operating activities:                                                |       |                                                          |       |   |   |   |   |
| Net profit  (loss)                                                                    |       | $                                                             | 680        |   | $ | (2,234 | ) | $ | 166 |   |
| Adjustments  to reconcile net profit (loss) to net cash used in operating activities: |       |                                                          |       |   |   |   |   |
| Revaluation  of warrant and conversion feature liabilities                            |       | (207                                                          | )          | (207 | ) | (207 | ) |
| Depreciation  and amortization                                                        |       | 233                                                           |       | 162 |   | 81 |   |
| Deferred  rent                                                                        |       | (167                                                          | )          | (167 | ) | (83 | ) |
| Stock-based  compensation                                                             |       | 177                                                           |       | 177 |   | 117 |   |
| Accretion of  debt discount                                                           |       | 630                                                           |       | 630 |   | 630 |   |
| Gain from  sale of intangible assets                                                  |       | (3,250                                                        | )          | — |   | — |   |
| Gain on  sales of fixed assets                                                        |       | (123                                                          | )          | (18 | ) | — |   |
| Loss from  discontinued operations                                                    |       | 176                                                           |       | 176 |   | 113 |   |
| Loss from  Chapter 11 restructuring                                                   |       | 911                                                           |       | 1,476 |   | — |   |
| Changes in  assets and liabilities:                                                   |       |                                                          |       |   |   |   |   |
| Accounts  receivable                                                                  |       | 877                                                           |       | 914 |   | 420 |   |
| Inventories,  net                                                                     |       | 1,832                                                         |       | 1,506 |   | 288 |   |
| Prepaid  expenses and other assets                                                    |       | 1,259                                                         |       | 183 |   | (216 | ) |
| Accounts  payable                                                                     |       | (2,175                                                        | )          | (2,200 | ) | (268 | ) |
| Liabilities  subject to compromise                                                    |       | 2,822                                                         |       | 6,072 |   | — |   |
| Customer  deposits                                                                    |       | (3,066                                                        | )          | (3,066 | ) | (1,524 | ) |
| Accrued  expenses                                                                     |       | (603                                                          | )          | (753 | ) | (4 | ) |
| Net cash provided  by (used in) operating activities                                  |       | 6                                                             |       | 2,651 |   | (487 | ) |
|                                                                                  |       |                                                          |       |   |   |   |   |
| Cash flows  from investing activity:                                                  |       |                                                          |       |   |   |   |   |
| Changes in  restricted cash                                                           |       | 162                                                           |       | 162 |   | — |   |
| Net cash provided  by investing activities                                            |       | 162                                                           |       | 162 |   | — |   |
|                                                                                  |       |                                                          |       |   |   |   |   |
| Cash flows  from financing activities:                                                |       |                                                          |       |   |   |   |   |
| Restructuring  of notes payable                                                       |       |                                                          |       | (3,250 | ) | — |   |
| Principal  payments on capital lease obligations                                      |       | (170                                                          | )          | (170 | ) | (20 | ) |
| Net cash used  in financing activities                                                |       | (170                                                          | )          | (3,420 | ) | (20 | ) |
|                                                                                  |       |                                                          |       |   |   |   |   |
| Net decrease  in cash and cash equivalents                                            |       | (2                                                            | )          | (607 | ) | (507 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                         |       | 9                                                             |       | 9 |   | — |   |
| Cash, and  cash equivalents, beginning of period                                      |       | 752                                                           |       | 752 |   | 752 |   |
| Cash, and  cash equivalents, end of period                                            |       | $                                                             | 759        |   | $ | 154 |   | $ | 245 |   |
|                                                                                  |       |                                                          |       |   |   |   |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                    |       |                                                          |       |   |   |   |   |   |   |   |
| Interest  paid                                                                        |       | $                                                             | 153        |   | $ | 153 |   | $ | 153 |   |
| Supplemental  disclosure of noncash flow investing and financing activities:          |       |                                                          |       |   |   |   |   |
| Issuannce of  common stock in lieu of principal payments on note payable              |       | $                                                             | 39         |   | $ | 39 |   | $ | 39 |   |
|                                                                                       |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these financialstatements.

 

F-23

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**TRIPATH TECHNOLOGY INC.**

**NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

1.*Basisof Presentation*

* *

The unaudited condensed interimconsolidated financial statements included herein have been prepared by TripathTechnology Inc. (the “Company”) in accordance with accounting principlesgenerally accepted in the United States of America and reflect all adjustments,consisting of normal recurring adjustments, which in the opinion of managementare necessary to state fairly the Company’s financial position, results ofoperations and cash flows for the periods presented. These interim financialstatements should be read in conjunction with the consolidated financialstatements and footnotes thereto included in the Company’s Annual Report on Form 10-KSBfor the fiscal year ended September 30, 2007. The results of operationsfor any of the quarters are not necessarily indicative of the results to beexpected for any subsequent quarter or for the entire year.

 

On November 14, 2004, theCompany’s Board of Directors approved a change in the Company’s fiscal year endfrom December 31 to September 30, effective as of September 30,2004.

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andreported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates, and such differences could affectthe results of operations reported in future periods and such differences couldbe material.

 

The unaudited condensed interimconsolidated financial statements include the accounts of the Company and itswholly-owned Japanese subsidiary, which was incorporated in January 2001.All significant intercompany balances and transactions have been eliminated inconsolidation. The U.S. dollar is the functional currency for the Company’sJapanese wholly-owned subsidiary. Assets and liabilities that are not denominatedin the functional currency are remeasured into U.S. dollars and the resultinggains or losses are included in “Interest and other income, net.” Such gains orlosses have not been material for any period presented.

 

*Going Concern*

* *

The Company’s consolidatedfinancial statements have been prepared on the basis of a going concern, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business. The Company has incurred substantial losses andhas experienced negative cash flow since inception and has an accumulateddeficit of $212.1 million at December 31, 2007. These factors raisesubstantial doubt about the Company’s ability to continue as a going concern.In addition, on February 2, 2007, the Company declared bankruptcy underthe provision of Chapter 11 of the bankruptcy laws. These factors raisesubstantial doubt about the Company’s ability to continue as a going concern.

 

*Bankruptcy*

* *

The  Company entered into bankruptcy in February2007.  Please refer to the Company’sfiling on Form 10-KSB for more information.

 
| ** **                                                   | ** ** | **June 30,   2007** | ** ** | **March 30,  2007** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
| **Inventories, Net:**                                        |       |                |       |                |       |                   |       |   |   |   |
| Work-in-process                                              |       | $                   | —     |                | $          | —                 |       | $ | 137 |   |
|                                                         |       |                |       |                |       |                   |       |
| Inventory in transit                                         |       | —              |       | —              |       | 530                    |       |
|                                                         |       |                |       |                |       |                   |       |
| Finished goods                                               |       | 3,731               |       | 5,698               |       | 5,665                  |       |
|                                                         |       | 3,731               |       | 5,698               |       | 6,332                  |       |
|                                                         |       |                |       |                |       |                   |       |
| Less: reserve for slow moving, excess and obsolete inventory |       | (3,114              | )          | (4,755              | )          | (4,171                 | )          |
|                                                         |       |                |       |                |       |                   |       |
|                                                         |       | $                   | 617        |                | $          | 943                    |       | $ | 2,161 |   |

* *

On December 20, 2007, theCompany and Enable Growth Partners LP filed with the bankruptcy court the“Third Amended Disclosure Statement Accompanying Third Amended Plan ofReorganization dated December 20, 2007 Proposed by Tripath Technology Inc.and Enable Growth Partners LP, for itself and as agent for the Secured Parties”(the “Plan of Reorganization”), which included the proposed merger of Etelos,Incorporated, a Washington corporation (“Etelos”), with and into the Company.

 

F-24

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