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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
 
     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934
 
                     FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998, OR
 
     [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934
 
           FOR THE TRANSITION PERIOD FROM                TO                .
 
                        COMMISSION FILE NUMBER: 0-26942
 
                        SMART MODULAR TECHNOLOGIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                      <C>
                     CALIFORNIA                                               77-0200166
            (STATE OR OTHER JURISDICTION                                   (I.R.S. EMPLOYER
          OF INCORPORATION OR ORGANIZATION)                               IDENTIFICATION NO.)
</TABLE>
 
                              4305 CUSHING PARKWAY
                           FREMONT, CALIFORNIA 94538
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-1231
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                           COMMON STOCK, NO PAR VALUE
                                (TITLE OF CLASS)
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]
 
    The aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $661,760,892 as of January 4, 1999 based upon the
closing price on the Nasdaq National Market System reported for such date.
Shares of common stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may under certain circumstances be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
 
    Number of shares of common stock outstanding as of January 4, 1999:
45,138,620
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Parts of the following document are incorporated by reference to Part III of
this Form 10-K: Proxy Statement for Registrant's Annual Meeting of Shareholders
to be held March 16, 1999.
 
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<PAGE>   2
 
                        SMART MODULAR TECHNOLOGIES, INC.
 
                          1998 FORM 10-K ANNUAL REPORT
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>        <C>                                                           <C>
                                   PART I
Item 1.    Business....................................................    3
Item 2.    Properties..................................................   12
Item 3.    Legal Proceedings...........................................   12
Item 4.    Submission of Matters to Vote of Security Holders...........   13
 
                                   PART II
Item 5.    Market for Registrant's Common Equity and Related              14
             Shareholder Matters.......................................
Item 6.    Selected Consolidated Financial Data........................   15
Item 7.    Management's Discussion and Analysis of Financial Condition    16
             and Results of Operations.................................
Item 7A.   Quantitative and Qualitative Disclosures About Market          30
             Risk......................................................
Item 8.    Financial Statements and Supplementary Data.................   30
Item 9.    Changes in and Disagreements with Accountants on Accounting    30
             and Financial Disclosure..................................
 
                                  PART III
Item 10.   Directors and Executive Officers of the Registrant..........   31
Item 11.   Executive Compensation......................................   31
Item 12.   Security Ownership of Certain Beneficial Owners and            31
             Management................................................
Item 13.   Certain Relationships and Related Transactions..............   31
 
                                   PART IV
Item 14.   Exhibits, Financial Statement Schedules and Reports on Form    32
             8-K.......................................................
           Signatures..................................................   36
</TABLE>
 
                                        2
<PAGE>   3
 
                                     PART I
 
ITEM 1. BUSINESS
 
     SMART Modular Technologies, Inc., a California corporation ("SMART" or the
"Company"), is a leading independent manufacturer of specialty and standard
memory modules and Flash memory cards and also manufactures high performance
embedded computer modules, as well as communication card solutions in PC card
and other form factors. SMART offers more than 500 products to leading original
equipment manufacturers ("OEMs") in the computer, networking and
telecommunications industries. The Company's principal customers include Cisco
Systems, Inc. ("Cisco"), Compaq Computer Corporation ("Compaq"), Data General
Corporation ("Data General"), Electronics For Imaging, Inc. ("EFI"), Fujitsu
Microelectronics ("Fujitsu"), Hewlett-Packard Company ("Hewlett-Packard"),
Hyundai Electronics America ("Hyundai"), IBM Corporation ("IBM"), Lucent
Technologies ("Lucent"), Motorola, Inc. ("Motorola"), NCR Corp. ("NCR") and
Solectron Corp. ("Solectron").
 
     SMART has developed extensive design, manufacturing, testing and logistics
expertise that the Company believes enables it to respond to its customers'
rapidly changing product and service requirements; provide its customers with
timely access to new higher speed or higher performance modules or subsystems;
reduce its customers' time-to-market and capital requirements; and decrease its
customers' production and inventory costs.
 
INDUSTRY BACKGROUND
 
     The demand for semiconductor memory devices and other subsystems in digital
electronic systems has grown dramatically over the last several years as a
result of the increasing importance of both of these components in determining
system performance. The demand for greater overall system performance, as well
as the increasing number and variety of electronic devices, has required that
electronics manufacturers increase the number and functionality of memory
devices and the performance of other subsystems.
 
     The factors contributing to the increasing demand for memory devices and
communications and embedded computer subsystems include the expanding unit sales
of PCs in the business and consumer market segments; the increasing use of PCs
to perform memory-intensive graphics and multimedia functions; the volume of
memory required to support faster microprocessors; the proliferation of
increasingly complex operating system and applications software; the increased
use of local area network and wide area network routing and switching equipment
that incorporates complex memory and embedded computer subsystems; the growth in
on-line communications, such as e-mail and the Internet; and, in general, the
increasing performance requirements of workstations, servers and networking and
telecommunications equipment.
 
     Memory integrated circuits ("ICs") and subsystems encompass several types
of devices designed to perform specific functions within computer and other
electronic systems. The three most significant categories of memory ICs are
DRAM, SRAM and non-volatile memory, including Flash. DRAM provides large
capacity "main" memory; SRAM provides specialized high speed memory; and Flash
and other non-volatile memory provide low power memory that retains data after a
system is turned off. Within each of these broad categories of memory products,
semiconductor manufacturers are offering an increasing variety of memory devices
that are designed for different application and performance requirements. For
example, the variety of DRAM memory ICs has increased in recent years with the
introduction and adoption of technologies such as Rambus DRAM, DDR, SDRAM,
SGRAM, VRAM, FPM and EDO. This increase in the variety of memory ICs has placed
greater demands on OEMs to maintain a current knowledge base and expertise. In
addition, other specialized subsystems, such as modems, networking devices and
embedded computer solutions, enable critical data transfer and data processing
functions.
 
MARKETS
 
     Memory Module Market. Memory modules are compact circuit board assemblies
consisting of DRAM, SRAM, Flash or other semiconductor memory devices and
related circuitry. Electronic systems increasingly employ memory modules as
building blocks in system design as a result of the many advantages memory
 
                                        3
<PAGE>   4
 
modules offer OEMs and end users. The use of memory modules enables OEMs to
easily configure a system with a variety of different levels of memory, thus
increasing their flexibility to address multiple price points or applications
with a single base system design. In addition, the use of memory modules enables
OEMs to offer a relatively easy path for upgradeability of a PC or workstation,
a feature of system design that is increasingly required by end users. To
achieve this flexibility and upgradeability, both PC and communications OEMs
frequently design their systems to use memory modules as a "daughter card,"
reducing the need to include memory devices on the motherboard. This design
structure frees up space on the motherboard and enables the OEM to use a single
motherboard as a common central element for a variety of different systems,
resulting in significant cost savings. The use of memory modules further reduces
costs by reducing OEMs' work-in-process inventories by allowing them to add
expensive and increasingly diverse memory devices to products during the final
stages of the manufacturing process.
 
     The market for memory modules includes both standard and specialty modules.
The high volume standard memory module market includes modules that can be
sourced from many module suppliers, and are designed to be incorporated into a
wide variety of equipment. These modules employ designs meeting widely used
industry specifications and are available with a variety of options to address
the needs of multiple OEMs. Standard memory modules are typically used in
desktop PCs and printers and are sold both to OEMs and through computer
resellers directly to end users.
 
     Specialty memory modules include both custom and application specific
modules. The varying requirements of different electronic systems and the
increased number of memory device options have resulted in a market for
specialized memory modules that are designed to enhance the performance of a
particular system or a set of applications. These modules are based on either
Rambus DRAM, DDR, SDRAM, FPM, EDO, SRAM or Flash technologies and may include
additional control circuitry. Specialty memory modules are typically sourced
from a limited number of suppliers. Application specific and custom memory
modules are generally used in mobile computers, workstations and
telecommunications devices, such as routers and switches, and are primarily sold
to OEMs.
 
     Communication Card Market. Communication card products come in PC card,
desktop (ISA and PCI) and proprietary form factors. PC cards are small form
factor cards conforming to the Personal Computer Memory Card International
Association ("PCMCIA") standards and are used as peripheral devices in products
such as notebook and subnotebook computers, personal digital assistants
("PDAs"), cellular phones, pagers and digital cameras. The Company believes that
growth in the mobile computing market will expand the market for mobile
computing peripherals and communications (wireline and wireless data/fax
modems). Increasingly important aspects of PC card modem functionality are the
abilities to be easily configurable for use internationally and to provide high
speed connections over wireline and wireless networks such as ISDN, switched
cellular, digital cellular (GSM and CDMA) and personal communications services
(PCS).
 
     Embedded Computer Subsystem Market. Unlike PCs or workstations that serve
as general purpose computers, embedded computer subsystems are integrated into
larger systems and perform a single function or a closely related group of
functions such as input/output ("I/O") and data processing with high degrees of
repeatability, accuracy and reliability. Embedded computer subsystems are
incorporated into an ever-increasing array of products used in a variety of
markets, including telecommunications, networking, imaging, simulation, command
and control, industrial control and desktop publishing. Examples of embedded
computer subsystem applications include ATM and Gigabit ethernet switches,
network security systems, Digital Satellite Systems, set-top boxes, video games,
laser printers, scanners, network routers and switches, robots, computer guided
missiles, paint mixing systems, medical imaging analyzers, automated toll
collection systems and Global Positioning System receivers. With current market
conditions requiring shorter design cycles and the options for implementation
becoming more varied and complex, OEMs are increasingly outsourcing their
requirements for embedded computer subsystems to specialists that complement the
value added by the OEM.
 
     Opportunity for Manufacturers of Memory Modules and Subsystems. As the
variety of memory devices and subsystems available to address specific
applications has expanded, the design and manufacture of memory modules,
communication cards and embedded computer subsystems have increasingly become
areas
 
                                        4
<PAGE>   5
 
in which electronics OEMs employ outsourcing strategies. OEM outsourcing
practices for memory products range from contract manufacturing, in which the
OEM may turn to an outside supplier to procure third-party components and
design, manufacture and distribute a specific product for the OEM on a turnkey
basis, to consignment, in which the OEM employs the outside supplier to design
and manufacture a product using memory or other components supplied by the OEM.
OEMs may also purchase memory modules or subsystems which have been designed by
a supplier for a specific application.
 
     The use of outsourcing strategies has many benefits for OEMs. By
outsourcing design, manufacturing, testing and logistics functions, OEMs are
able to focus their resources on activities and technologies in which they add
the greatest value, such as system design, sales, marketing and distribution. In
addition, OEMs can reduce their time to market by utilizing the manufacturing
and logistics expertise of specialized manufacturers. In particular, the
increasing trend under which large PC OEMs are implementing build-to-order and
direct sales distribution strategies may create opportunities for independent
suppliers of memory modules, as these strategies place increased reliance on the
manufacturing, logistics and inventory management functions of these suppliers.
Moreover, as memory modules, communication cards, embedded computer subsystems
and other subsystems become more complex and differentiated, the design,
manufacturing and test processes become increasingly automated and more complex,
requiring a greater level of investment in capital equipment and skilled
engineers and specialists. Outsourcing enables OEMs to gain access to advanced
manufacturing facilities, thereby reducing the OEMs' overall capital equipment
requirements. Also, the proliferation of a wide variety of DRAM, SRAM and Flash
memory devices combined with frequent product design changes, short product life
cycles and component price fluctuations, have created increasing difficulties
for OEMs in planning, procuring and managing their inventories efficiently. By
using a manufacturing specialist's volume procurement capabilities and expertise
in inventory management, OEMs can reduce production and inventory costs.
 
THE SMART SOLUTION
 
     SMART is a leading independent manufacturer of specialty and standard
memory modules and Flash memory cards and also manufactures high performance
embedded computer modules, as well as communication card solutions in PC card
and other form factors. SMART offers more than 500 products to leading OEMs in
the computer, networking and telecommunications industries. SMART has developed
extensive design, manufacturing, testing and logistics expertise that the
Company believes enables it to respond to its customers' rapidly changing
product and service requirements; provide its customers with timely access to
new higher speed or higher performance modules or subsystems; reduce its
customers' time-to-market and capital requirements; and decrease its customers'
production and inventory costs.
 
PRODUCTS
 
     The Company designs and markets products consisting of memory modules,
communication cards and embedded computer modules. The Company's memory modules
include Rambus DRAM, DDR, SDRAM, FPM, EDO, SRAM and Flash memory-based products.
The Company offers custom and application specific memory modules, as well as
standard memory modules that comply with industry standards established by the
Joint Electronic Development Engineering Council ("JEDEC"). The Company's
communication card products come in PC card, ISA, PCI and proprietary form
factors. They include wireless data modems with international PTT approval and
56 kbps technology. The Company's embedded computer module products include a
range of standard and perfect fit embedded computers for use in a variety of
specialized computing applications.
 
  Memory Modules
 
     DRAM Modules. The Company offers a comprehensive line of DRAM memory
modules, including a wide range of single in-line memory modules ("SIMMs"), dual
in-line memory modules ("DIMMs") and small outline dual in-line memory modules
("SO DIMMs"). The Company's DRAM modules are available in various configurations
of up to 200 pins and densities of up to 256 MBytes. Many of these products are
offered in both 5.0 volt and 3.3 volt versions, with FPM, EDO, SDRAM and SGRAM
architectures.
 
                                        5
<PAGE>   6
 
     Among the latest emerging DRAM technology memory products are high density
PC100 modules, Rambus RIMMs and SO-RIMMs, DDR, and PC133 based modules. Each of
these technologies require an increasing level of design, manufacturing and test
expertise. SMART has positioned itself at the leading edge of these technologies
by continuing to strengthen its core engineering, design, and manufacturing
strengths. SMART has also established important technology partnerships with
chip makers Intel Corporation and Rambus, Inc. to provide engineering and design
support.
 
     The following table summarizes certain of the Company's DRAM module product
offerings:
 
<TABLE>
<CAPTION>
       DRAM                                           SPEED
 PRODUCT FAMILIES     DENSITY        FEATURES         (MHZ)                      APPLICATIONS
 ----------------   ------------  ---------------  ------------                  ------------
<S>                 <C>           <C>              <C>           <C>
72 Pin SIMMs        4-64 MBytes   FPM, EDO         10-33         Desktop PCs, Printers, Embedded Controllers,
                                                                 Routers, Servers
100 Pin DIMMs       4-64 MBytes   FPM, EDO, SDRAM  66-133        Networking, Printers
144 Pin SO DIMMs    4-128 MBytes  FPM, EDO,        10-33         Notebook PCs, Printers,
                                  SDRAM, SGRAM     66-133        X-Window Terminals, 3D Graphics
168 Pin DIMMs       8MB-1GBytes   FPM, EDO, SDRAM  10-33         Workstations, Routers, PCs
                                                   66-133        Servers, Telecom Equipment, PCs
Registered 168 Pin  8MB-1GBytes   SDRAM            66-133        Workstations, Servers, Routers
  DIMMs
200 Pin DIMMs       16-64 MBytes  FPM, SDRAM       10-150        Workstations, Super Computers
VRAM Modules        2-16 MBytes   RAM, High Speed  60-200        High Performance Graphics for Workstations
                                  SRAM
VME Bus Modules     256KBytes-    FPM, Low         10-33         Industrial Control Systems
                    16MBytes      Profile
Intel PC-100 DIMMs  8MB-1GByte    PC100 SDRAM      100           Desktop PCs, Workstations, Servers
Custom              1MB-1GByte    Per Customer     Per Customer  Embedded Controllers, Telecom Switches,
                                  Specifications   Specifications Notebook PCs
Rambus RIMM         32-256MBytes  RDRAM            800           High-end Workstations, PCs, Graphics
Rambus SO-RIMM      32-128MBytes  RDRAM            800           Portable PCs, Networking
184-pin DDR         64-256MBytes  DDR              200           Servers, Workstations, High-end PCs
</TABLE>
 
     SRAM Modules. The Company offers a comprehensive line of SRAM memory
modules, including L2 cache modules and other high speed and low power SRAM
modules. The Company's L2 cache modules are available in speeds from 50 to 83
MHz, in asynchronous and synchronous versions, with burst, pipelined burst and
serial access operating modes and in densities from 256 KBytes to 8 MBytes.
 
     The following table summarizes certain of the Company's high speed SRAM L2
cache module product offerings:
 
<TABLE>
<CAPTION>
   SRAM L2 CACHE                                 CHIPSET             SPEED
 PRODUCT FAMILIES          DENSITY            COMPATIBILITY          (MHZ)                   APPLICATIONS
 ----------------    -------------------  ----------------------  ------------               ------------
<S>                  <C>                  <C>                     <C>           <C>
Synchronous 64 Bit   256 Kbytes-1 MByte   Intel, SIS, OPTi, VLSI     66-83      Desktop PCs, Embedded Controllers
Synchronous 72 Bit   256 Kbytes-1 MByte   Intel, SIS, OPTi, VLSI     66-83      Desktop PCs, Workstations, Servers,
                                                                                Routers
Asynchronous 64 Bit  256 Kbytes-1 MByte   Intel, OPTi, VLSI          50-66      Desktop PCs, Embedded Controllers
Asynchronous 72 Bit  256 Kbytes-1 MByte   Intel, OPTi, VLSI          50-66      Desktop PCs, Workstations, Servers,
                                                                                Routers
Custom               256 Kbytes-8 MBytes  Per Customer            Per Customer  Desktop PCs
                                          Specifications          Specifications
</TABLE>
 
                                        6
<PAGE>   7
 
     The following table summarizes certain of the Company's other high speed
and low power SRAM module product offerings:
 
<TABLE>
<CAPTION>
   SRAM
 PRODUCT
 FAMILIES           DENSITY          SPEED (NS)                            APPLICATIONS
 --------     -------------------    ----------                            ------------
<S>           <C>                    <C>           <C>
8 Bit I/O     256 KBytes-2 MBytes     100-20       Point of Sale Terminals, Electronic Verification Equipment,
                                                   Industrial Instrumentation
16 Bit I/O    32 KBytes-1 MByte       120-15       Disk Drives, Medical Instruments
18 Bit I/O    768 KBytes               25-15       Disk Drives, Medical Instruments
24 Bit I/O    960 KBytes               25-15       Servers, Graphics
32 Bit I/O    32 KBytes-1 MByte       100-12       Graphics, Industrial Instrumentation
36 Bit I/O    32 KBytes-1 MByte        35-15       Servers, Workstations
44 Bit I/O    1.4-5.5 MBytes           20-15       Minicomputers
</TABLE>
 
     Flash Modules. The Company offers a comprehensive line of Flash modules,
including 72 Pin DRAM-like SIMMs, 80 Pin synchronous SIMMs, 80 Pin asynchronous
SIMMs and 168 Pin synchronous and asynchronous DIMMs. The Company's Flash
modules are available in densities of up to 64 MBytes. The Company also offers
additional options such as an on-board active reset control, system reset
control and DC to DC power conversion which allows the use of 12.0 volt
components in a 5.0 volt system.
 
     The following table summarizes certain of the Company's Flash module
product offerings:
 
<TABLE>
<CAPTION>
  FLASH PRODUCT FAMILIES        DENSITY                      FEATURES                           APPLICATIONS
  ----------------------      -----------                    --------                           ------------
<S>                           <C>            <C>                                          <C>
72 Pin DRAM-like SIMMs        4-8 MBytes     Reads like DRAM, Plugs into DRAM Socket      Embedded Controllers
80 Pin Synchronous SIMMs      8-32 MBytes    Synchronized to System Clock                 Embedded Controllers
80 Pin Asynchronous SIMMS     1-32 MBytes    12.0 Volt/5.0 Volt Programming               Routers, Servers,
                                             5.0 Volt/3.3 Volt Read Voltage               Telecom Switches
                                             5.0 Volt Only
                                             3 Reset Options
168 Pin Asynchronous DIMMs    4-64 MBytes    5.0 Volt/3.3 Volt Read Voltage               Telecom Switches, Routers
Custom                        1-64 MBytes    Per Customer Specifications                  Industrial Applications
</TABLE>
 
     Sales of memory modules accounted for a substantial majority of the
Company's net sales during fiscal 1998, fiscal 1997 and fiscal 1996.
 
  PC Card Products
 
     The Company sells PC card products that provide both memory, I/O and
communication functions. The Company offers a comprehensive line of memory PC
card products, including 68 Pin PC cards with densities ranging from 2 MBytes to
64 MBytes and 68 Pin ATA Flash memory PC cards with densities ranging from 2
MBytes to 256 MBytes. These cards provide additional memory for notebook and
subnotebook computers and PDAs. The Company's memory PC cards are PCMCIA Type I
compatible.
 
     The following table summarizes certain of the Company's PC card memory
product offerings:
 
<TABLE>
<CAPTION>
 PC CARD MEMORY
PRODUCT FAMILIES           DENSITY                     FEATURES                           APPLICATIONS
----------------     --------------------              --------                           ------------
<S>                  <C>                     <C>                             <C>
68 Pin Linear        2-64 MBytes             Plug & Play, Software Driver    PDAs, Notebook PCs, Networking,
  Flash                                      Included                        Portable Medical Equipment
68 Pin ATA Flash     4-256 MBytes            5.0 Volt, 3.3 Volt              PDAs, Notebook PCs, Networking
                                             ATA Compliant
Compact Flash ATA    4-64 MBytes             5.0 Volt, 3.3 Volt ATA          PDAs, Cellular Phones, Pagers, Digital
                                             Compliant                       Cameras
Miniature (Flash)    2-8 MBytes              5.0 Volt, 3.3 Volt 16 Bit       PDAs, Cellular Phones, Pagers, Digital
                                             Data Interface MCIF             Cameras
                                             Specification Compliant
Custom (Flash)       128 KBytes-20 MBytes    Per Customer Specifications     Portable Medical Equipment
</TABLE>
 
     The Company also offers a comprehensive line of modem and communication
card products. These products include a full line of PC card data/fax modems for
notebook and PDA devices, as well as internal (ISA and PCI) modems for desktop
computers. The Company has integrated the V.90 standard into its products for
the highest level of compatibility. To address the needs of users demanding
international mobility,
 
                                        7
<PAGE>   8
 
the Company's world-approved modems allow users to have one modem that can be
used worldwide. The Company has added digital GSM technology to its
world-approved modems providing users with secure, digital, wireless
communications. In addition, the Company has added ISDN technology in both
United States and European interfaces.
 
     The following chart summarizes certain of the Company's communication card
product offerings:
 
<TABLE>
<CAPTION>
          COMMUNICATION CARD PRODUCT FAMILIES                                     FEATURES
          -----------------------------------                                     --------
<S>                                                        <C>
Clippercom V.90, 56kbps World/ISDN PC card with GSM        International PTT approved multiple feature V.90 card,
                                                           ISDN support S/T and U Interface, Internal DAA
                                                           certified in over 50 countries, Country Select GUI
                                                           software, Digital GSM wireless capabilities
Clippercom V.90, 56kbps World PC card with GSM             Approved for use in over 50 countries, Country Select
                                                           GUI software, Digital GSM wireless capabilities
Winperformer 56 kbps PC card                               HSP technology, Win95, NT
Rapid Transit V.90, 56 kbps PC card                        V.90 and K56flex(TM) technology
PCI V.90, 56 kbps Data/Fax Voice Modem                     Software upgradable, K56flex(TM) technology, Full
                                                           duplex speakerphone
PCI V.90 Combo Modem and Sound Card                        Combination modem and sound card, WHQL approved
</TABLE>
 
  Embedded Computer Modules
 
     The Company believes that its SMARTengine family of products helps
accelerate time to market, reduce system cost, lower power requirements and
provide a clear upgrade path for OEMs. The Company offers a line of standard and
perfect-fit embedded computers with complete software support that offer varying
price/ performance and industry standard bus interfaces. The Company's product
line is processor independent and operates in systems using 32 and 64 bit CPUs
from several vendors. This compatibility enhances flexibility to match price,
performance and power requirements to the customer's application. The Company
has also used industry standard buses, including ISA, EISA, PCI and Compact PCI,
as well as custom buses, where required. All products are supported by on-board
software for development and real-time operating systems support.
 
     The following table summarizes certain of the Company's SMARTengine
embedded computer module product offerings:
 
<TABLE>
<CAPTION>
  EMBEDDED COMPUTER
   MODULE FAMILIES                               FEATURES                                     APPLICATIONS
  -----------------                              --------                                     ------------
<S>                     <C>                                                          <C>
SMARTengine/603cPCI     Power PC 603, 6-U Compact PCI, 16-128 MBytes DRAM            Telecommunications,
                                                                                     Networking, Peripherals
SMARTengine/50cPCI-3U   R5000, 3-U Compact PCI, 16-128 MBytes DRAM, 10/100           Internetworking, Ethernet
                        Ethernet, FLASH                                              Switch, 3-U Jupiter
SMARTengine/50cPCI-6U   R5000, 6-U Compact PCI, 8-128 MBytes DRAM, FLASH, PROM,      ATM Switch, Ethernet Switch,
                        Ethernet, SCSI, RTC, DUART                                   Power PC
SMARTengine/50PCI       R5000, Compact PCI, 8-128 MBytes DRAM, FLASH, PROM,          ATM Switch, Ethernet Switch
                        Ethernet, SCSI, RTC, DUART
SMARTengine/iPC-3       Pentium Socket7, 32-128 MBytes SDRAM, 10/100 Ethernet,       Embedded PC for networking,
                        Flash, BIOS                                                  instrumentation, Datacom
SMARTengine             43hPCI, R4300, 8 MBytes DRAM, FLASH, PROM, RTC               Networking, Printers, Datacom,
                                                                                     Test and Measurement
SMARTengine/43NET       R4300, 2 Ethernets, 8 MBytes DRAM, FLASH, PROM, RTC, DUART   Networking, Ethernet Switch
SMARTengine/47PCI       R4700, 2 PCI buses, 8-128 MBytes DRAM, FLASH, PROM, RTC,     Imaging
                        DUART
SMARTengine/30ISA       R3081, ISA bus, 8 MBytes DRAM Perfect-fit embedded computer  Simulation Various
  Custom                for the Customer's application
</TABLE>
 
CUSTOMERS, SALES AND MARKETING
 
     The Company's principal customers include major computing, networking and
telecommunication OEMs and semiconductor manufacturers. For fiscal 1998, fiscal
1997 and fiscal 1996, the Company's ten largest customers accounted for 87%, 86%
and 71% of net sales, respectively. For fiscal 1998, the Company's largest
customer was Compaq, which accounted for 62% of net sales. In fiscal 1997, the
Company's three
 
                                        8
<PAGE>   9
 
largest customers were Compaq, Cisco and Hewlett-Packard, which accounted for
53%, 12% and 11% of net sales, respectively. In fiscal 1996, the Company's three
largest customers were Cisco, Hewlett-Packard and IBM, which accounted for 19%,
15% and 12% of net sales, respectively. During these periods, no other customers
accounted for more than 10% of net sales.
 
     The Company primarily sells its products directly to major OEM customers
and uses a network of independent sales representatives located throughout North
America and Europe for sales to other OEM customers. The Company's direct sales
and marketing efforts are conducted in an integrated process involving direct
salespeople, customer service representatives and senior executives. An
important aspect of the Company's sales and marketing efforts is that the
Company's experienced applications engineers work closely with OEM customers in
designing the Company's products into the OEMs' systems. The Company's sales
offices are located in California, Colorado, Texas, Massachusetts, New York,
Florida, North Carolina, the United Kingdom, Malaysia, France and Germany.
 
     To address the needs of its OEM customers, the Company has developed and
maintains relationships with leading vendors of memory devices located in the
United States, Japan and South Korea. These include limited and sole source
suppliers of certain products, such as NEC Corporation, IBM, Intel Corporation
("Intel"), Oki Semiconductor, Inc., Rockwell and Samsung Electronics Company
Ltd. ("Samsung"). The Company frequently works jointly with these vendors in
bidding for customers' design-in opportunities. The Company's OEM marketing
activities include advertising in technical journals and direct mail
solicitation.
 
     Sales are generally made pursuant to standard purchase orders. The Company
includes in its backlog only those customer orders for which it has accepted
purchase orders and it expects to ship within the next twelve (12) months. Since
orders constituting the Company's current backlog are subject to changes in
delivery schedules and are subject to cancellation with only limited or no
penalties, backlog is not necessarily an accurate indication of future net
sales. There can be no assurance that current backlog will necessarily lead to
net sales in any future period. The Company's total backlog was approximately
$29.7 million and $35.2 million as of October 31, 1998 and 1997, respectively.
 
DESIGN, MANUFACTURING AND TEST
 
     The Company has a staff of engineers for applications development,
component selection, schematic design, layout, firmware and software driver
development. The layouts for memory modules, communication cards and embedded
computer modules are specialized due to their high component and trace
densities, particularly for high-speed memory modules. To further enhance its
design capability, the Company established in fiscal 1995 a design center in
Bangalore, India.
 
     The Company believes that the efficiency of its manufacturing operations
has benefited from its extensive experience and its library of proven designs
which stress high manufacturability and quality. Through its extensive library
of memory module designs and its experience in designing and manufacturing
memory modules, the Company is able to work closely with its customers and
suppliers to design competitive solutions to system memory problems and shorten
the time it takes its customers to get their products to market.
 
     The Company's manufacturing processes rely on a high level of automation
and involve the use of a substantial base of fine pitch surface mount equipment
which is specialized for the production of memory modules, embedded computer
modules, communication card products and PC cards. The Company's surface mount
manufacturing lines have been optimized to support the placement and
configuration of a high number of ICs on each board, in contrast to surface
mount equipment used in less specialized electronics manufacturing which
typically involves a fewer number of ICs and a greater number of passive
components on each printed circuit board. The Company also has developed
automated methods for PC card case assembly and test. As a result of its design
efficiencies, high level of automation and general manufacturing expertise, the
Company believes that it achieves relatively high manufacturing yields. In
addition, due to the high level of automation in the Company's manufacturing
approach, the Company maintains a relatively low percentage of direct labor
costs. The Company believes that it has achieved and maintains a rapid
manufacturing cycle and is able to offer its customers quick turnaround of both
small and large projects. The Company is frequently able to provide turnaround
on major customer orders within days or weeks.
 
                                        9
<PAGE>   10
 
     An important aspect of the Company's manufacturing operations is its focus
on product testing. The Company tests 100% of its memory modules, communication
card products and embedded computer modules for full functionality, in contrast
with many other suppliers which the Company believes may test only at the system
level. The Company believes that it has established substantial technical
expertise in the testing of memory modules, communication card products and
embedded computer modules. The Company further believes that test capability
will grow in importance as the speed and complexity of memory devices and
modules utilizing those devices increase. The Company has a group of experienced
test engineers that develop proprietary testing routines and parameters which,
combined with the Company's continued investment in advanced test equipment,
enable it to diagnose problems in system design or memory components, to
characterize the performance of new products and to provide high quality
products in volume.
 
     The Company currently manufactures and tests the majority of its products
in a 62,250 square foot facility in Fremont, California. In addition, the
Company utilizes an 83,000 square foot manufacturing and test facility in
Aguada, Puerto Rico, a 50,000 square foot manufacturing and test facility in
East Kilbride, Scotland and a 33,000 square foot manufacturing and test facility
in Penang, Malaysia. The Company operates multiple production lines at these
facilities. The Company subcontracts a limited amount of production requirements
to third party manufacturers.
 
RESEARCH AND DEVELOPMENT
 
     The Company believes that the timely development of new memory modules,
communication card products and embedded computer modules is essential to
maintaining the Company's competitive position. In the memory market, the
Company's research and development activities are focused primarily on new high
speed memory modules, the continual improvement in test routines and software
and the ongoing improvement in manufacturing processes and technologies. In
particular, the Company is focusing its research and development resources on
the development of Rambus DRAM, DDR, SDRAM, Flash and SRAM products. The Company
plans to continue to devote substantial research and development efforts to the
design of new memory module products which address the requirements of OEMs and
corporate end users.
 
     In the communication card market, the Company's research and development
efforts are focused primarily on the design and introduction of new
communication card products which provide improved functionality and the latest
technology in various form factors. The Company's research and development
efforts in the embedded computer market are focused on the design of standard
and custom embedded computer modules.
 
     The Company's research and development expenses totaled $8.9 million, $8.5
million and $5.9 million in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively.
 
COMPETITION
 
     The memory module, communication card and embedded computer subsystem
industries are intensely competitive. Each of these markets includes a large
number of competitive companies, several of which have achieved a substantial
market share. Certain of the Company's competitors in each of these markets have
substantially greater financial, marketing, technical, distribution and other
resources, greater name recognition, lower cost structures and larger customer
bases than the Company. In the memory module market, the Company competes
against semiconductor manufacturers that maintain captive memory module
production capabilities, including Samsung. The Company also competes with
independent memory module manufacturers, including Celestica Inc., MCMS, Inc.,
PNY Electronics, Inc. and Simple Technology Incorporated. In the computer
systems reseller market for memory modules, the Company primarily competes with
companies such as Kingston Technology, Inc., Viking Technology, Inc. and Vision
Tek, Inc. In the communication card market, the Company competes with GVC, TDK
and U.S. Robotics, Inc. (a subsidiary of 3Com Corporation), among others. In the
embedded computer subsystem market, the Company competes with Force Computers
Inc. (a subsidiary of Solectron Corporation), Motorola and Radisys Corporation,
among others. The Company faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally. In addition, certain of the Company's
 
                                       10
<PAGE>   11
 
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers have the ability to manufacture competitive products at lower costs
than the Company as a result of their higher levels of integration and therefore
have the ability to sell competitive products at lower prices than the Company's
products. The Company also faces competition from new and emerging companies
that have recently entered or may in the future enter the markets in which the
Company participates.
 
     The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past and may continue to
lead to intensified price competition, resulting in lower prices and gross
margin, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
 
INTELLECTUAL PROPERTY
 
     The Company has one issued patent. The Company expects to file new patent
applications where appropriate to protect its proprietary technologies; however,
the Company believes that its continued success depends primarily on factors
such as the technological skills and innovation of its personnel rather than on
patent protection. In the semiconductor, computer, telecommunications and
networking industries, it is typical for companies to receive notices from time
to time alleging infringement of patents, copyrights or other intellectual
property rights of others. The Company is currently being sued by a party who
alleges that certain of the Company's communication card products have infringed
and continue to infringe upon the party's intellectual property rights.
Moreover, the Company has been and may from time to time continue to be notified
of claims that it may be infringing patents, copyrights or other intellectual
property rights owned by other third parties. There can be no assurance that
these or other companies will not in the future pursue claims against the
Company with respect to the alleged infringement of patents, copyrights or other
intellectual property rights. In addition, litigation may be necessary to
protect the Company's intellectual property rights and trade secrets, to
determine the validity of and scope of the proprietary rights of others or to
defend against third party claims of invalidity. The current litigation or any
other litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     There can be no assurance that additional infringement, invalidity, right
to use or ownership claims by third parties or claims for indemnification
resulting from infringement claims will not be asserted in the future. The
Company has entered into license agreements in the past regarding certain
alleged infringement claims asserted by third parties. In response to the
current litigation or if any other claims or actions are asserted against the
Company, the Company may again seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. The failure to obtain a
license under a patent or intellectual property right from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of the products utilizing the
intellectual property. In addition, should the Company decide to litigate the
current claim or such other claims, such litigation could be extremely expensive
and time consuming and could materially and adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation.
 
     The Company attempts to protect its intellectual property rights through a
variety of measures including non-disclosure agreements, trademarks, trade
secrets and to a lesser extent, patents. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information, that disputes with respect to the
ownership of its intellectual property rights will
 
                                       11
<PAGE>   12
 
not arise, that the Company's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors or that the
Company can otherwise meaningfully protect its intellectual property rights.
 
EMPLOYEES
 
     As of October 31, 1998, the Company had 831 regular, full time employees of
which 588 were in manufacturing (including test, quality assurance and materials
work), 80 were in design and product development, 68 were in marketing and sales
and 95 were in finance and administration. The Company's future results depend
in significant part upon its ability to attract, train and retain qualified
management, manufacturing and quality assurance, engineering, marketing, sales
and support personnel. The Company's employees are not represented by any
collective bargaining agreements and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     The Company's business, financial condition and results of operations can
be impacted by a number of factors. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors that May
Affect Future Results." For the impact of recently issued Financial Accounting
Standards on the Company's financial position and results of operations, see
Note 2 to the Consolidated Financial Statements.
 
ITEM 2. PROPERTIES
 
     The Company's corporate headquarters are located in a 22,500 square foot
facility in Fremont, California. The lease on this facility expires in December
2004. The Company leases a 62,250 square foot manufacturing facility in Fremont,
California. The lease on this facility expires in January 2003. The Company
leases an additional 25,000 square foot facility in Fremont, California. The
lease on this facility expires in January 2003. The Company leases an 83,000
square foot manufacturing facility in Aguada, Puerto Rico and a 50,000 square
foot manufacturing facility in East Kilbride, Scotland. The leases on these
facilities expire in October 2007 and September 2006, respectively. The Company
also leases a 33,000 square foot manufacturing facility in Penang, Malaysia. The
lease on this facility expires in May 2000. In addition, the Company leases
various small facilities for its sales offices.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company and certain of its officers and directors have been named as
defendants in six securities class action lawsuits filed in the United States
District Court for the Northern District of California, Boren v. SMART Modular
Technologies, Inc., et al., No. C 98 20692 JW (PVT) (filed July 1, 1998),
Woszczak v. SMART Modular Technologies, Inc., et al., No. C 98 2617 JL (filed
July 2, 1998), Bisson v. SMART Modular Technologies, Inc., et al., No. C 98
20714 JF (filed July 8, 1998), D'Amato v. SMART Modular Technologies, Inc., et
al., No. C 98 2804 PJH (filed July 16, 1998), Cha v. SMART Modular Technologies,
Inc., et al., No. C 98 2833 BZ (filed July 17, 1998) and Chang v. SMART Modular
Technologies, Inc., et al., No. C 98 3151 SI (filed August 13, 1998)
(collectively, the "Federal Actions"). The plaintiffs in the Federal Actions
allege that defendants made material misrepresentations and omissions during the
period from July 1, 1997 through May 21, 1998 in violation of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
Federal Actions were consolidated on October 9, 1998, and a consolidated
complaint was filed on November 30, 1998 (the "Federal Complaint").
 
     On October 22, 1998, a putative securities class action lawsuit, captioned
Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the
"State Complaint"), was filed against the Company and certain of its officers
and directors in the Superior Court of the State of California, County of
Alameda. The State Complaint alleges violations of Sections 25400 and 25500 of
the California Corporations Code and seeks unspecified damages on behalf of a
purported class of purchasers of SMART common stock during the period
 
                                       12
<PAGE>   13
 
from July 1, 1997 through May 21, 1998. The factual allegations of the State
Complaint are nearly identical to the factual allegations contained within the
Federal Complaint.
 
     The Company believes that all claims related to the state and federal
securities actions are without merit and intends to defend itself vigorously
against these actions. Currently, the Company is unable to estimate the
financial impact of the state and federal securities actions.
 
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
     Not Applicable.
 
                                       13
<PAGE>   14
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SMOD." The following table sets forth, for the periods indicated,
the high and low closing sale prices for the Common Stock as reported by the
Nasdaq National Market. In December 1997, the Company consummated a stock split
effected as a stock dividend whereby each issued and outstanding share of the
Common Stock was converted into two shares of Common Stock. Accordingly, all
share and per share amounts presented herein have been retroactively adjusted to
reflect the stock split.
 
<TABLE>
<CAPTION>
                                                             HIGH       LOW
                                                             ----       ---
<S>                                                          <C>        <C>
Fiscal year ended October 31, 1998
  First Quarter............................................. $31 9/16   $21 5/8
  Second Quarter............................................  36         20 7/16
  Third Quarter.............................................  26 1/4     12 1/16
  Fourth Quarter............................................  21 1/2     15 1/4
Fiscal year ending October 31, 1997
  First Quarter.............................................  15 23/32    9 11/16
  Second Quarter............................................  17         11 5/8
  Third Quarter.............................................  23 11/16   15 15/16
  Fourth Quarter............................................  44 1/16    20 1/2
</TABLE>
 
     On January 4, 1999, the reported last sale price for the Common Stock on
the Nasdaq National Market was $26 per share. At January 4, 1999, the Company
had approximately 158 holders of record of the Common Stock and approximately
11,300 beneficial holders of the Common Stock. The Company has never paid cash
dividends on the Common Stock. The Company presently intends to retain any
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future. Certain financial covenants set forth in
the Company's bank line of credit agreement prohibit the Company from paying
dividends.
 
     On November 17, 1995, the Company commenced its initial public offering of
6,000,000 shares of Common Stock with an aggregate offering price of $36,000,000
(the "Offering"). The Company's Registration Statement on Form S-1 (File No.
33-97748) for the Offering became effective on November 16, 1995. The Offering
terminated upon the sale of all securities registered at the offering price.
Donaldson, Lufkin & Jenrette Securities Corporation, Cowen & Company and
Oppenheimer & Co., Inc. served as the managing underwriters for the Offering.
 
     In connection with the issuance and distribution of the securities
registered, direct or indirect payments to others were made as follows: (i)
underwriting discounts and commissions of $2,520,000, and (ii) estimated other
expenses of $1,028,536. Total estimated expenses for the Offering were
$3,548,536. The Company received net offering proceeds of $32,451,464, of which
as of October 31, 1998 an estimated $24,950,000 has been used for the purchase
and installation of machinery and equipment and an estimated $7,500,000 toward
the repayment of indebtedness. These uses of net offering proceeds were made in
the form of direct or indirect payments to others.
 
                                       14
<PAGE>   15
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
     The selected consolidated financial data presented below under the captions
"Consolidated Statement of Income Data" and "Consolidated Balance Sheet Data"
are derived from the consolidated financial statements of the Company and
subsidiaries, which financial statements have been audited by Arthur Andersen
LLP, independent public accountants, to the extent indicated in their reports.
On July 28, 1995, a wholly-owned subsidiary of the Company merged with Apex
Data, Inc., a Delaware corporation ("Apex"), which resulted in Apex becoming a
wholly-owned subsidiary of the Company. The merger was accounted for as a
pooling of interests. On July 31, 1996, a wholly-owned subsidiary of the Company
merged with RISQ Modular Systems, Inc., a California corporation ("RISQ"), which
resulted in RISQ becoming a wholly-owned subsidiary of the Company. The merger
was accounted for as a pooling of interests.
 
     The selected consolidated financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements.
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                             FISCAL YEARS ENDED OCTOBER 31,
                                              -------------------------------------------------------------
                                                1998        1997          1996          1995         1994
                                              --------   -----------   -----------   -----------   --------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>        <C>           <C>           <C>           <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
  Net sales.................................  $714,651    $694,675      $401,774      $274,592     $163,849
  Cost of sales.............................   595,279     582,515       329,644       224,931      132,826
                                              --------    --------      --------      --------     --------
  Gross profit..............................   119,372     112,160        72,130        49,661       31,023
  Operating expenses:
  Research and development..................     8,945       8,496         5,933         5,283        5,891
  Sales, general and administrative.........    41,781      37,163        28,544        23,952       15,192
                                              --------    --------      --------      --------     --------
          Total operating expenses..........    50,726      45,659        34,477        29,235       21,083
                                              --------    --------      --------      --------     --------
  Income from operations....................    68,646      66,501        37,653        20,426        9,940
  Other income (expense), net...............     7,065       2,364         2,238          (515)        (143)
                                              --------    --------      --------      --------     --------
  Income before provision for income
     taxes..................................    75,711      68,865        39,891        19,911        9,797
  Provision for income taxes................    24,228      23,418        14,760         7,344        3,759
                                              --------    --------      --------      --------     --------
  Income before cumulative effect of change
     in accounting principle................    51,483      45,447        25,131        12,567        6,038
  Cumulative effect of change in accounting
     principle..............................        --          --            --            --          121
                                              --------    --------      --------      --------     --------
  Net income................................  $ 51,483    $ 45,447      $ 25,131      $ 12,567     $  6,159
                                              ========    ========      ========      ========     ========
  Diluted net income per share(1)...........  $   1.10    $   1.04      $   0.60      $   0.36     $   0.19
                                              ========    ========      ========      ========     ========
  Weighted average common and common
     equivalent shares outstanding(2).......    46,902      43,892        41,748        35,130       33,074
                                              ========    ========      ========      ========     ========
  Basic net income per share(1).............  $   1.19    $   1.17      $   0.69      $   0.44     $   0.23
                                              ========    ========      ========      ========     ========
  Weighted average common shares
     outstanding(2).........................    43,445      38,895        36,459        28,986       26,876
                                              ========    ========      ========      ========     ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                               AS OF OCTOBER 31,
                                              ----------------------------------------------------
                                                1998       1997       1996       1995       1994
                                              --------   --------   --------   --------   --------
<S>                                           <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA (IN
  THOUSANDS):
  Working capital...........................  $231,291   $206,115   $ 74,324   $ 21,464   $ 12,185
  Total assets..............................   368,992    327,985    172,185     91,976     45,612
  Capital lease obligations, net of current
     portion................................        --        234      1,241      1,599        632
  Shareholders' equity......................   279,621    230,320     86,619     26,234     13,665
</TABLE>
 
---------------
(1) The cumulative effect of the change in accounting principle did not
    materially impact diluted or basic net income per share.
 
(2) See Note 2 to the Consolidated Financial Statements for an explanation of
    the method used to determine the number of shares used in computing diluted
    and basic net income per share.
 
                                       15
<PAGE>   16
 
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS
 
     In addition to other areas of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, the fourth and sixth paragraphs
of the Overview Section, the first paragraph of the Gross Profit Section, the
first paragraph of the Research and Development Section, the first paragraph of
the Sales, General and Administrative Section and the first, third and fifth
paragraphs of the Liquidity and Capital Resources Section contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors that May Affect Future Results." In particular, note the
factors entitled "Significant Customer Concentration," "Product Concentration;
Dependence on Memory Market," "Dependence on Semiconductor, Computer,
Telecommunications and Networking Industries," "Intense Competition,"
"Fluctuations in Operating Results," "Dependence on Sole or Limited Sources of
Supply," "Rapid Technological Change" and "International Sales." The discussion
of those factors is incorporated herein by this reference as if said discussion
was fully set forth at this point.
 
OVERVIEW
 
     The Company commenced operations in 1989 and initially focused on the
design and manufacture of standard memory modules for OEMs and semiconductor
manufacturers. Standard memory modules implement industry standard
specifications, primarily utilize DRAM and are designed to be incorporated into
a wide variety of electronic equipment. In 1991, the Company expanded its
design, manufacturing and marketing efforts to offer specialty memory modules
and PC card memory products. The Company expanded its PC card communication
product line through the acquisition of Apex in July 1995. The Company further
expanded its product line to include embedded computer modules through the
acquisition of RISQ in July 1996.
 
     The Company's net sales and gross profit have increased over the last three
fiscal years. Over the last three fiscal years, SMART's gross margin has ranged
from 16.1% to 18.0%. One of the primary factors affecting gross margin has been
the proportion of the Company's memory products manufactured on either a turnkey
or consignment basis. Products manufactured on a turnkey basis are designed and
manufactured by the Company with purchased memory devices. Products manufactured
on a consignment basis are generally designed and manufactured by the Company
with memory devices which are owned and supplied by the customer. While products
manufactured on a turnkey basis typically have lower gross margin than products
manufactured on a consignment basis, products manufactured on a turnkey basis
generally contribute greater net sales and higher gross profit per unit than
products manufactured on a consignment basis. Currently, a substantial majority
of the Company's net sales is derived from sales of products manufactured on a
turnkey basis.
 
     The other primary factor affecting the Company's gross margin has been the
mix between sales of specialty memory modules, standard memory modules,
communication card products and embedded computer modules. Prior to the last two
fiscal years, a significant majority of the Company's net sales were derived
from the sales of its specialty memory modules, which typically have slightly
higher gross margin than the Company's standard memory modules. In fiscal 1998
and fiscal 1997, sales of standard memory modules accounted for approximately
one half of the Company's net sales. The Company's embedded computer modules
currently generate the Company's highest gross margin, followed by the Company's
PC card communication products. Both of these product lines currently contribute
a relatively small portion of the Company's net sales.
 
     The Company expects that its net sales and gross margin will continue to
vary significantly based on these and other factors, including the mix of
products sold and the manufacturing services provided, the channels through
which the Company's products are sold, changes in product selling prices and
component costs, the level of manufacturing efficiencies achieved and pricing by
competitors. The selling prices of the Company's products have declined in the
past and the Company expects that prices could continue to decline in the
 
                                       16
<PAGE>   17
 
future. In particular, during fiscal 1998, the selling prices of the Company's
products declined due to significant declines in DRAM semiconductor prices and
declines in SRAM and Flash semiconductor prices. Because a substantial portion
of the Company's net sales are attributable to the resale of semiconductor
memory devices, a continued decline in the prices of these components would have
a material adverse effect on the Company's net sales and could have a material
adverse effect on the Company's business, financial condition and results of
operations. Accordingly, the Company's ability to maintain or increase net sales
will be highly dependent upon its ability to increase unit sales volumes of
existing products and to introduce and sell new products in quantities
sufficient to compensate for the anticipated declines in selling prices.
Declining product selling prices may also materially and adversely affect the
Company's gross margin unless the Company is able to reduce its cost per unit to
offset declines in product selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In addition, the Company's business has in
the past been subject to seasonality, although the Company believes such
seasonality has been masked by its growth. The Company expects that its business
will experience more significant seasonality to the extent it continues to sell
a material portion of its products in Europe and to the extent its exposure to
the personal computer market remains significant.
 
     The Company primarily sells its products to OEMs and semiconductor
manufacturers in the computer, networking and telecommunications industries. A
relatively small number of customers have accounted for a significant percentage
of the Company's net sales. For fiscal 1998, fiscal 1997 and fiscal 1996, the
Company's ten largest customers accounted for 87%, 86% and 71% of net sales,
respectively. For fiscal 1998, the Company's largest customer was Compaq, which
accounted for 62% of net sales. For fiscal 1997, the Company's three largest
customers were Compaq, Cisco and Hewlett-Packard, which accounted for 53%, 12%
and 11% of net sales, respectively. In fiscal 1996, the Company's three largest
customers were Cisco, Hewlett-Packard and IBM, which accounted for 19%, 15% and
12% of net sales, respectively. During these periods, no other customers
accounted for more than 10% of net sales.
 
     The Company expects that sales to relatively few customers will continue to
account for a significant percentage of its net sales in the foreseeable future.
However, there can be no assurance that any of these customers or any of the
Company's other customers will continue to utilize the Company's products at
current levels, if at all. The Company has experienced significant changes in
the composition of its major customer base and expects that this variability
will continue in the future. For example, sales to Compaq, which represented
less than 10% of net sales in fiscal 1996, represented 62% and 53% of the
Company's net sales in fiscal 1998 and fiscal 1997, respectively. The loss of
any major customer or any reduction in orders by any such customer would have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
                                       17
<PAGE>   18
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain consolidated statement of income
data of the Company expressed as a percentage of net sales:
 
<TABLE>
<CAPTION>
                                                               FISCAL YEARS ENDED
                                                                   OCTOBER 31,
                                                              ---------------------
                                                              1998    1997    1996
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Net sales...................................................  100.0%  100.0%  100.0%
Cost of sales...............................................   83.3    83.9    82.0
                                                              -----   -----   -----
Gross profit................................................   16.7    16.1    18.0
Operating expenses:
Research and development....................................    1.3     1.2     1.5
Sales, general and administrative...........................    5.8     5.3     7.1
                                                              -----   -----   -----
          Total operating expenses..........................    7.1     6.6     8.6
                                                              -----   -----   -----
Income from operations......................................    9.6     9.6     9.4
Other income (expense), net.................................    1.0      .3      .6
                                                              -----   -----   -----
Income before provision for income taxes....................   10.6     9.9     9.9
Provision for income taxes..................................    3.4     3.4     3.7
                                                              -----   -----   -----
Net income..................................................    7.2%    6.5%    6.3%
                                                              =====   =====   =====
</TABLE>
 
 Net Sales
 
     Fiscal Year 1998 vs. 1997. Net sales consist of sales of specialty and
standard memory products, PC cards, embedded computer modules and communication
card products, less returns and discounts. Net sales increased 2.9% to $714.7
million in fiscal 1998 from $694.7 million in fiscal 1997. The increase in net
sales was primarily due to an increase in sales of standard memory products,
communication card products and embedded computer modules as compared to the
same period of fiscal 1997. This increase was partially offset by a substantial
decline in the cost of certain memory devices used in the production of the
Company's products and a decrease in sales of specialty memory products.
 
     Fiscal Year 1997 vs. 1996. Net sales increased 72.9% to $694.7 million in
fiscal 1997 from $401.8 million in fiscal 1996, reflecting an overall increase
in demand for the Company's products from new customers and certain existing
customers. In addition, increases in sales of products manufactured on a turnkey
basis as compared to products manufactured on a consignment basis further
contributed to the increase in net sales as compared to the same period of
fiscal 1996.
 
 Gross Profit
 
     Fiscal Year 1998 vs. 1997. Cost of sales includes the costs of
semiconductor devices and other components and materials purchased by the
Company for its products, as well as the direct labor and overhead costs
associated with manufacturing. Gross profit increased 6.4% to $119.4 million in
fiscal 1998 from $112.2 million in fiscal 1997. Gross margin increased to 16.7%
in fiscal 1998 from 16.1% in fiscal 1997. The increase in gross margin was
principally due to a decrease in the cost of certain memory chips used in the
production of the Company's products as compared to the same period of fiscal
1997. Further contributing to the increase in gross margin was an increase in
the proportion of the Company's net sales derived from its higher margin
embedded computer modules and PC card communication products as compared to the
same period of fiscal 1997. The increase in gross margin was partially offset by
a decrease in the proportion of the Company's net sales derived from its
specialty memory products. The Company expects gross margin to continue to be
affected in future periods by, among other things, changes in the cost of memory
devices used in the production of the Company's products, changes in the sales
mix of the Company's products and changes in the proportion of products
manufactured on a turnkey basis versus those manufactured on a consignment
basis.
 
                                       18
<PAGE>   19
 
     Fiscal Year 1997 vs. 1996. Gross profit increased 55.5% to $112.2 million
in fiscal 1997 from $72.1 million in fiscal 1996. Gross margin decreased to
16.1% in fiscal 1997 from 18.0% in fiscal 1996. The decrease in gross margin was
due in large part to an increase in the proportion of products manufactured on a
turnkey basis versus those products manufactured on a consignment basis as
compared to fiscal 1996. Further contributing to the decline in gross margin in
fiscal 1997 was an increase in the proportion of the Company's net sales derived
from its lower margin standard memory products as compared to fiscal 1996.
 
  Research and Development
 
     Fiscal Year 1998 vs. 1997. Research and development expenses consist
primarily of the costs associated with the design and testing of new products.
These costs relate primarily to compensation of personnel involved with
development efforts, materials and outside design and testing services. Research
and development expenses increased 5.3% to $8.9 million in fiscal 1998 from $8.5
million in fiscal 1997. As a percentage of net sales, research and development
expenses were 1.3% and 1.2% in fiscal 1998 and fiscal 1997, respectively. The
increase in research and development expenses was primarily due to an increase
in the number of employees involved with development efforts as compared to the
same period of fiscal 1997. The Company expects that its research and
development expenses will increase in absolute dollars in future periods to the
extent the Company expands its research and development efforts.
 
     Fiscal Year 1997 vs. 1996. Research and development expenses increased
43.2% to $8.5 million in fiscal 1997 from $5.9 million in fiscal 1996. As a
percentage of net sales, research and development expenses were 1.2% and 1.5% in
fiscal 1997 and fiscal 1996, respectively. The increase in research and
development expenses was primarily due to an overall increase in
non-compensation based research and development expenses as compared to the same
period of fiscal 1996. Research and development expenses were further increased
by an increase in employees involved with development efforts as compared to the
same period of fiscal 1996.
 
  Sales, General and Administrative
 
     Fiscal Year 1998 vs. 1997. Sales, general and administrative expenses
consist primarily of personnel costs (including salaries, performance-based
bonuses, commissions and employee benefits), facilities and equipment costs,
costs related to advertising and marketing and other support costs including
utilities, insurance and professional fees. Sales, general and administrative
expenses increased 12.4% to $41.8 million in fiscal 1998 from $37.2 million in
fiscal 1997. Sales, general and administrative expenses totaled 5.8% and 5.3% of
net sales in fiscal 1998 and fiscal 1997, respectively. The increase in sales,
general and administrative expenses as a percentage of net sales was due in part
to growth in the Company's staffing and infrastructure, particularly in its
international operations. The Company expects that its sales, general and
administrative expenses will increase in absolute dollars in future periods to
the extent the Company expands its staffing, information systems and other
systems and personnel in connection with the expansion of the Company's
infrastructure.
 
     Fiscal Year 1997 vs. 1996. Sales, general and administrative expenses
increased 30.1% to $37.2 million in fiscal 1997 from $28.5 million in fiscal
1996. Sales, general and administrative expenses totaled 5.3% and 7.1% of net
sales in fiscal 1997 and fiscal 1996, respectively. The decrease in sales,
general and administrative expenses as a percentage of net sales was principally
due to the growth in net sales generated by certain OEM customers, which sales
generally require lower incremental levels of selling and marketing expenses.
 
  Other Income (Expense), Net
 
     Other income (expense), net consists primarily of interest income, less
interest expense. Interest expense is attributable to the Company's utilization
of its line of credit and interest paid on certain lease obligations. Interest
income from the proceeds of the Company's secondary public offering of common
stock completed during September 1997 has resulted in significant increases in
other income during fiscal 1998 as compared to fiscal 1997 and fiscal 1996.
 
                                       19
<PAGE>   20
 
  Provision for Income Taxes
 
     Provisions for income taxes were $24.2 million, $23.4 million and $14.8
million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The Company's
effective tax rates for these periods were 32.0%, 34.0% and 37.0%, respectively.
The decrease in the Company's consolidated effective tax rate for fiscal 1998
was principally due to anticipated increases in the amount of income contributed
to the Company from its Puerto Rican and international operations as compared to
fiscal 1997. At October 31, 1998, the Company had a net operating loss
carryforward of approximately $1.8 million for federal income tax purposes
arising from the acquisition of Apex. Utilization of this net operating loss
carryforward is subject to certain annual limitations. See Note 9 to the
Consolidated Financial Statements.
 
  Liquidity and Capital Resources
 
     Since inception, SMART has used funds generated primarily from operations,
certain borrowings, capital leases and equity financings to support its
operations, acquire capital equipment and finance inventory and accounts
receivable. The Company generated cash from operations totaling $63.8 million,
$15.9 million and $27.0 million in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively. The increase in cash provided by operations in fiscal 1998 as
compared to fiscal 1997 was primarily due to increases in net income and
depreciation and amortization, and decreases in accounts receivable and certain
prepaid expenses related to the Company's international operations, and
partially offset by decreases in accounts payable and other accrued expenses. At
October 31, 1998, the Company had $175.3 million of cash, cash equivalents and
short-term investments, and $231.3 million of working capital. The Company
primarily funds its liquidity requirements from existing cash balances and
amounts borrowed under its existing line of credit. The Company expects to fund
any future liquidity requirements from a combination of available cash balances
and certain short-term borrowings under its existing line of credit. The Company
currently anticipates that its working capital requirements will continue to
increase in future periods to the extent that the Company's operations continue
to expand.
 
     The Company has a revolving line of credit agreement (the "Credit Line")
with a term expiring in May 1999. Borrowings under the Credit Line are limited
to $20.0 million. Borrowings under the Credit Line bear interest at either the
bank's prime rate or a spread over LIBOR, at the Company's option. The Company
is required to maintain specified levels of tangible net worth and comply with
certain other covenants. As of October 31, 1998, the Company was in compliance
with all covenants related to the Credit Line. The Credit Line is unsecured and
no borrowings were outstanding under the Credit Line as of October 31, 1998.
 
     Capital expenditures totaled $33.3 million, $17.1 million and $9.0 million
in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. These expenditures
were primarily for manufacturing and test equipment and the expansion of the
Company's manufacturing facilities. SMART anticipates spending an additional
$35.0 million to $40.0 million during fiscal 1999 for the continued growth and
expansion of the Company's manufacturing facilities and related equipment.
 
     SMART has entered into certain capital lease arrangements. The outstanding
principal on these obligations was approximately $176,000 and $1.2 million at
October 31, 1998 and October 31, 1997, respectively. See Note 4 to the
Consolidated Financial Statements.
 
     On May 25, 1998, the Company's Board of Directors authorized the repurchase
from time to time of up to 4,000,000 shares of the Company's Common Stock
through open market purchases. During fiscal 1998, the Company repurchased
620,000 shares of its Common Stock in the open market at an average purchase
price of $14.80 per share and a total cost of approximately $9.2 million.
 
  Year 2000 Readiness Disclosure; Information Technology Transition
 
     Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning with 21st
century dates, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded, to comply
with such "Year 2000" requirements.
 
                                       20
<PAGE>   21
 
Significant uncertainty exists concerning the potential effects associated with
such compliance. The Company believes its existing management information system
is not Year 2000 compliant. The Company has licensed a new management
information system that is Year 2000 compliant and intends to replace its
existing management information system with the new system as early as the
second quarter of fiscal 1999. The implementation of the new system will impact
almost all phases of the Company's operations (e.g., planning, manufacturing,
finance and accounting). Implementation of the new system and transition from
the existing system to the new system will require substantial financial
resources, time and personnel. There can be no assurance that the new system
will be implemented in time to avoid any Year 2000 compliance problems, or that
the Company will not experience problems, delays or unanticipated additional
costs in implementing the new management information system or in the use of its
existing system that could have a material adverse effect on the Company's
business, financial condition and results of operations, particularly in the
period in which the new system is brought online. The new system will be
centrally operated from one location for all of the Company's facilities
worldwide. Each of the Company's facilities will remotely access the new system
via a wide area network. There can be no assurance that the Company will not
experience interruption of use of the new system due to telecommunications
problems or otherwise that could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     During the second quarter of fiscal 1998, the Company began a Year 2000
assessment of its management information system, other information technology
systems, non-information technology systems, products and key suppliers. Items
identified and under review include manufacturing and test equipment,
telecommunications systems and equipment and computer systems and equipment. In
addition, the Company is assessing the Year 2000 compliance of its products. The
Company intends to have its Year 2000 assessment, testing, remediation efforts
and development of necessary contingency plans complete by the year 2000, the
total cost of which has not yet been determined. To date, however, costs
incurred to address Year 2000 compliance issues have not been material. Costs
related to Year 2000 compliance issues continue to be funded through operating
cash flows. There can be no assurance that the Company will be able to complete
its Year 2000 assessment, testing, remediation efforts and development of
necessary contingency plans by the year 2000. Any failure to complete the Year
2000 assessment, testing, remediation efforts and development of necessary
contingency plans prior to the year 2000 could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
     During the third quarter of fiscal 1998, the Company initiated formal
communications with its key suppliers of raw materials and services. Although a
number of respondents indicated that their products are or will be Year 2000
compliant prior to the year 2000 and that they expect their operations and
services will continue uninterrupted, there can be no assurance that the
Company's key suppliers have, or will have information technology systems,
non-information technology systems and products that are Year 2000 compliant.
Similarly, there can be no assurance that the Company's customers have or will
have information technology systems, non-information technology systems and
products that are Year 2000 compliant. Any Year 2000 compliance problem facing
the Company, its customers or suppliers could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     The Company's business, financial condition and results of operations could
be impacted by a number of factors including without limitation the following
factors.
 
  Significant Customer Concentration
 
     A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. For fiscal 1998, fiscal 1997 and fiscal
1996, the Company's ten largest customers accounted for 87%, 86% and 71% of net
sales, respectively. For fiscal 1998, the Company's largest customer was Compaq,
which accounted for 62% of net sales. In fiscal 1997, the Company's three
largest customers were Compaq, Cisco and Hewlett-Packard, which accounted for
53%, 12% and 11% of net sales, respectively. In fiscal 1996, the Company's three
largest customers were Cisco, Hewlett-Packard and IBM, which accounted for 19%,
15% and 12% of net sales, respectively. During these periods, no other customers
accounted for more than 10% of
 
                                       21
<PAGE>   22
 
net sales. The Company expects that sales to relatively few customers will
continue to account for a significant percentage of its net sales in the
foreseeable future. However, there can be no assurance that any of these
customers or any of the Company's other customers will continue to utilize the
Company's products at current levels, if at all. The Company has experienced
significant changes in the composition of its major customer base and expects
that this variability will continue in the future. For example, sales to Compaq,
which represented less than 10% of net sales in fiscal 1996, represented 62% and
53% of the Company's net sales in fiscal 1998 and fiscal 1997, respectively. The
loss of any major customer or any reduction in orders by any such customer would
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
     The Company has no firm long-term volume commitments from any of its major
customers and generally enters into individual purchase orders with its
customers, in certain cases under master agreements governing the terms and
conditions of the relationship. The Company has experienced cancellations of
orders and fluctuations in order levels from period to period and expects it
will continue to experience such cancellations and fluctuations in the future.
Customer purchase orders may be canceled and order volume levels can be changed,
canceled or delayed with limited or no penalties. The replacement of canceled,
delayed or reduced purchase orders with new business cannot be assured.
Moreover, the Company's business, financial condition and results of operations
will depend in significant part on its ability to obtain orders from new
customers, as well as on the financial condition and success of its customers.
Therefore, any adverse factors affecting any of the Company's customers or their
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  Product Concentration; Dependence on Memory Market
 
     A substantial majority of the Company's net sales is derived from memory
products. The market for memory products is characterized by frequent
transitions in which products rapidly incorporate new features and performance
standards. A failure to develop products with required feature sets or
performance standards or a delay as short as a few months in bringing a new
product to market could significantly reduce the Company's net sales for a
substantial period, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     The market for semiconductor memory devices has been cyclical. The industry
has experienced significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production overcapacity. During fiscal 1998, there were significant declines in
DRAM semiconductor prices and declines in SRAM and Flash semiconductor prices.
Because a substantial portion of the Company's net sales are attributable to the
resale of semiconductor memory devices, a continued decline in the prices of
these components would have a material adverse effect on the Company's net sales
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
 Dependence on Semiconductor, Computer, Telecommunications and Networking
 Industries
 
     The Company may experience substantial period-to-period fluctuations in
future operating results due to factors affecting the semiconductor, computer,
telecommunications and networking industries. From time to time, each of these
industries has experienced downturns, often in connection with, or in
anticipation of, declines in general economic conditions. A decline or
significant shortfall in growth in any one of these industries could have a
material adverse impact on the demand for the Company's products and therefore a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, changes in end user demand for the products
sold by any individual OEM customer can have a rapid and exaggerated effect on
demand for the Company's products from that customer in any given period,
particularly in the event that the OEM customer has accumulated excess
inventories of products purchased from the Company. There can be no assurance
that the Company's net sales and results of operations will not be materially
and adversely affected in the future due to changes in demand from individual
customers or cyclical changes in the semiconductor, computer,
telecommunications, networking or other industries utilizing the Company's
products.
 
                                       22
<PAGE>   23
 
  Intense Competition
 
     The memory module, communication card and embedded computer subsystem
industries are intensely competitive. Each of these markets includes a large
number of competitive companies, several of which have achieved a substantial
market share. Certain of the Company's competitors in each of these markets have
substantially greater financial, marketing, technical, distribution and other
resources, greater name recognition, lower cost structures and larger customer
bases than the Company. In the memory module market, the Company competes
against semiconductor manufacturers that maintain captive memory module
production capabilities, including Samsung. The Company also competes with
independent memory module manufacturers, including Celestica Inc., MCMS, Inc.,
PNY Electronics, Inc. and Simple Technology Incorporated. In the computer
systems reseller market for memory modules, the Company primarily competes with
companies such as Kingston Technology, Inc., Viking Technology, Inc. and Vision
Tek, Inc. In the communication card market, the Company competes with GVC, TDK
and U.S. Robotics, Inc. (a subsidiary of 3Com Corporation), among others. In the
embedded computer subsystem market, the Company competes with Force Computers
Inc. (a subsidiary of Solectron Corporation), Motorola and Radisys Corporation,
among others. The Company faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers have the ability to manufacture competitive products at lower costs
than the Company as a result of their higher levels of integration and therefore
have the ability to sell competitive products at lower prices than the Company's
products. The Company also faces competition from new and emerging companies
that have recently entered or may in the future enter the markets in which the
Company participates.
 
     The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past and may continue to
lead to intensified price competition, resulting in lower prices and gross
margin, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
 
  Fluctuations in Operating Results
 
     The Company's results of operations and gross margin have fluctuated
significantly from period to period in the past and may in the future continue
to fluctuate significantly from period to period. The primary factors that have
affected and may in the future affect the Company's results of operations
include the partial or complete loss of a principal customer or the reduction in
orders from a customer due to, among other things, excess product inventory
accumulation by such customer, adverse changes in the mix of products sold by
the Company, and the inability to procure required components. Other factors
that have affected and may in the future affect the Company's results of
operations include fluctuating market demand for and declines in the selling
prices of the Company's products, decreases or increases in the costs of the
components of the Company's products, market acceptance of new products and
enhanced versions of the Company's products, the Company's competitors selling
products that compete with the Company's products at lower prices or on better
terms than the Company's products, delays in the introduction of new products
and enhancements to existing products, manufacturing inefficiencies associated
with the start up of new product introductions, and the Company's semiconductor
customers manufacturing memory modules, internally or with other third parties,
outside of the United States due to concerns about United States antidumping
investigations and laws.
 
                                       23
<PAGE>   24
 
     The Company's operating results may also be affected by the timing of new
product announcements and releases by the Company or its competitors, the timing
of significant orders, the ability to produce products in volume, delays,
cancellations or reschedulings of orders due to customer financial difficulties
or other events, inventory obsolescence, including the reduction in value of the
Company's inventories due to price declines, unexpected product returns, the
timing of expenditures in anticipation of increased sales, cyclicality in the
Company's targeted markets, and expenses associated with acquisitions. In
particular, declines in DRAM, SRAM and Flash semiconductor prices could affect
the valuation of the Company's inventory which could result in adverse changes
in the Company's business, financial condition and results of operations. The
concentration of the Company's assets in its Fremont, California facility could
make the Company's exposure to business disruptions greater than if the
Company's assets were more geographically dispersed.
 
     The Company's net sales and gross margin have varied and will continue to
vary significantly based on a variety of factors, including the mix of products
sold and the manufacturing services provided, the channels through which the
Company's products are sold, changes in product selling prices and component
costs, the level of manufacturing efficiencies achieved and pricing by
competitors. The selling prices of the Company's products have declined in the
past and the Company expects that prices could continue to decline in the
future. In particular, during fiscal 1998, the selling prices of the Company's
products declined due to significant declines in DRAM semiconductor prices and
declines in SRAM and Flash semiconductor prices. Because a substantial portion
of the Company's net sales are attributable to the resale of semiconductor
memory devices, a continued decline in the prices of these components would have
a material adverse effect on the Company's net sales and could have a material
adverse effect on the Company's business, financial condition and results of
operations. Accordingly, the Company's ability to maintain or increase net sales
will be highly dependent upon its ability to increase unit sales volumes of
existing products and to introduce and sell new products in quantities
sufficient to compensate for the anticipated declines in selling prices.
Declining product selling prices may also materially and adversely affect the
Company's gross margin unless the Company is able to reduce its cost per unit to
offset declines in product selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In addition, the Company's business has in
the past been subject to seasonality, although the Company believes such
seasonality has been masked by its growth. The Company expects that its business
will experience more significant seasonality to the extent it continues to sell
a material portion of its products in Europe and to the extent its exposure to
the personal computer market remains significant.
 
     Sales of the Company's individual products and product lines toward the end
of a product's life cycle are typically characterized by steep declines in
sales, pricing and gross margin, the precise timing of which may be difficult to
predict. The Company has experienced and could continue to experience unexpected
reductions in sales of products as customers anticipate new product purchases.
In addition, to the extent that the Company manufactures products in
anticipation of future demand that does not materialize, or in the event a
customer cancels outstanding orders during a period of either declining product
selling prices or decreasing demand, the Company could experience an
unanticipated decrease in sales of products. These factors could give rise to
charges for obsolete or excess inventory, returns of products by distributors,
or substantial price protection charges or discounts. In the past, the Company
has had to write-down and write-off excess or obsolete inventory. To the extent
that the Company is unsuccessful in managing product transitions, its business,
financial condition and results of operations could be materially and adversely
affected.
 
     The need for continued significant expenditures for capital equipment
purchases, research and development and ongoing customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in any particular period if the Company's expectations for
net sales for that period are not met. The Company has significantly increased
its expense levels to support its recent growth, and there can be no assurance
that the Company will maintain its current level of net sales or rate of growth
for any period in the future. Accordingly, there can be no assurance that the
Company will be able to continue to be profitable. The Company believes that
period-to-period comparisons of the Company's financial results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to the foregoing factors, it is likely that in some future
period the Company's operating results will be below
 
                                       24
<PAGE>   25
 
the expectations of public market analysts or investors. In such event, the
market price of the Company's securities would be materially and adversely
affected.
 
  Dependence on Sole or Limited Sources of Supply
 
     The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products. In
particular, the Company is dependent in significant part upon certain limited or
sole source suppliers for critical components in the Company's memory module,
communication card and embedded computer products. The Company also depends on
sole source third party manufacturers to produce certain of the Company's
embedded computer products. The electronics industry has experienced in the
past, and may experience in the future, shortages in semiconductor devices,
including DRAM, SRAM and Flash memory. The Company has experienced and may
continue to experience delays in component deliveries and quality problems with
respect to certain component deliveries which have caused and could in the
future cause delays in product shipments and have required and could in the
future require the redesign of certain products. The Company generally has no
written agreements with its suppliers. There can be no assurance that the
Company will receive adequate component supplies on a timely basis in the
future. The inability to continue to obtain sufficient supplies of components as
required, or to develop alternative sources if required, could cause delays,
disruptions or reductions in product shipments or require product redesigns
which could damage relationships with current or prospective customers, could
increase costs and/or prices and could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
  Management of Growth; Expansion of Operations
 
     The Company has significantly expanded its operations over the last several
years. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The Company's ability to manage the recent and any possible
future growth will require an expansion of its manufacturing capacity,
accounting and other internal management systems and the implementation of a
variety of procedures and controls. There can be no assurance that significant
problems in these areas will not occur. Any failure to expand these systems and
implement such procedures and controls in an efficient manner and at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
     The Company has licensed a new management information system that is Year
2000 compliant and intends to replace its existing management information system
with the new system as early as the second quarter of fiscal 1999. The
implementation of the new system will impact almost all phases of the Company's
operations (e.g., planning, manufacturing, finance and accounting).
Implementation of the new system and transition from the existing system to the
new system will require substantial financial resources, time and personnel.
There can be no assurance that the Company will not experience problems, delays
or unanticipated additional costs in implementing the new management information
system or in the use of its existing system that could have a material adverse
effect on the Company's business, financial condition and results of operations,
particularly in the period in which the new system is brought online. The new
system will be centrally operated from one location for all of the Company's
facilities worldwide. Each of the Company's facilities will remotely access the
new system via a wide area network. There can be no assurance that the Company
will not experience interruption of use of the new system due to
telecommunications problems or otherwise that could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     In connection with the Company's growth over the last several years, the
Company's operating expenses have increased significantly, and the Company
anticipates that operating expenses will continue to increase in absolute
dollars in the future. In particular, in order to continue to provide quality
products and customer service and to meet any anticipated demand of its
customers, the Company will be required to continue to increase staffing and
other expenses, including expenditures on capital equipment, sales and
marketing. Should the Company increase its expenditures in anticipation of a
future level of sales that does not materialize, the
 
                                       25
<PAGE>   26
 
Company's business, financial condition and results of operations would be
materially and adversely affected. Certain customers have required and may
continue to require rapid increases in production and accelerated delivery
schedules which have placed and may continue to place a significant burden on
the Company's resources. In order to achieve anticipated sales levels and
profitability, the Company will continue to be required to manage its assets and
operations efficiently. In addition, should the Company continue to expand
geographically, it may experience certain inefficiencies from the management of
geographically dispersed facilities.
 
     In fiscal 1998, the Company opened a new manufacturing facility in Penang,
Malaysia, which has resulted and will continue to result in higher operating
expenses. There can be no assurance that enough future sales will exist to
support the operating expenses of the new facility or that the production lines
of the new facility will be efficient or that they will result in an increase in
output. Any delay or difficulties arising from the start-up of the new facility
could materially and adversely affect the Company's business, financial
condition and results of operations.
 
  Year 2000 Readiness Disclosure; Information Technology Transition
 
     Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning with 21st
century dates, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such Year 2000 requirements. Significant uncertainty exists concerning the
potential effects associated with such compliance. The Company believes its
existing management information system is not Year 2000 compliant. The Company
has licensed a new management information system that is Year 2000 compliant and
intends to replace its existing management information system with the new
system as early as the second quarter of fiscal 1999. The implementation of the
new system will impact almost all phases of the Company's operations (e.g.,
planning, manufacturing, finance and accounting). Implementation of the new
system and transition from the existing system to the new system will require
substantial financial resources, time and personnel. There can be no assurance
that the new system will be implemented in time to avoid any Year 2000
compliance problems, or that the Company will not experience problems, delays or
unanticipated additional costs in implementing the new management information
system or in the use of its existing system that could have a material adverse
effect on the Company's business, financial condition and results of operations,
particularly in the period in which the new system is brought online. The new
system will be centrally operated from one location for all of the Company's
facilities worldwide. Each of the Company's facilities will remotely access the
new system via a wide area network. There can be no assurance that the Company
will not experience interruption of use of the new system due to
telecommunications problems or otherwise that could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     During the second quarter of fiscal 1998, the Company began a Year 2000
assessment of its management information system, other information technology
systems, non-information technology systems, products and key suppliers. Items
identified and under review include manufacturing and test equipment,
telecommunications systems and equipment and computer systems and equipment. In
addition, the Company is assessing the Year 2000 compliance of its products. The
Company intends to have its Year 2000 assessment, testing, remediation efforts
and development of necessary contingency plans complete by the year 2000, the
total cost of which has not yet been determined. To date, however, costs
incurred to address Year 2000 compliance issues have not been material. Costs
related to Year 2000 compliance issues continue to be funded through operating
cash flows. There can be no assurance that the Company will be able to complete
its Year 2000 assessment, testing, remediation efforts and development of
necessary contingency plans by the year 2000. Any failure to complete the Year
2000 assessment, testing, remediation efforts and development of necessary
contingency plans prior to the year 2000 could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
     During the third quarter of fiscal 1998, the Company initiated formal
communications with its key suppliers of raw materials and services. Although a
number of respondents indicated that their products are or will be Year 2000
compliant prior to the year 2000 and that they expect their operations and
services will
 
                                       26
<PAGE>   27
 
continue uninterrupted, there can be no assurance that the Company's key
suppliers have, or will have information technology systems, non-information
technology systems and products that are Year 2000 compliant. Similarly, there
can be no assurance that the Company's customers have or will have information
technology systems, non-information technology systems and products that are
Year 2000 compliant. Any Year 2000 compliance problem facing the Company, its
customers or suppliers could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
  Rapid Technological Change
 
     The semiconductor, computer, telecommunications and networking industries
are subject to rapid technological change, short product life cycles, frequent
new product introductions and enhancements, changes in end user requirements and
evolving industry standards. The Company's ability to be competitive in these
markets will depend in significant part upon its ability to invest significant
amounts of resources for research and development efforts, to successfully
develop, introduce and sell new products and enhancements on a timely and
cost-effective basis and to respond to changing customer requirements that meet
evolving industry standards. For example, the semiconductor memory market is
expected to transition from SDRAM to Direct RDRAM. The Company is currently
focusing its research and development resources on the development of Rambus
DRAM, DDR, SDRAM, Flash and SRAM products, 56 kbps asynchronous modem products
and various embedded computer products. The success of the Company in developing
new and enhanced products will depend upon a variety of factors, including
integration of various elements of complex technology, timely and efficient
completion of product design, timely and efficient implementation of
manufacturing and assembly processes, availability of production capacity,
achievement of acceptable manufacturing yields and product performance, quality
and reliability. The Company has experienced, and may in the future experience,
delays from time to time in the development and introduction of new products.
Moreover, there can be no assurance that the Company will be successful in
selecting, developing, manufacturing and marketing new products or enhancements.
There can be no assurance that defects or errors will not be found in the
Company's products after commencement of commercial shipments, which could
result in the delay in market acceptance of such products. The inability of the
Company to introduce new products or enhancements that contribute to net sales
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
  Dependence on Key Personnel
 
     The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. None of such persons, including the
executive officers, has an employment agreement with the Company. The Company's
future operating results also depend in significant part upon its ability to
attract, train and retain qualified management, manufacturing and quality
assurance, engineering, marketing, sales and support personnel. The Company is
actively recruiting such personnel. However, competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting, training or retaining such personnel now or in the future. There may
be only a limited number of persons with the requisite skills to serve in these
positions and it may be increasingly difficult for the Company to hire such
persons over time. The loss of any key employee, the failure of any key employee
to perform in his or her current position, the Company's inability to attract,
train and retain skilled employees as needed or the inability of the officers
and key employees of the Company to expand, train and manage the Company's
employee base could materially and adversely affect the Company's business,
financial condition and results of operations.
 
  International Sales
 
     International sales accounted for 30%, 18% and 8% of net sales in fiscal
1998, fiscal 1997 and fiscal 1996, respectively. The Company anticipates that
international sales will continue to be material in future periods. As a result,
a material portion of the Company's sales may be subject to certain risks,
including changes in regulatory requirements, tariffs and other barriers, timing
and availability of export licenses, political and economic instability,
difficulties in accounts receivable collections, natural disasters, difficulties
in staffing and
 
                                       27
<PAGE>   28
 
managing foreign subsidiary and branch operations, difficulties in managing
distributors, difficulties in obtaining governmental approvals for
telecommunications and other products, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and
treaties, potentially adverse tax consequences and uncertainties relative to
regional, political and economic circumstances. In particular, recent
instability in certain Asian economies and financial markets could have an
adverse effect on the Company's business, financial condition and results of
operations in future quarters. In fiscal 1998, the Company's net sales to
customers in Asia accounted for less than one percent of all net sales. In
addition to net sales to customers in Asia, the Company maintains strategic
supply relationships with companies located in Asia. Moreover and as a result of
currency changes and other factors, certain of the Company's competitors may
have the ability to manufacture competitive products in Asia at lower costs than
the Company. There can be no assurance that current economic instability in Asia
will not have a material adverse effect on the Company's net sales, its ability
to compete or its ability to receive raw materials for its products.
 
     The Company is also subject to the risks associated with the imposition of
legislation and regulations relating to the import or export of high technology
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions upon the importation or exportation of the Company's
products will be implemented by the United States or other countries. Because
sales of the Company's products have been denominated to date primarily in
United States dollars, increases in the value of the United States dollar could
increase the price of the Company's products so that they become relatively more
expensive to customers in the local currency of a particular country, leading to
a reduction in sales and profitability in that country. Future international
activity may result in increased foreign currency denominated sales. Gains and
losses on the conversion to United States dollars of accounts receivable,
accounts payable and other monetary assets and liabilities arising from
international operations may contribute to fluctuations in the Company's results
of operations. Some of the Company's customer's purchase orders and agreements
are governed by foreign laws, which may differ significantly from United States
laws. Therefore, the Company may be limited in its ability to enforce its rights
under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
 
  Uncertainty Regarding Protection of Proprietary Rights
 
     In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents, copyrights or other intellectual property
rights of others. The Company is currently being sued by a party who alleges
that certain of the Company's communication card products have infringed and
continue to infringe upon the party's intellectual property rights. Moreover,
the Company has been and may from time to time continue to be notified of claims
that it may be infringing patents, copyrights or other intellectual property
rights owned by other third parties. There can be no assurance that these or
other companies will not in the future pursue claims against the Company with
respect to the alleged infringement of patents, copyrights or other intellectual
property rights. In addition, litigation may be necessary to protect the
Company's intellectual property rights and trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
third party claims of invalidity. The current litigation or any other litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     There can be no assurance that additional infringement, invalidity, right
to use or ownership claims by third parties or claims for indemnification
resulting from infringement claims will not be asserted in the future. The
Company has entered into license agreements in the past regarding certain
alleged infringement claims asserted by third parties. In response to the
current litigation or if any other claims or actions are asserted against the
Company, the Company may again seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. The failure to obtain a
license under a patent or intellectual property right from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of the products utilizing the
intellectual property. In addition, should the Company decide to
 
                                       28
<PAGE>   29
 
litigate the current claim or such other claims, such litigation could be
extremely expensive and time consuming and could materially and adversely affect
the Company's business, financial condition and results of operations,
regardless of the outcome of the litigation.
 
     The Company attempts to protect its intellectual property rights through a
variety of measures including non-disclosure agreements, trademarks, trade
secrets and to a lesser extent, patents. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information, that disputes with respect to the
ownership of its intellectual property rights will not arise, that the Company's
trade secrets or proprietary technology will not otherwise become known or be
independently developed by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights.
 
  Risks Associated with Acquisitions
 
     As part of its business strategy, the Company expects to acquire or make
significant investments in businesses that offer complementary products and
technologies. Any such future acquisitions or investments would expose the
Company to the risks commonly encountered in acquisitions of businesses. Such
risks include, among others, difficulty of assimilating the operations,
information systems and personnel of the acquired businesses, the potential
disruption of the Company's ongoing business, the inability of management to
maximize the financial and strategic position of the Company through the
successful incorporation of acquired employees and customers, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of new
management personnel. There can be no assurance that any potential acquisition
will be consummated or, if consummated, that it will not have a material adverse
effect on the Company's business, financial condition and results of operations.
 
  Volatility of Stock Prices
 
     There has been a history of significant volatility in the market prices of
the common stock of technology companies, including the Common Stock of the
Company, and it is likely that the market price of the Company's Common Stock
will continue to be subject to significant fluctuations. Factors such as the
timing and market acceptance of new product introductions by the Company, demand
for products of the Company's customers, the introduction of new products by the
Company's competitors, variations in quarterly operating results, changes in
securities analysts' recommendations regarding the Company's Common Stock,
developments in the technology industry and general economic conditions may have
a significant impact on the market price of the Company's Common Stock. In
addition, the equity markets in recent years have experienced significant price
and volume fluctuations that have affected the market prices of technology
companies and that have often been unrelated to the operating performance of
such companies.
 
                                       29
<PAGE>   30
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  Interest Rate Risk
 
     The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's investment portfolio. Currently, the Company does not
use derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
principal exposure to any one issuer. As stated in the Company's policy, the
Company seeks to ensure the safety and preservation of its invested principal
funds by limiting default and market risk.
 
     The Company seeks to mitigate default risk by investing in high-credit
quality securities and by positioning its investment portfolio to respond to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. The Company seeks to mitigate market risk by limiting the principal
and investment term of funds held with any one issuer and by investing funds in
marketable securities with active secondary or resale markets.
 
     The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio as of
October 31, 1998 (in thousands):
 
<TABLE>
<CAPTION>
                                           1999      2000     2001   2002   2003   THEREAFTER    TOTAL
                                         --------   -------   ----   ----   ----   ----------   --------
<S>                                      <C>        <C>       <C>    <C>    <C>    <C>          <C>
CASH EQUIVALENTS AND SHORT-TERM
  INVESTMENTS:
  Fixed-rate investments...............  $113,061   $20,885    $--    $--    $--       $--      $133,946
  Average interest rate................      3.93%     4.19%   --     --     --        --           3.97%
</TABLE>
 
  Foreign Currency Exchange Risk
 
     The Company transacts business in various foreign countries. The Company's
primary foreign currency cash flows are in certain European countries.
Currently, the Company does not employ a foreign currency hedge program with
respect to transactions and expenditures originating in these or any other
foreign countries. The Company believes that its foreign currency exchange risk
is immaterial. See Note 2 to the Consolidated Financial Statements.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's financial statements and the report of the independent
auditors appear on pages F-1 through F-24 of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                       30
<PAGE>   31
 
                                    PART III
 
     Certain information required by Part III is omitted from this Annual Report
on Form 10-K because the Registrant will file a definitive proxy statement for
its Annual Meeting of Shareholders currently scheduled for March 16, 1999 (the
"Proxy Statement") with the Securities and Exchange Commission within one
hundred twenty (120) days after the end of its fiscal year pursuant to
Regulation 14A, and certain information included in the Proxy Statement is
incorporated herein by reference.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Election of
Directors" and "Other Information -- Executive Officers."
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Other
Information -- Executive Compensation," "Other Information -- Option Grants in
Last Fiscal Year," and "Other Information -- Aggregate Option Exercises in Last
Fiscal Year and Fiscal Year End Option Values."
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Information
Concerning Solicitation and Voting -- Record Date and Shares Outstanding" and
"Other Information -- Security Ownership of Certain Beneficial Owners and
Management."
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Other
Information -- Compensation Committee Interlocks and Insider Participation" and
"Other Information -- Certain Transactions."
 
                                       31
<PAGE>   32
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) The following documents are filed as part of this report:
 
     1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of
SMART Modular Technologies, Inc. are filed as part of this report:
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................  F-2
Consolidated Balance Sheets as of October 31, 1998 and
  1997......................................................  F-3
Consolidated Statements of Income for the Years Ended
  October 31, 1998, 1997 and 1996...........................  F-4
Consolidated Statements of Shareholders' Equity for the
  Years Ended October 31, 1998, 1997 and 1996...............  F-5
Consolidated Statements of Cash Flows for the Years Ended
  October 31, 1998, 1997 and 1996...........................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
     2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules of SMART Modular Technologies, Inc. for the years ended October 31,
1998, 1997 and 1996 are filed as part of this report and should be read in
conjunction with the Consolidated Financial Statements of SMART Modular
Technologies, Inc.:
 
<TABLE>
<CAPTION>
                          SCHEDULE                            PAGE
                          --------                            ----
<S>                                                           <C>
Report of Independent Public Accountants on Schedule........  F-22
Valuation and Qualifying Accounts...........................  F-23
</TABLE>
 
          Schedules not listed above have been omitted because they are not
     applicable or are not required or the information required to be set forth
     therein is included in the Consolidated Financial Statements or Notes
     thereto.
 
     3. EXHIBITS. The following exhibits are filed as part of this report:
 
<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                               EXHIBITS
 -------                               --------
<C>          <S>
   2.1(1)    Agreements and Plan of Reorganization among the Registrant,
             Apex Data, Inc. and SMART Acquisition Inc. dated April 24,
             1995.
   3.1(7)    Registrant's Amended and Restated Articles of Incorporation.
   3.2(1)    Registrant's Amended Bylaws.
   4.1(1)    Registration Rights Agreement dated July 26, 1995.
   4.2(1)    Registrant's specimen stock certificate.
   4.3(3)    Termination to the Registration Rights Agreement dated July
             26, 1995.
  10.1(1)    1989 Incentive Stock Plan, as amended, and forms of
             agreements attached thereto.
  10.2(1)    1995 Employee Stock Purchase Plan, and forms of agreements
             attached thereto.
  10.3(1)    1995 Director Option Plan, and forms of agreements attached
             thereto.
  10.4(1)    1995 Stock Plan, and forms of agreements attached thereto.
  10.5(1)    Form of Indemnification Agreement between the Registrant and
             its officers, directors and certain significant employees.
  10.6(1)    Standard Triple Net Industrial Lease between the Registrant
             and Pactel Properties dated November 18, 1991.
  10.7(1)    First Amendment to Lease between the Registrant and Pactel
             Properties dated July 19, 1993.
</TABLE>
 
                                       32
<PAGE>   33
 
<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                               EXHIBITS
 -------                               --------
<C>          <S>
  10.8(1)    Second Amendment to Lease between the Registrant and Riggs
             National Bank of Washington, D.C. as Trustee of the
             Multi-Employer Property Trust Northport Business Park, a
             National Banking Association dated May 31, 1994.
  10.9(1)    Third Amendment to Lease between the Registrant and Riggs
             National Bank of Washington, D.C. as Trustee of the
             Multi-Employer Property Trust Northport Business Park, a
             National Banking Association dated November 1994.
  10.10(1)   Standard Triple Net Industrial Lease between the Registrant
             and Riggs National Bank of Washington, D.C., as Trustee of
             the Multi-Employer Property Trust, dated June 18, 1995.
  10.11(1)   Lease Contract between the Registrant and The Puerto Rico
             Industrial Development Company dated April 24, 1995.
  10.12(1)   Note, Loan and Security Agreement between the Registrant and
             Merrill Lynch Business Financial Services Inc. dated May 19,
             1993.
  10.13(1)   Letter Agreement between the Registrant and Merrill Lynch
             Business Financial Services Inc. dated December 28, 1994.
  10.14(1)   Letter Agreement between the Registrant and Merrill Lynch
             Business Financial Services Inc. dated June 27, 1995.
  10.15(1)   Intercreditor Agreement among the Registrant, Merrill Lynch
             Business Financial Services Inc. and Imperial Bank dated
             June 27, 1995.
  10.16(1)   Security and Loan Agreement between the Registrant and
             Imperial Bank dated July 19, 1995.
 *10.17(1)   License and Supply Agreement between the Registrant and
             Krypton Isolation, Inc. dated July 22, 1994.
  10.18(1)   Warrant Purchase Agreement between the Registrant and
             Krypton Isolation, Inc. dated July 27, 1994.
  10.19(1)   Holders' Agreement dated July 27, 1994 by and among Krypton
             Isolation, Inc. and certain individuals and entities
             identified on Exhibit A attached thereto.
  10.20(1)   Common Stock Purchase Agreement dated July 27, 1994 by and
             among Krypton Isolation, Inc. and the individuals identified
             on Exhibit A attached thereto.
  10.21(1)   First Amendment to the Krypton Isolation, Inc. Warrant to
             Purchase 2,000,000 Shares of Series A Preferred Stock
             between the Registrant and Krypton Isolation, Inc. dated
             October 24, 1995.
  10.22(1)   Letter of Intent dated as of October 24, 1995 by and among
             Krypton Isolation, Inc., the Registrant and certain
             individuals identified on the signature pages thereto.
**10.23(2)   License and Supply Agreement between the Registrant and
             Krypton Isolation, Inc. dated January 29, 1996.
  10.24(2)   Warrant Purchase Agreement between the Registrant and
             Krypton Isolation, Inc. dated January 29, 1996.
  10.25(2)   First Amended and Restated Holders' Agreement dated January
             29, 1996 by and among Krypton Isolation, Inc. and certain
             individuals and entities identified on Exhibit A attached
             thereto.
  10.26(2)   Common Stock Agreement dated January 29, 1996 by and among
             Krypton Isolation, Inc. and the entities identified on
             Exhibit A attached thereto.
  10.27(2)   First Amendment to the License and Supply Agreement between
             the Registrant and Krypton Isolation, Inc. dated January 29,
             1996.
  10.28(3)   1989 Incentive Stock Plan, as amended, dated March 25, 1996.
</TABLE>
 
                                       33
<PAGE>   34
 
<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                               EXHIBITS
 -------                               --------
<C>          <S>
  10.29(4)   Fourth Amendment to Lease between the Registrant and Riggs
             Bank N.A. dated September 27, 1996.
  10.30(5)   Revolving Line of Credit Note between the Registrant and
             Wells Fargo Bank, National Association dated May 29, 1997.
  10.31(5)   Credit Agreement between the Registrant and Wells Fargo
             Bank, National Association dated May 29, 1997.
  10.32(5)   Subfeature Note between the Registrant and Wells Fargo Bank,
             National Association dated May 29, 1997.
  10.33(6)   Lease Contract between the Registrant and The Puerto Rico
             Industrial Development Company dated October 9, 1997.
  10.34(6)   Second Amendment to the Krypton Isolation, Inc. Warrant to
             Purchase 2,000,000 Shares of Series A Preferred Stock
             between the Registrant and Krypton Isolation, Inc. dated
             January 21, 1998.
  10.35(7)   Revolving Line of Credit Note between the Registrant and
             Wells Fargo Bank, National Association dated May 1, 1998.
  10.36(7)   Credit Agreement between the Registrant and Wells Fargo
             Bank, National Association dated May 1, 1998.
  10.37(7)   Subfeature Note between the Registrant and Wells Fargo Bank,
             National Association dated May 1, 1998.
  10.38(8)   Sublease Contract between the Registrant and Philips
             Consumer Communications, L.P. dated June 30, 1998.
  10.39      First Amendment to the License and Supply Agreement between
             the Registrant and Krypton Isolation, Inc. dated June 22,
             1998.
  10.40      Second Amendment to the License and Supply Agreement between
             the Registrant and Krypton Isolation, Inc. dated June 22,
             1998.
  16.1(1)    Letter Regarding Change in Certifying Accountant.
  16.2(1)    Letter Regarding Change in Certifying Accountant.
  16.3(1)    Letter Regarding Change in Certifying Accountant.
  16.4(1)    Letter Regarding Change in Certifying Accountant.
  21.1       Subsidiaries of the Registrant.
  23.1       Consent of Independent Public Accountants.
  24.1       Power of Attorney (included on page 36).
  27.1       Financial Data Schedule for the Year Ended October 31, 1998.
</TABLE>
 
---------------
(1) Incorporated by reference to exhibit filed with the Registrant's
    Registration Statement on Form S-1 (No. 33-97748) filed October 4, 1995,
    Amendment No. 1 thereto filed October 24, 1995, Amendment No. 2 thereto
    filed November 6, 1995, Amendment No. 3 thereto filed November 14, 1995 and
    Amendment No. 4 thereto filed November 16, 1995, which Registration
    Statement became effective November 16, 1995.
 
(2) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed March 16, 1996.
 
(3) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed June 14, 1996.
 
(4) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed June 16, 1997.
 
(5) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed August 28, 1997.
 
                                       34
<PAGE>   35
 
(6) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-K filed January 29, 1998.
 
(7) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed June 15, 1998.
 
(8) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed September 11, 1998.
 
 *  Pursuant to Rule 406(b) under the Securities Act of 1933, confidential
    treatment has been granted to certain portions of this exhibit, which
    portions have been deleted and filed separately with the Securities and
    Exchange Commission.
 
 ** Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
    confidential treatment has been granted to certain portions of this exhibit,
    which portions have been deleted and filed separately with the Securities
    and Exchange Commission.
 
     (b) REPORTS ON FORM 8-K.
 
     No reports on Form 8-K were filed during the last quarter of fiscal 1998.
 
     (c) EXHIBITS.
 
     See Item 14(a)(3) above.
 
     (d) FINANCIAL STATEMENT SCHEDULES.
 
     See Item 14(a)(2) above.
 
                                       35
<PAGE>   36
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
 
                                          SMART MODULAR TECHNOLOGIES, INC.
 
                                          By:         /s/ AJAY SHAH
 
                                            ------------------------------------
                                                         Ajay Shah
                                             President, Chief Executive Officer
                                                             and
                                             Chairman of the Board of Directors
 
Dated: January 27, 1999
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ajay Shah and David B. Mullin and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any or all amendments to this report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission granting unto
said attorneys-in-fact and agents the full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as full to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his substitute, may lawfully do or cause to be done by
virtue hereof. Witness our hands on the date set forth below.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
              SIGNATURE                                TITLE                        DATE
              ---------                                -----                        ----
<S>                                    <C>                                    <C>
 
            /s/ AJAY SHAH               President, Chief Executive Officer    January 27, 1999
-------------------------------------                   and
              Ajay Shah                 Chairman of the Board of Directors
                                           (Principal Executive Officer)
 
         /s/ DAVID B. MULLIN                Vice President, Finance and       January 27, 1999
-------------------------------------         Chief Financial Officer
           David B. Mullin                   (Principal Financial and
                                                Accounting Officer)
 
          /s/ MUKESH PATEL                           Director                 January 27, 1999
-------------------------------------
            Mukesh Patel
 
          /s/ ERIK ANDERSON                          Director                 January 27, 1999
-------------------------------------
            Erik Anderson
 
          /s/ TOR R. BRAHAM                          Director                 January 27, 1999
-------------------------------------
            Tor R. Braham
</TABLE>
 
                                       36
<PAGE>   37
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................   F-2
CONSOLIDATED BALANCE SHEETS.................................   F-3
CONSOLIDATED STATEMENTS OF INCOME...........................   F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY......................................................   F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................   F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................   F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE.................................................  F-22
SCHEDULE II -- Valuation and Qualifying Accounts............  F-23
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA...................  F-24
</TABLE>
 
                                       F-1
<PAGE>   38
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholders of
SMART Modular Technologies, Inc.:
 
     We have audited the accompanying consolidated balance sheets of SMART
Modular Technologies, Inc. (a California corporation) and subsidiaries as of
October 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SMART
Modular Technologies, Inc. and subsidiaries as of October 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended October 31, 1998 in conformity with generally accepted
accounting principles.
 
                                                /s/ ARTHUR ANDERSEN LLP
 
                                          --------------------------------------
                                                   ARTHUR ANDERSEN LLP
 
San Jose, California
November 18, 1998
 
                                       F-2
<PAGE>   39
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                                  OCTOBER 31,
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
Current Assets:
Cash and cash equivalents...................................  $ 75,478   $111,331
Short-term investments......................................    99,822     38,672
Accounts receivable, net of allowance for doubtful accounts
  of $571 and $669, respectively............................    89,203     95,366
Related party notes receivable..............................        --          8
Inventories.................................................    40,138     39,336
Deferred income taxes.......................................     5,080      5,325
Prepaid expenses and other..................................    10,262     12,984
                                                              --------   --------
          Total current assets..............................   319,983    303,022
Property and equipment, net.................................    47,920     24,604
Other.......................................................     1,089        359
                                                              --------   --------
          Total assets......................................  $368,992   $327,985
                                                              ========   ========
                 LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................  $ 64,335   $ 73,833
Accrued bonuses.............................................     4,545      6,761
Other accrued expenses......................................     8,255      9,001
Income taxes payable........................................    11,557      7,312
                                                              --------   --------
          Total current liabilities.........................    88,692     96,907
Long-term Liabilities:
Capital lease obligations, net of current portion...........        --        234
Deferred income taxes and other.............................       679        524
                                                              --------   --------
          Total liabilities.................................    89,371     97,665
                                                              --------   --------
Shareholders' Equity:
Common stock, no par value  --
Authorized -- 200,000,000 shares
Outstanding -- 44,714,589 and 42,334,260 shares,
  respectively..............................................   133,013    135,302
Shareholder notes receivable related to common stock
  issuances.................................................       (72)      (179)
Retained earnings...........................................   146,680     95,197
                                                              --------   --------
          Total shareholders' equity........................   279,621    230,320
                                                              --------   --------
          Total liabilities and shareholders' equity........  $368,992   $327,985
                                                              ========   ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-3
<PAGE>   40
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
                        FOR THE YEARS ENDED OCTOBER 31,
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $714,651    $694,675    $401,774
Cost of sales..............................................   595,279     582,515     329,644
                                                             --------    --------    --------
Gross profit...............................................   119,372     112,160      72,130
                                                             --------    --------    --------
Operating expenses:
  Research and development.................................     8,945       8,496       5,933
  Sales, general and administrative........................    41,781      37,163      28,544
                                                             --------    --------    --------
          Total operating expenses.........................    50,726      45,659      34,477
                                                             --------    --------    --------
Income from operations.....................................    68,646      66,501      37,653
Other income (expense), net:
  Interest expense.........................................       (73)       (225)       (309)
  Interest income..........................................     7,548       2,615       2,252
  Other, net...............................................      (410)        (26)        295
                                                             --------    --------    --------
          Total other income (expense).....................     7,065       2,364       2,238
Income before provision for income taxes...................    75,711      68,865      39,891
Provision for income taxes.................................    24,228      23,418      14,760
                                                             --------    --------    --------
Net income.................................................  $ 51,483    $ 45,447    $ 25,131
                                                             ========    ========    ========
Diluted net income per share...............................  $   1.10    $   1.04    $   0.60
                                                             ========    ========    ========
Weighted average common and common equivalent shares
  outstanding..............................................    46,902      43,892      41,748
                                                             ========    ========    ========
Basic net income per share.................................  $   1.19    $   1.17    $   0.69
                                                             ========    ========    ========
Weighted average common shares outstanding.................    43,445      38,895      36,459
                                                             ========    ========    ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   41
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                              COMMON STOCK        SHAREHOLDER                   TOTAL
                                              ------------           NOTES      RETAINED    SHAREHOLDERS'
                                            SHARES      AMOUNT    RECEIVABLE    EARNINGS       EQUITY
                                          ----------   --------   -----------   ---------   -------------
<S>                                       <C>          <C>        <C>           <C>         <C>
BALANCE, October 31, 1995...............  29,306,010   $  2,222      $(501)     $ 24,513    $      26,234
  Issuance of common stock pursuant to
     acquisition of pooled company......     736,000        205         (5)          106              306
  Issuance of common stock pursuant to
     initial public offering............   6,000,000     32,640         --            --           32,640
  Issuance of common stock pursuant to
     exercise of stock options..........   1,627,276        772         --            --              772
  Issuance of common stock..............      47,040        240         --            --              240
  Disqualifying dispositions of stock
     options............................          --      1,242         --            --            1,242
  Repayment of shareholder note
     receivable.........................          --         --         54            --               54
  Net income............................          --         --         --        25,131           25,131
                                          ----------   --------      -----      --------    -------------
BALANCE, October 31, 1996...............  37,716,326     37,321       (452)       49,750           86,619
  Issuance of common stock pursuant to
     secondary public offering..........   2,821,000     86,391         --            --           86,391
  Issuance of common stock pursuant to
     exercise of stock options..........   1,729,342      3,909         --            --            3,909
  Issuance of common stock..............      67,592        574         --            --              574
  Disqualifying dispositions of stock
     options............................          --      7,107         --            --            7,107
  Repayment of shareholder note
     receivable.........................          --         --        273            --              273
  Net income............................          --         --         --        45,447           45,447
                                          ----------   --------      -----      --------    -------------
BALANCE, October 31, 1997...............  42,334,260    135,302       (179)       95,197          230,320
  Issuance of common stock pursuant to
     exercise of stock options..........   2,922,046      3,909         --            --            3,909
  Issuance of common stock..............      78,283        856         --            --              856
  Disqualifying dispositions of stock
     options............................          --      2,124         --            --            2,124
  Repayment of shareholder note
     receivable.........................          --         --        107            --              107
  Repurchases of common stock...........    (620,000)    (9,178)        --            --           (9,178)
  Net income............................          --         --         --        51,483           51,483
                                          ----------   --------      -----      --------    -------------
BALANCE, October 31, 1998...............  44,714,589   $133,013      $ (72)     $146,680    $     279,621
                                          ==========   ========      =====      ========    =============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   42
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED OCTOBER 31,
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998       1997      1996
                                                              -------   --------   -------
<S>                                                           <C>       <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $51,483   $ 45,447   $25,131
  Adjustments to reconcile net income to net cash provided
     by (used in) operating activities --
     Depreciation and amortization..........................    9,655      5,058     2,182
     Provision for doubtful accounts........................      571        207       349
     Reserve for inventory obsolescence.....................     (522)     1,068     2,135
     Loss on disposition of equipment.......................      155         24        31
     Change in assets and liabilities --
       Decrease (increase) in accounts and notes
          receivable........................................    5,600    (42,739)  (25,439)
       Increase in inventories..............................     (280)    (1,403)     (137)
       Decrease (increase) in deferred income taxes and
          other, net........................................      400     (1,784)     (776)
       Decrease (increase) in prepaid expenses and other....    2,722    (11,919)       77
       (Increase) decrease in other assets..................     (730)       574      (712)
       (Decrease) increase in accounts payable..............   (9,498)     7,627    15,518
       Increase in income taxes payable.....................    6,369      8,229     5,656
       (Decrease) increase in accrued expenses and
          bonuses...........................................   (2,107)     5,464     3,015
                                                              -------   --------   -------
          Net cash provided by operating activities.........   63,818     15,853    27,030
                                                              -------   --------   -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of investments available-for-sale...............  (94,417)   (36,712)   (8,494)
  Sales of investments available-for-sale...................   33,267      6,534        --
  Purchases of property and equipment.......................  (33,331)   (17,103)   (7,652)
  Proceeds from sales of equipment..........................      205        851        --
                                                              -------   --------   -------
          Net cash used in investing activities.............  (94,276)   (46,430)  (16,146)
                                                              -------   --------   -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from line of credit..............................    5,000      8,600    16,521
  Payments on line of credit................................   (5,000)    (8,600)  (20,087)
  Payments of capital lease obligations and long-term
     debt...................................................     (982)    (1,534)   (1,461)
  Repurchases of common stock...............................   (9,178)        --        --
  Proceeds from sale of common stock........................    4,765     91,257    33,912
  Expenses related to issuances of common stock.............       --       (383)     (260)
                                                              -------   --------   -------
          Net cash (used in) provided by financing
            activities......................................   (5,395)    89,340    28,625
                                                              -------   --------   -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........  (35,853)    58,763    39,509
CASH AND CASH EQUIVALENTS, beginning of year................  111,331     52,568    13,059
                                                              -------   --------   -------
CASH AND CASH EQUIVALENTS, end of year......................  $75,478   $111,331   $52,568
                                                              =======   ========   =======
SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid for income taxes................................  $17,859   $ 15,189   $ 9,895
                                                              =======   ========   =======
  Cash paid for interest....................................  $    73   $    225   $   309
                                                              =======   ========   =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Property and equipment acquired under capital leases......  $    --   $     --   $ 1,322
                                                              =======   ========   =======
  Tax benefits from employee stock transactions.............  $ 2,124   $  7,107   $ 1,242
                                                              =======   ========   =======
  Issuance of common stock pursuant to acquisition of pooled
     company................................................  $    --   $     --   $   306
                                                              =======   ========   =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   43
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1. ORGANIZATION AND OPERATIONS OF THE COMPANY
 
     SMART Modular Technologies, Inc. (the "Company") was incorporated in
California in August 1988. The Company designs, manufactures and markets memory
modules, Flash memory cards, high performance embedded computer modules and
communication card products primarily to the computer, networking and
telecommunications industries. The Company is headquartered in Fremont,
California and has manufacturing operations in Fremont, Scotland, Puerto Rico
and Malaysia.
 
     On September 11, 1997, the Company completed a secondary public offering of
2,821,000 shares of common stock (including underwriters' over-allotment) at
$32 3/8 per share (as adjusted for the Company's stock split in December 1997--
See Note 2). Total proceeds to the Company (net of underwriting discounts and
commissions) were approximately $86.4 million.
 
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all intercompany accounts and
transactions.
 
  Stock Split
 
     In December 1997, the Company consummated a stock split effected as a stock
dividend whereby each issued and outstanding share of the Company's common stock
was converted into two shares of common stock. All share and per share amounts
in the accompanying consolidated financial statements have been retroactively
adjusted to reflect the stock split.
 
  Cash Equivalents
 
     The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
 
  Investments in Debt and Equity Securities
 
     The Company accounts for its investments in debt and equity securities
pursuant to the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS No. 115, debt securities are classified as
held-to-maturity and recorded at amortized cost when the Company has the
positive intent and ability to hold the securities to maturity. Marketable debt
securities not classified as held-to-maturity are classified as available-
for-sale. Available-for-sale securities are carried at fair value, with
unrealized holding gains and losses reported as a separate component of
shareholders' equity, if significant.
 
                                       F-7
<PAGE>   44
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     All of the Company's investments are classified as available-for-sale
securities as summarized below (in thousands):
 
<TABLE>
<CAPTION>
                                                  AMORTIZED    AGGREGATE     UNREALIZED    UNREALIZED
                                                    COST       FAIR VALUE      GAINS         LOSSES
                                                  ---------    ----------    ----------    ----------
<S>                                               <C>          <C>           <C>           <C>
AS OF OCTOBER 31, 1998:
  AVAILABLE-FOR-SALE SECURITIES:
  Debt securities issued by the states of the
     United States and political subdivisions of
     the states.................................   $71,120      $ 71,445        $325          $ --
  Securities issued by private investment
     companies and backed by debts issued by the
     United States and states of United States
     government agencies........................    28,702        28,711          10            (1)
                                                   -------      --------        ----          ----
                                                   $99,822      $100,156        $335          $ (1)
                                                   =======      ========        ====          ====
AS OF OCTOBER 31, 1997:
  AVAILABLE-FOR-SALE SECURITIES:
  Debt securities issued by the states of the
     United States and political subdivisions of
     the states.................................   $34,772      $ 34,764        $  5          $(13)
  Securities issued by private investment
     companies and backed by debts issued by the
     United States and states of United States
     government agencies........................     3,900         3,900          --            --
                                                   -------      --------        ----          ----
                                                   $38,672      $ 38,664        $  5          $(13)
                                                   =======      ========        ====          ====
</TABLE>
 
  Property and Equipment
 
     Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of five years. Assets
acquired under capital leases are recorded at the present value of the related
lease obligations and depreciated on a straight-line basis over five years.
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and any resulting gain or loss on disposition is recognized in income.
 
     Property, plant and equipment consists of the following as of October 31,
(in thousands):
 
<TABLE>
<CAPTION>
                                                                1998      1997
                                                              --------   -------
<S>                                                           <C>        <C>
Computer and office equipment...............................  $  9,371   $ 4,019
Production machinery and equipment..........................    54,987    28,960
Vehicles....................................................        72        60
Construction in progress....................................       931       306
                                                              --------   -------
          Total property and equipment......................    65,361    33,345
Less: accumulated depreciation and amortization.............   (17,441)   (8,741)
                                                              --------   -------
Property and equipment, net.................................  $ 47,920   $24,604
                                                              ========   =======
</TABLE>
 
     Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $4,461,000 and $4,732,000 as
of October 31, 1998 and 1997, respectively. Accumulated amortization on the
leased assets was approximately $3,076,000 and $2,178,000 as of October 31, 1998
and 1997, respectively.
 
                                       F-8
<PAGE>   45
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  Foreign Currency Translation
 
     The functional currency of the Company's subsidiaries is the United States
dollar. Accordingly, all translation gains and losses resulting from
transactions denominated in currencies other than United States dollars are
included in net income. To date the resulting gains and losses have not been
material.
 
  Revenue Recognition
 
     Revenue is recognized upon shipment to the customer. The Company provides
for estimated future returns for inventory rebalancing, stock rotation,
established price protection arrangements and the estimated costs of warranty at
the time of sale.
 
  Net Income Per Share
 
     The Financial Accounting Standards Board issued SFAS No. 128, "Earnings per
Share," in March 1997 and is effective for years ending after December 15, 1997.
The Company retroactively adopted SFAS No. 128 in fiscal 1998. This statement
requires companies to compute net income per share under two different methods,
basic and diluted, and present per share data for all periods in which a
statement of operations is presented. Basic net income per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share is computed using
the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents consist of
preferred stock (using the "if converted" method), stock options and warrants
(using the treasury stock method). Preferred stock, stock options and warrants
are excluded from the computation of diluted net income per share if their
effect is anti-dilutive.
 
     The following table reconciles the amounts used in the computation of basic
and diluted net income per share as of October 31, (in thousands, except per
share data):
 
<TABLE>
<CAPTION>
                                                               1998      1997      1996
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Net income available to common shareholders.................  $51,483   $45,447   $25,131
                                                              =======   =======   =======
Diluted net income per share:
Weighted average common shares outstanding..................   43,445    38,895    36,459
Weighted average common stock options outstanding...........    3,457     4,997     5,289
                                                              -------   -------   -------
          Total weighted average common and common
            equivalent shares outstanding...................   46,902    43,892    41,748
                                                              =======   =======   =======
Diluted net income per share................................  $  1.10   $  1.04   $  0.60
                                                              =======   =======   =======
Basic net income per share:
Weighted average common shares outstanding..................   43,445    38,895    36,459
                                                              -------   -------   -------
          Total weighted average common shares
            outstanding.....................................   43,445    38,895    36,459
                                                              =======   =======   =======
Basic net income per share..................................  $  1.19   $  1.17   $  0.69
                                                              =======   =======   =======
</TABLE>
 
  Risks and Uncertainties
 
     Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. As of
October 31, 1998, approximately 90% of accounts receivable were concentrated
with seven customers. As of October 31, 1997, approximately 83% of accounts
receivable were concentrated with four customers. The Company generally does not
require collateral on accounts receivable as the majority of the Company's
customers are large, well established companies.
 
                                       F-9
<PAGE>   46
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products.
Although there are a limited number of manufacturers of such key components,
management believes that other suppliers could provide similar components on
comparable terms. A change in suppliers, however, could cause a delay in
manufacturing and a possible loss of net sales, which would affect operating
results adversely.
 
     A substantial majority of the Company's net sales are derived from memory
products. The market for memory products is characterized by frequent
transitions in which products rapidly incorporate new features and performance
standards. A failure to develop products with required feature sets or
performance standards or a delay in bringing a new product to market could
adversely affect the Company's operating results.
 
  Inventories
 
     Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing costs. Inventories consist of the
following as of October 31, (in thousands):
 
<TABLE>
<CAPTION>
                                                      1998      1997
                                                     -------   -------
<S>                                                  <C>       <C>
Raw materials......................................  $24,210   $22,692
Work-in-process....................................    7,379     5,266
Finished goods.....................................    8,549    11,378
                                                     -------   -------
          Total....................................  $40,138   $39,336
                                                     =======   =======
</TABLE>
 
  Effect of Recent Accounting Pronouncements
 
     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its individual components. The statement
requires the disclosure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners ("comprehensive income"). The Company is required to
adopt the provisions of SFAS No. 130 in the first quarter of fiscal 1999. At
that time, reclassification of financial statements for all periods presented
will be required. The Company does not expect the adoption of SFAS No. 130 to
have a material effect on the Company's consolidated financial statements.
 
     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
of operations and major customers. The Company is required to adopt the
provisions of SFAS No. 131 beginning with its annual report on Form 10-K for the
fiscal year ended October 31, 1999 and for all subsequent interim periods. The
Company does not expect the adoption of SFAS No. 131 to have a material effect
on the Company's consolidated financial statements.
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of SFAS
No. 133 to have a material effect on the Company's consolidated financial
statements.
 
                                      F-10
<PAGE>   47
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 3. LINE OF CREDIT
 
     In June 1997, the Company entered into an unsecured revolving bank line of
credit agreement which expires in May 1999. Borrowings under this agreement are
limited to $20.0 million and bear interest at either the bank's prime rate (8.0%
at October 31, 1998) or a spread over LIBOR (5.2% at October 31, 1998), at the
Company's option. The Company is required to maintain specified levels of
tangible net worth and comply with certain other covenants. As of October 31,
1998 and 1997, no borrowings were outstanding under this agreement.
 
 4. CAPITAL LEASE OBLIGATIONS
 
     Minimum future lease payments under capital leases as of October 31, 1998
are summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
               YEARS ENDING OCTOBER 31,
               ------------------------
<S>                                                     <C>
1999..................................................  $207
                                                        ----
          Total minimum lease payments................   207
Less: Amount representing interest (8%)...............   (31)
                                                        ----
Present value of lease payments.......................   176
Less: Current portion.................................  (176)
                                                        ----
Long-term portion.....................................  $ --
                                                        ====
</TABLE>
 
 5. COMMITMENTS
 
     The Company leases its current facilities and certain equipment under
noncancelable operating leases that expire at various dates through fiscal 2007.
Under the terms of the facilities leases, the Company is responsible for
utilities, maintenance, insurance and property taxes. As of October 31, 1998,
the future minimum lease payments are as follows (in thousands):
 
<TABLE>
<CAPTION>
              YEARS ENDING OCTOBER 31,
              ------------------------
<S>                                                   <C>
1999................................................  $1,976
2000................................................   1,523
2001................................................   1,539
2002................................................   1,549
2003................................................   1,000
Thereafter..........................................   1,758
                                                      ------
                                                      $9,345
                                                      ======
</TABLE>
 
     Rental expense was approximately $1,609,000, $1,417,000 and $1,025,000 for
the years ended October 31, 1998, 1997 and 1996, respectively.
 
 6. PROFIT SHARING AND 401(K) PLANS
 
     The Company has a profit sharing plan (the "Plan") which generally covers
all employees of the Company who are over 21 years of age and have worked for
the Company for at least one year. Annual contributions to the Plan are
discretionary, as determined by the Board of Directors. Contributions vest at a
rate of 20% per year beginning with an individual's third year with the Company.
There were no contributions to the Plan for the fiscal years ended October 31,
1998, 1997 or 1996.
 
     Effective November 1, 1993, the Company established a 401(k) Plan. The
401(k) Plan covers all employees of the Company who are over 18 years of age and
have worked for the Company for at least 90 days. Annual Company contributions
are discretionary, as determined by the Board of Directors and are
 
                                      F-11
<PAGE>   48
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
based on the Company's annual performance. Contributions vest at a rate of 20%
per year beginning with an individual's second year with the Company. Employer
contributions to the 401(k) Plan for the years ended October 31, 1998, 1997 and
1996 were approximately $236,000, $86,000 and $50,000, respectively.
 
 7. SHAREHOLDERS' EQUITY
 
  Preferred Stock
 
     The Board of Directors has the authority to issue up to 30,000,000 shares
of preferred stock in one or more series, and to fix the number of shares of any
series and to determine or alter the rights, preferences, privileges,
restrictions and designation granted to or imposed upon any wholly unissued
series of preferred stock, without any further vote or action by the
shareholders. No preferred shares were issued during fiscal 1998 and no shares
were outstanding as of October 31, 1998.
 
  Stock Plans
 
     The Company has four stock plans: the 1989 Incentive Stock Plan (the "1989
Stock Plan"), the 1995 Stock Plan (the "1995 Stock Plan"), the 1995 Director
Option Plan (the "Director Plan") and the Employee Stock Purchase Plan (the
"Purchase Plan"). The Company accounts for these plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Pursuant to the provisions of APB No. 25, no compensation cost has
been recognized by the Company related to option grants issued under any of its
stock plans. Under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company is required to calculate compensation cost related to option grants
issued to employees subsequent to October 31, 1995 and present the pro forma
effect of this expense on net income and net income per share.
 
     Had compensation cost been charged to the Company pursuant to the
provisions of SFAS No. 123 for option grants issued under its stock plans, the
Company's net income and net income per share would have been adjusted to the
following pro forma amounts for the years ended October 31, (in thousands,
except per share data):
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
NET INCOME:
  As reported.........................................  $51,483    $45,447    $25,131
  Pro forma...........................................  $47,547    $44,351    $24,614
NET INCOME PER SHARE -- AS REPORTED:
  Diluted.............................................  $  1.10    $  1.04    $  0.60
  Basic...............................................  $  1.19    $  1.17    $  0.69
NET INCOME PER SHARE -- PRO FORMA:
  Diluted.............................................  $  1.01    $  1.01    $  0.59
  Basic...............................................  $  1.09    $  1.14    $  0.68
</TABLE>
 
     Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to November 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
 
  1989 Incentive Stock Plan
 
     Under the 1989 Stock Plan, the Board of Directors may grant incentive stock
options to employees and nonstatutory stock options and stock purchase rights
("SPRs") to employees, directors and consultants. SPRs are rights, other than
stock options, to purchase common stock pursuant to the 1989 Stock Plan. The
exercise price for an incentive stock option cannot be less than the fair market
value on the date of grant. The exercise price per share of nonstatutory stock
options granted under the 1989 Stock Plan cannot be less than 85% of the
 
                                      F-12
<PAGE>   49
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
fair market value on the date of grant. As of October 31, 1998, a total of
13,540,000 shares of common stock have been authorized by the Company's Board of
Directors and shareholders for grant under the 1989 Stock Plan.
 
     Under the 1989 Stock Plan, in the event of the termination of a purchaser's
continuous status as an employee or consultant, the Company has the right to
repurchase, at the original purchase price, any unvested stock granted under a
SPR.
 
     The 1989 Stock Plan grants the Board of Directors the discretion to
determine when the SPRs and options granted thereunder shall become exercisable.
The majority of the options vest at the rate of 1/36th per month. In addition,
under the 1989 Stock Plan, all unvested stock options are exercisable at any
time in whole or in part provided that the optionee executes a purchase
agreement that grants the Company repurchase rights similar to those described
above. In October 1995, the Board of Directors suspended the issuance of further
grants under the 1989 Stock Plan.
 
     Stock option and purchase right activity under the 1989 Stock Plan is as
follows:
 
<TABLE>
<CAPTION>
                                                              STOCK OPTIONS AND PURCHASE
                                                                  RIGHTS OUTSTANDING
                                                  SHARES      ---------------------------
                                                 AVAILABLE      NUMBER          PRICE
                                                 FOR GRANT     OF SHARES      PER SHARE
                                                 ---------    -----------    ------------
<S>                                              <C>          <C>            <C>
BALANCE, October 31, 1995......................  2,695,354     7,203,280     $.008-$4.00
Exercised/Canceled/Forfeited...................     65,294    (1,692,570)    $.008-$3.50
                                                 ---------    ----------     -----------
BALANCE, October 31, 1996......................  2,760,648     5,510,710     $0.01-$4.00
Exercised/Canceled/Forfeited...................     62,138    (1,520,186)    $0.01-$4.00
                                                 ---------    ----------     -----------
BALANCE, October 31, 1997......................  2,822,786     3,990,524     $0.01-$4.00
Exercised/Canceled/Forfeited...................      6,488    (2,656,893)    $0.01-$4.00
                                                 ---------    ----------     -----------
BALANCE, October 31, 1998......................  2,829,274     1,333,631     $1.50-$4.00
                                                 =========    ==========     ===========
</TABLE>
 
     The following table summarizes information about stock options outstanding
under the 1989 Stock Plan as of October 31, 1998:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING
                  -----------------------------------------------       OPTIONS EXERCISABLE
                                 WEIGHTED AVG.                      ----------------------------
   RANGE OF         NUMBER         REMAINING       WEIGHTED AVG.      NUMBER      WEIGHTED AVG.
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE
---------------   -----------   ----------------   --------------   -----------   --------------
<S>               <C>           <C>                <C>              <C>           <C>
  $0.01 - $5.00    1,333,631          1.3             $2.0064        1,332,964       $2.0057
</TABLE>
 
  1995 Stock Plan
 
     On October 3, 1995, the Company's Board of Directors adopted and its
shareholders approved the 1995 Stock Plan to be effective as of the date of the
Company's initial public offering (November 17, 1995). The 1995 Stock Plan
provides for the granting to employees (including officers and employee
directors) of incentive stock options and for the granting to employees
(including officers and employee directors) and consultants of nonstatutory
stock options and SPRs. Unless terminated sooner, the 1995 Stock Plan will
terminate automatically in October 2005. A total of 12,000,000 shares of common
stock are reserved for issuance under the 1995 Stock Plan.
 
     The exercise price of all nonstatutory stock options and SPRs granted under
the 1995 Stock Plan will be determined by the 1995 Stock Plan administrator.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock (a "10%
Shareholder"), the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the date of grant. The exercise
price of incentive stock options for all other employees will be no less than
100% of the fair market value per share on the date of grant. The maximum term
of an option granted under the 1995 Stock Option Plan will not exceed ten years
from the date of grant (five years in the case of an incentive stock option
granted to a 10% Shareholder).
 
                                      F-13
<PAGE>   50
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Stock option activity under the 1995 Stock Plan is as follows:
 
<TABLE>
<CAPTION>
                                                                    STOCK OPTIONS OUTSTANDING
                                                SHARES     -------------------------------------------
                                              AVAILABLE     NUMBER         PRICE        WEIGHTED AVG.
                                              FOR GRANT    OF SHARES     PER SHARE      EXERCISE PRICE
                                              ----------   ---------   --------------   --------------
<S>                                           <C>          <C>         <C>              <C>
BALANCE, October 31, 1995...................          --          --               --            --
Authorized..................................   6,000,000          --               --            --
Granted.....................................  (1,285,200)  1,285,200   $ 5.125-$7.688      $ 7.4766
Exercised...................................          --          --               --            --
Canceled / Forfeited........................      52,044     (52,044)  $ 7.625-$7.625      $ 7.6250
                                              ----------   ---------   --------------      --------
BALANCE, October 31, 1996...................   4,766,844   1,233,156   $ 5.125-$7.688      $ 7.4699
Granted.....................................  (1,206,440)  1,206,440   $ 9.688-$20.50      $ 14.370
Exercised...................................          --    (271,294)  $5.125-$17.125      $ 7.7609
Canceled / Forfeited........................     161,502    (161,502)  $ 7.50-$17.125      $ 8.7410
                                              ----------   ---------   --------------      --------
BALANCE, October 31, 1997...................   3,721,906   2,006,800   $ 5.125-$20.50      $11.5028
Authorized..................................   6,000,000          --               --            --
Granted.....................................  (3,178,300)  3,178,300   $ 12.06-$25.71      $19.5050
Exercised...................................          --    (271,641)  $ 5.25-$23.375      $ 9.1753
Canceled / Forfeited........................     332,657    (332,657)  $ 5.125-$25.71      $19.8305
                                              ----------   ---------   --------------      --------
BALANCE, October 31, 1998...................   6,876,263   4,580,802   $ 5.125-$25.71      $16.5882
                                              ==========   =========   ==============      ========
</TABLE>
 
     The following table summarizes information about stock options outstanding
under the 1995 Stock Plan as of October 31, 1998:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING
                  -----------------------------------------------       OPTIONS EXERCISABLE
                                 WEIGHTED AVG.                      ----------------------------
   RANGE OF         NUMBER         REMAINING       WEIGHTED AVG.      NUMBER      WEIGHTED AVG.
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE
---------------   -----------   ----------------   --------------   -----------   --------------
<S>               <C>           <C>                <C>              <C>           <C>
$ 5.00 - $10.00      902,506          7.7              $ 7.99          447,920        $ 7.80
$10.01 - $15.00      647,136          8.9              $12.31           78,843        $12.01
$15.01 - $20.00    1,500,184          9.1              $16.75          187,027        $16.81
$20.01 - $30.00    1,530,976          8.7              $23.30          359,183        $23.31
                   ---------          ---              ------        ---------        ------
                   4,580,802          8.6              $16.59        1,072,973        $14.87
                   =========          ===              ======        =========        ======
</TABLE>
 
     The per share weighted average fair value of options granted under the 1995
Stock Plan in fiscal 1998, fiscal 1997 and fiscal 1996 was $10.68, $9.67 and
$5.27, respectively. The fair value of each option granted is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively: average risk-free interest rates of 5.17%, 6.20% and 6.04%;
expected dividend yield of 0.0% in all fiscal years; expected life of 3 years in
fiscal 1998 and 5 years in both fiscal 1997 and 1996; and expected volatility of
80%, 78.0% and 83.5%.
 
  1995 Director Option Plan
 
     Non-employee directors are entitled to participate in the Director Plan.
The Director Plan has a term of ten years, unless terminated sooner by the Board
of Directors. A total of 200,000 shares of common stock are reserved for
issuance under the Director Plan.
 
     The Director Plan provides that each non-employee director who first
becomes a non-employee director on or after the date of the Company's initial
public offering (November 17, 1995) will be automatically granted an option to
purchase 24,000 shares of common stock (the "First Option") on the date on which
the person first becomes a non-employee director, unless immediately prior to
becoming a non-employee director,
 
                                      F-14
<PAGE>   51
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
such person was a director of the Company. Beginning November 1, 1996, each
non-employee director will be automatically granted an option to purchase 7,200
shares (a "Subsequent Option") on November 1 of each year provided he or she is
then a non-employee director and, provided further, that on such date he or she
has served on the Board of Directors for at least the preceding six months. Each
First Option and each Subsequent Option shall have a term of ten years and the
shares subject to the option shall vest as to 1/36th of the shares at the end of
each month after the date of grant, provided that the optionee continues to
serve as a director on such dates. The exercise prices of the First Option and
each Subsequent Option shall be 100% of the fair market value per share of the
common stock on the date of grant of the option.
 
     Stock option activity under the 1995 Director Plan is as follows:
 
<TABLE>
<CAPTION>
                                                                     STOCK OPTIONS OUTSTANDING
                                               SHARES      ---------------------------------------------
                                              AVAILABLE     NUMBER           PRICE        WEIGHTED AVG.
                                              FOR GRANT    OF SHARES       PER SHARE      EXERCISE PRICE
                                              ---------    ---------    ---------------   --------------
<S>                                           <C>          <C>          <C>               <C>
BALANCE, October 31, 1995...................        --          --                   --           --
  Authorized................................   200,000          --                   --           --
  Granted...................................        --          --                   --           --
                                               -------      ------      ---------------       ------
BALANCE, October 31, 1996...................   200,000          --                   --           --
  Granted...................................   (14,400)     14,400               $10.56       $10.56
  Exercised.................................        --          --                   --           --
  Canceled/Forfeited........................        --          --                   --           --
                                               -------      ------      ---------------       ------
BALANCE, October 31, 1997...................   185,600      14,400               $10.56       $10.56
  Granted...................................   (14,400)     14,400               $26.25       $26.25
  Exercised.................................        --          --                   --           --
  Canceled/Forfeited........................        --          --                   --           --
                                               -------      ------      ---------------       ------
BALANCE, October 31, 1998...................   171,200      28,800      $10.56 - $26.25       $18.41
                                               =======      ======      ===============       ======
</TABLE>
 
     The following table summarizes information about stock options outstanding
under the Director Plan as of October 31, 1998:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                  -----------------------------------------------   ----------------------------
                                 WEIGHTED AVG.
   RANGE OF         NUMBER         REMAINING       WEIGHTED AVG.      NUMBER      WEIGHTED AVG.
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE
---------------   -----------   ----------------   --------------   -----------   --------------
<S>               <C>           <C>                <C>              <C>           <C>
   $10.5625         14,400            8.0             $10.5625         9,200         $10.5625
   $26.2500         14,400            9.0             $26.2500         4,410         $26.2500
                    ------            ---             --------        ------         --------
                    28,800            8.5             $18.4062        13,610         $15.6456
                    ======            ===             ========        ======         ========
</TABLE>
 
     The weighted average fair value of options granted under the Director Plan
in fiscal 1998 and fiscal 1997 was $17.89 and $7.12 per share, respectively.
There were no grants in fiscal 1996. The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in fiscal 1998 and fiscal 1997,
respectively: average risk-free interest rates of 5.84% and 6.13%; expected
dividend yield of 0.0% in both fiscal years; expected lives of 5 years in both
fiscal years; and expected volatility of 80.0% and 78.0%.
 
  Employee Stock Purchase Plan
 
     On October 3, 1995, the Company's Board of Directors adopted and its
shareholders approved the Purchase Plan to be effective as of the date of the
Company's initial public offering (November 17, 1995). A total of 1,000,000
shares of common stock are reserved for issuance under the Purchase Plan. The
Purchase Plan permits eligible employees of the Company to purchase common stock
through payroll deductions of up
 
                                      F-15
<PAGE>   52
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
to 15% of their compensation (excluding payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation), up
to a maximum of $21,250 for all purchase periods ending within any calendar
year.
 
     The price of common stock purchased under the Purchase Plan will be 85% of
the lower of the fair market value of the common stock on the first or last day
of each six-month purchase period. Employees may end their participation in the
Purchase Plan at any time during an offering period, upon which time, any
payroll deductions not used to purchase Company stock will be refunded.
Participation ends automatically upon termination of employment with the
Company.
 
     Employees are eligible to participate if they are customarily employed by
the Company or any designated subsidiary for at least 20 hours per week and for
more than five months in any calendar year. The Purchase Plan will terminate in
October 2005. For the year ended October 31, 1998, a total of 78,283 shares of
the Company's common stock were issued under the Purchase Plan at an approximate
average of $10.93 per share. For the year ended October 31, 1997, a total of
67,592 shares of the Company's common stock were issued under the Purchase Plan
at an approximate average of $8.50 per share. For the year ended October 31,
1996, a total of 47,040 shares of the Company's common stock were issued under
the Purchase Plan at $5.10 per share. The per share weighted average fair value
of shares sold in fiscal 1998, fiscal 1997 and fiscal 1996 was $5.86, $3.41 and
$2.12, respectively. At October 31, 1998, 807,085 shares remained available for
sale under the Purchase Plan.
 
 8. STOCK REPURCHASE
 
     On May 25, 1998, the Company's Board of Directors authorized the repurchase
from time to time of up to 4,000,000 shares of the Company's Common Stock
through open market purchases. During the fiscal year ended October 31, 1998,
the Company repurchased 620,000 shares of its Common Stock in the open market at
an average purchase price of $14.80 per share and a total cost of approximately
$9.2 million.
 
 9. INCOME TAXES
 
     Effective November 1, 1993, the Company adopted the provisions of SFAS No.
109 "Accounting for Income Taxes." SFAS No. 109 provides for an asset and
liability approach to accounting for income taxes under which deferred income
taxes are provided based upon enacted tax laws and rates applicable to the
periods in which taxes become payable.
 
     Pre-tax income from continuing operations for the years ended October 31
was taxed in the following jurisdictions (in thousands):
 
<TABLE>
<CAPTION>
                                         1998       1997       1996
                                        -------    -------    -------
<S>                                     <C>        <C>        <C>
Domestic..............................  $60,366    $64,839    $39,991
Foreign...............................   15,345      4,026       (100)
                                        -------    -------    -------
                                        $75,711    $68,865    $39,891
                                        =======    =======    =======
</TABLE>
 
                                      F-16
<PAGE>   53
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The provision for income taxes consisted of the following components as of
October 31, (in thousands):
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Current:
  Federal.............................................  $17,972    $19,122    $14,178
  State...............................................    1,560      4,611      3,598
  Foreign.............................................    5,005      1,573         --
                                                        -------    -------    -------
          Total current...............................   24,537     25,306     17,776
                                                        -------    -------    -------
Deferred (prepaid):
  Federal.............................................     (126)    (1,600)    (2,526)
  State...............................................     (183)      (288)      (490)
                                                        -------    -------    -------
          Total deferred (prepaid), net...............     (309)    (1,888)    (3,016)
                                                        -------    -------    -------
          Total provision for income taxes............  $24,228    $23,418    $14,760
                                                        =======    =======    =======
</TABLE>
 
     The provision for income taxes differs from the amount computed by applying
the statutory Federal income tax rates as follows as of October 31, (in
thousands):
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Provision computed at Federal statutory rate..........  $26,499    $24,103    $13,962
State income taxes, net of Federal benefit............    2,498      2,204      2,513
Foreign taxes provided for at rates other than
  U.S. statutory rate.................................     (984)    (3,374)        --
Tax credits...........................................     (530)    (1,239)    (1,795)
Tax exempt interest income............................   (1,590)      (482)      (798)
FSC benefit...........................................     (303)      (550)      (598)
Other.................................................   (1,362)     2,756      1,476
                                                        -------    -------    -------
          Total provision for income taxes............  $24,228    $23,418    $14,760
                                                        =======    =======    =======
</TABLE>
 
     The major components of deferred tax assets and liabilities are as follows
as of October 31, (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
Inventory reserves..........................................  $1,613    $1,721
Bad debt reserves...........................................     158       234
Accrued vacation............................................     546       342
Warranty reserves...........................................     823       912
State taxes.................................................   1,024     1,024
Net operating loss carryforward.............................     619       679
Other temporary differences.................................     297       413
                                                              ------    ------
          Total deferred tax assets.........................  $5,080    $5,325
                                                              ======    ======
Deferred tax liabilities -- depreciation....................  ($ 484)   ($ 420)
                                                              ------    ------
          Total deferred tax liabilities....................  ($ 484)   ($ 420)
                                                              ======    ======
</TABLE>
 
     Net operating loss and tax credit carryforwards, all of which resulted from
the acquisition of Apex Data, Inc., a Delaware corporation ("Apex"), expire at
various dates through 2010. In accordance with certain provisions of the
Internal Revenue Code, a change in ownership of greater than 50% within a three
year period results in an annual limitation of the Company's ability to utilize
its net operating loss
 
                                      F-17
<PAGE>   54
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
carryforwards from tax periods prior to the ownership change. Accordingly,
utilization of net operating loss carryforwards of approximately $1,770,000 for
Federal income tax purposes is subject to this annual limitation. Realization is
dependent on generating sufficient taxable income prior to the expiration of the
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that all the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
 
10. RELATED PARTY TRANSACTIONS
 
  Research and Development Funding
 
     In July 1994, the Company paid $30,000 for a warrant to purchase 2,000,000
shares of Series A Preferred Stock of a company in which certain shareholders of
the Company and members of its Board of Directors had concurrently purchased a
combined 42.8% interest in the affiliate's common stock. The Company has the
right to exercise the warrant until January 29, 2000 at $0.05 per warrant share.
The Company also entered into a license and supply agreement with the affiliate,
whereby the affiliate agreed to supply the Company with 100% of the Company's
requirements for certain of the affiliate's product, and the Company agreed to
purchase 100% of such requirements from the affiliate. In addition, the
affiliate granted to the Company certain license and trademark rights, with
respect to the use and modification of the affiliate's product. In exchange, the
Company agreed to provide research and development funding to the affiliate in
an aggregate amount of $750,000. Prior to fiscal 1996, all agreed upon funding
had been paid in full to the affiliate. Pursuant to the affiliate's Series C
Preferred Stock financing in June 1998, the Company agreed to amend the
termination provisions of the agreement. In general, the license portion of the
agreement has no expiration date and all other provisions of the agreement shall
continue in effect for a period of 15 years; provided, however, the agreement,
including the license portion of the agreement, can be terminated earlier upon
certain events including the affiliate's initial public offering.
 
     In January 1996, the Company and the affiliate entered into an agreement
whereby the Company paid an additional $80,000 for a warrant to purchase
2,000,000 shares of Series B Preferred Stock of the affiliate. The Company has
the right to exercise the warrant for a period of up to 48 months after the date
of issuance at $0.15 per warrant share. The Company and the affiliate also
entered into a license and supply agreement similar to that described above but
covering different intellectual property. In exchange, the Company provided
research and development funding to the affiliate totaling $500,000. Pursuant to
the affiliate's Series C Preferred Stock financing in June 1998, the Company
agreed to amend the termination provisions of the agreement. In general, the
license portion of the agreement has no expiration date and all other provisions
of the agreement shall continue in effect for a period of 15 years; provided,
however, the agreement, including the license portion of the agreement, can be
terminated earlier upon certain events including the affiliate's initial public
offering. Concurrently with the Company's purchase of the warrant, certain
shareholders of the Company and members of its Board of Directors purchased
additional common stock of the affiliate, which increased their interest to
50.0% of the affiliate.
 
     In April 1996, certain shareholders of the Company and members of its Board
of Directors purchased additional common stock of the affiliate from other
shareholders of the affiliate. As of October 31, 1998, certain shareholders of
the Company and members of its Board of Directors have a 40.2% interest in the
affiliate.
 
     During fiscal 1998, the Company paid approximately $200,000 to the
affiliate for its products. As of October 31, 1997, the affiliate owed the
Company approximately $7,600 on a note bearing interest at 10% per annum and
payable in full by April 1998. As of October 31, 1998, no amount was owed to the
Company from the affiliate.
 
                                      F-18
<PAGE>   55
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  Note Receivable from Shareholder
 
     On November 15, 1993, a former officer of the Company borrowed $146,250
from the Company. The debt arose from the issuance and sale of shares of the
common stock of Apex to the officer prior to the acquisition of Apex. The loan,
which is unsecured, bears interest at a rate of 6.5% per annum, and is payable
in annual interest-only installments through November 15, 1998, when the
principal balance is due in full. As of October 31, 1998, the officer owed the
Company approximately $71,500 under this loan.
 
  Stock Option Grant
 
     On August 31, 1995, pursuant to the 1989 Stock Plan, the Company granted a
nonstatutory stock option exercisable for 60,000 shares of common stock to one
of the Company's directors. The stock option exercise price is $3.50 per share
and vests at the rate of 1/36th of the shares on the first day of each calendar
month.
 
11. EXPORT SALES, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC DATA
 
     The Company operates in a single industry segment. The Company markets its
products in the United States (which includes Puerto Rico) and in foreign
countries through its sales personnel, independent sales representatives and
distributors. The Company's geographic sales as a percent of net sales were as
follows for the years ended October 31,:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
United States...............................................   70%     82%     92%
International...............................................   30      18       8
                                                              ---     ---     ---
          Total.............................................  100%    100%    100%
                                                              ===     ===     ===
</TABLE>
 
     A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. Sales to major customers as a percentage
of net sales were as follows for the years ended October 31,:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Compaq Computer Corporation.................................   62%     53%      *
Cisco Systems, Inc..........................................    *      12%     19%
Hewlett-Packard Company.....................................    *      11%     15%
IBM Corporation.............................................    *       *      12%
</TABLE>
 
---------------
* Less than 10%
 
                                      F-19
<PAGE>   56
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company's operations by geographic area for each of the three years in
the period ended October 31, 1998 were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                   ADJUSTMENTS
                                              UNITED     UNITED        AND
                                              STATES    KINGDOM    ELIMINATIONS   CONSOLIDATED
                                             --------   --------   ------------   ------------
<S>                                          <C>        <C>        <C>            <C>
1998
Revenues:
Customers..................................  $511,554   $203,097     $     --       $714,651
Intercompany...............................    18,001      1,484      (19,485)            --
                                             --------   --------     --------       --------
                                             $529,555   $204,581     $(19,485)      $714,651
                                             ========   ========     ========       ========
Income from operations.....................  $ 49,521   $ 19,151     $    (26)      $ 68,646
                                             ========   ========     ========       ========
          Total identifiable assets........  $306,121   $ 63,366     $   (495)      $368,992
                                             ========   ========     ========       ========
1997
Revenues:
Customers..................................  $595,942   $ 98,733     $     --       $694,675
Intercompany...............................    19,262         --      (19,262)            --
                                             --------   --------     --------       --------
                                             $615,204   $ 98,733     $(19,262)      $694,675
                                             ========   ========     ========       ========
Income from operations.....................  $ 61,101   $  5,398     $      2       $ 66,501
                                             ========   ========     ========       ========
          Total identifiable assets........  $269,121   $ 58,941     $    (77)      $327,985
                                             ========   ========     ========       ========
1996
Revenues:
Customers..................................  $397,237   $  4,537     $     --       $401,774
Intercompany...............................     7,694         --       (7,694)            --
                                             --------   --------     --------       --------
                                             $404,931   $  4,537     $ (7,694)      $401,774
                                             ========   ========     ========       ========
Income (loss) from operations..............  $ 37,945   $   (279)    $    (13)      $ 37,653
                                             ========   ========     ========       ========
          Total identifiable assets........  $165,310   $  6,936     $    (61)      $172,185
                                             ========   ========     ========       ========
</TABLE>
 
     Intercompany sales and transfers are accounted for based on established
intercompany sales prices. The Company's Malaysian subsidiary was not material
to the Company's fiscal 1998 consolidated results of operations.
 
12. LITIGATION
 
     The Company and certain of its officers and directors have been named as
defendants in six securities class action lawsuits filed in the United States
District Court for the Northern District of California, Boren v. SMART Modular
Technologies, Inc., et al., No. C 98 20692 JW (PVT) (filed July 1, 1998),
Woszczak v. SMART Modular Technologies, Inc., et al., No. C 98 2617 JL (filed
July 2, 1998), Bisson v. SMART Modular Technologies, Inc., et al., No. C 98
20714 JF (filed July 8, 1998), D'Amato v. SMART Modular Technologies, Inc., et
al., No. C 98 2804 PJH (filed July 16, 1998), Cha v. SMART Modular Technologies,
Inc., et al., No. C 98 2833 BZ (filed July 17, 1998) and Chang v. SMART Modular
Technologies, Inc., et al., No. C 98 3151 SI (filed August 13, 1998)
(collectively, the "Federal Actions"). The plaintiffs in the Federal Actions
allege that defendants made material misrepresentations and omissions during the
period from July 1, 1997 through May 21, 1998 in violation of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
Federal Actions were consolidated on October 9, 1998, and a consolidated
complaint was filed on November 30, 1998 (the "Federal Complaint").
 
                                      F-20
<PAGE>   57
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     On October 22, 1998, a putative securities class action lawsuit, captioned
Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the
"State Complaint"), was filed against the Company and certain of its officers
and directors in the Superior Court of the State of California, County of
Alameda. The State Complaint alleges violations of Sections 25400 and 25500 of
the California Corporations Code and seeks unspecified damages on behalf of a
purported class of purchasers of SMART common stock during the period from July
1, 1997 through May 21, 1998. The factual allegations of the State Complaint are
nearly identical to the factual allegations contained within the Federal
Complaint.
 
     The Company believes that all claims related to the state and federal
securities actions are without merit and intends to defend itself vigorously
against these actions. Currently, the Company is unable to estimate the
financial impact of the state and federal securities actions.
 
                                      F-21
<PAGE>   58
 
              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
 
     We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of SMART Modular Technologies, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
November 18, 1998. Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The schedule
listed under Item 14 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
 
                                                 /s/ ARTHUR ANDERSEN LLP
 
                                          --------------------------------------
                                                   Arthur Andersen LLP
 
San Jose, California
November 18, 1998
 
                                      F-22
<PAGE>   59
 
                                  SCHEDULE II
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                    BALANCE AT    CHARGED TO                  BALANCE
                                                    BEGINNING     COSTS AND                   AT END
                   DESCRIPTION                       OF YEAR       EXPENSES     DEDUCTIONS    OF YEAR
                   -----------                      ----------    ----------    ----------    -------
<S>                                                 <C>           <C>           <C>           <C>
Year ended October 31, 1996
  Allowance for doubtful accounts.................     $443          $349         $(209)       $583
  Allowance for future returns....................     $ 68          $ 75         $  --        $143
Year ended October 31, 1997
  Allowance for doubtful accounts.................     $583          $207         $(121)       $669
  Allowance for future returns....................     $143          $ --         $  --        $143
Year ended October 31, 1998
  Allowance for doubtful accounts.................     $669          $571         $(669)       $571
  Allowance for future returns....................     $143          $ --         $  --        $143
</TABLE>
 
                                      F-23
<PAGE>   60
 
               SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                   SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA
 
QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                               YEAR ENDED OCTOBER 31, 1998
                                        -----------------------------------------
                                         FIRST      SECOND     THIRD      FOURTH
                                        QUARTER    QUARTER    QUARTER    QUARTER
                                        --------   --------   --------   --------
<S>                                     <C>        <C>        <C>        <C>
Net Sales.............................  $202,840   $181,421   $150,406   $179,984
Gross Profit..........................    35,082     31,107     24,379     28,804
Net Income............................    16,422     13,962      9,131     11,968
Diluted Net Income Per Share..........  $   0.35   $   0.30   $   0.20   $   0.26
</TABLE>
 
<TABLE>
<CAPTION>
                                               YEAR ENDED OCTOBER 31, 1997
                                        -----------------------------------------
                                         FIRST      SECOND     THIRD      FOURTH
                                        QUARTER    QUARTER    QUARTER    QUARTER
                                        --------   --------   --------   --------
<S>                                     <C>        <C>        <C>        <C>
Net Sales.............................  $131,612   $143,652   $201,923   $217,488
Gross Profit..........................    22,631     24,141     30,876     34,512
Net Income............................     8,710      9,468     12,452     14,817
Diluted Net Income Per Share..........  $   0.20   $   0.22   $   0.29   $   0.32
</TABLE>
 
                                      F-24
<PAGE>   61
 
                        SMART MODULAR TECHNOLOGIES, INC.
 
                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
                                                                           SEQUENTIALLY
 EXHIBIT                                                                     NUMBERED
  NUMBER                               EXHIBITS                              PAGE NO.
----------                             --------                            ------------
<C>          <S>                                                           <C>
   2.1(1)    Agreements and Plan of Reorganization among the Registrant,
             Apex Data, Inc. and SMART Acquisition Inc. dated April 24,
             1995........................................................
   3.1(7)    Registrant's Amended and Restated Articles of
             Incorporation...............................................
   3.2(1)    Registrant's Amended Bylaws.................................
   4.1(1)    Registration Rights Agreement dated July 26, 1995...........
   4.2(1)    Registrant's specimen stock certificate.....................
   4.3(3)    Termination to the Registration Rights Agreement dated July
             26, 1995....................................................
  10.1(1)    1989 Incentive Stock Plan, as amended, and forms of
             agreements attached thereto.................................
  10.2(1)    1995 Employee Stock Purchase Plan, and forms of agreements
             attached thereto............................................
  10.3(1)    1995 Director Option Plan, and forms of agreements attached
             thereto.....................................................
  10.4(1)    1995 Stock Plan, and forms of agreements attached thereto...
  10.5(1)    Form of Indemnification Agreement between the Registrant and
             its officers, directors and certain significant employees...
  10.6(1)    Standard Triple Net Industrial Lease between the Registrant
             and Pactel Properties dated November 18, 1991...............
  10.7(1)    First Amendment to Lease between the Registrant and Pactel
             Properties dated July 19, 1993..............................
  10.8(1)    Second Amendment to Lease between the Registrant and Riggs
             National Bank of Washington, D.C. as Trustee of the
             Multi-Employer Property Trust Northport Business Park, a
             National Banking Association dated May 31, 1994.............
  10.9(1)    Third Amendment to Lease between the Registrant and Riggs
             National Bank of Washington, D.C. as Trustee of the
             Multi-Employer Property Trust Northport Business Park, a
             National Banking Association dated November 1994............
  10.10(1)   Standard Triple Net Industrial Lease between the Registrant
             and Riggs National Bank of Washington, D.C., as Trustee of
             the Multi-Employer Property Trust, dated June 18, 1995......
  10.11(1)   Lease Contract between the Registrant and The Puerto Rico
             Industrial Development Company dated April 24, 1995.........
  10.12(1)   Note, Loan and Security Agreement between the Registrant and
             Merrill Lynch Business Financial Services Inc. dated May 19,
             1993........................................................
  10.13(1)   Letter Agreement between the Registrant and Merrill Lynch
             Business Financial Services Inc. dated December 28, 1994....
  10.14(1)   Letter Agreement between the Registrant and Merrill Lynch
             Business Financial Services Inc. dated June 27, 1995........
  10.15(1)   Intercreditor Agreement among the Registrant, Merrill Lynch
             Business Financial Services Inc. and Imperial Bank dated
             June 27, 1995...............................................
  10.16(1)   Security and Loan Agreement between the Registrant and
             Imperial Bank dated July 19, 1995...........................
</TABLE>
 
                                       E-1
<PAGE>   62
 
<TABLE>
<CAPTION>
                                                                           SEQUENTIALLY
 EXHIBIT                                                                     NUMBERED
  NUMBER                               EXHIBITS                              PAGE NO.
----------                             --------                            ------------
<C>          <S>                                                           <C>
 *10.17(1)   License and Supply Agreement between the Registrant and
             Krypton Isolation, Inc. dated July 22, 1994.................
  10.18(1)   Warrant Purchase Agreement between the Registrant and
             Krypton Isolation, Inc. dated July 27, 1994.................
  10.19(1)   Holders' Agreement dated July 27, 1994 by and among Krypton
             Isolation, Inc. and certain individuals and entities
             identified on Exhibit A attached thereto....................
  10.20(1)   Common Stock Purchase Agreement dated July 27, 1994 by and
             among Krypton Isolation, Inc. and the individuals identified
             on Exhibit A attached thereto...............................
  10.21(1)   First Amendment to the Krypton Isolation, Inc. Warrant to
             Purchase 2,000,000 Shares of Series A Preferred Stock
             between the Registrant and Krypton Isolation, Inc. dated
             October 24, 1995............................................
  10.22(1)   Letter of Intent dated as of October 24, 1995 by and among
             Krypton Isolation, Inc., the Registrant and certain
             individuals identified on the signature pages thereto.......
**10.23(2)   License and Supply Agreement between the Registrant and
             Krypton Isolation, Inc. dated January 29, 1996..............
  10.24(2)   Warrant Purchase Agreement between the Registrant and
             Krypton Isolation, Inc. dated January 29, 1996..............
  10.25(2)   First Amended and Restated Holders' Agreement dated January
             29, 1996 by and among Krypton Isolation, Inc. and certain
             individuals and entities identified on Exhibit A attached
             thereto.....................................................
  10.26(2)   Common Stock Agreement dated January 29, 1996 by and among
             Krypton Isolation, Inc. and the entities identified on
             Exhibit A attached thereto..................................
  10.27(2)   First Amendment to the License and Supply Agreement between
             the Registrant and Krypton Isolation, Inc. dated January 29,
             1996........................................................
  10.28(3)   1989 Incentive Stock Plan, as amended, dated March 25,
             1996........................................................
  10.29(4)   Fourth Amendment to Lease between the Registrant and Riggs
             Bank N.A. dated September 27, 1996..........................
  10.30(5)   Revolving Line of Credit Note between the Registrant and
             Wells Fargo Bank, National Association dated May 29, 1997...
  10.31(5)   Credit Agreement between the Registrant and Wells Fargo
             Bank, National Association dated May 29, 1997...............
  10.32(5)   Subfeature Note between the Registrant and Wells Fargo Bank,
             National Association dated May 29, 1997.....................
  10.33(6)   Lease Contract between the Registrant and The Puerto Rico
             Industrial Development Company dated October 9, 1997........
  10.34(6)   Second Amendment to the Krypton Isolation, Inc. Warrant to
             Purchase 2,000,000 Shares of Series A Preferred Stock
             between the Registrant and Krypton Isolation, Inc. dated
             January 21, 1998............................................
  10.35(7)   Revolving Line of Credit Note between the Registrant and
             Wells Fargo Bank, National Association dated May 1, 1998....
  10.36(7)   Credit Agreement between the Registrant and Wells Fargo
             Bank, National Association dated May 1, 1998................
  10.37(7)   Subfeature Note between the Registrant and Wells Fargo Bank,
             National Association dated May 1, 1998......................
</TABLE>
 
                                       E-2
<PAGE>   63
 
<TABLE>
<CAPTION>
                                                                           SEQUENTIALLY
 EXHIBIT                                                                     NUMBERED
  NUMBER                               EXHIBITS                              PAGE NO.
----------                             --------                            ------------
<C>          <S>                                                           <C>
  10.38(8)   Sublease Contract between the Registrant and Philips
             Consumer Communications, L.P. dated June 30, 1998...........
  10.39      First Amendment to the License and Supply Agreement between
             the Registrant and Krypton Isolation, Inc. dated June 22,
             1998........................................................
  10.40      Second Amendment to the License and Supply Agreement between
             the Registrant and Krypton Isolation, Inc. dated June 22,
             1998........................................................
  16.1(1)    Letter Regarding Change in Certifying Accountant............
  16.2(1)    Letter Regarding Change in Certifying Accountant............
  16.3(1)    Letter Regarding Change in Certifying Accountant............
  16.4(1)    Letter Regarding Change in Certifying Accountant............
  21.1       Subsidiaries of the Registrant..............................
  23.1       Consent of Independent Public Accountants...................
  24.1       Power of Attorney (included on page 36).....................
  27.1       Financial Data Schedule for the Year Ended October 31,
             1998........................................................
</TABLE>
 
---------------
(1) Incorporated by reference to exhibit filed with the Registrant's
    Registration Statement on Form S-1 (No. 33-97748) filed October 4, 1995,
    Amendment No. 1 thereto filed October 24, 1995, Amendment No. 2 thereto
    filed November 6, 1995, Amendment No. 3 thereto filed November 14, 1995 and
    Amendment No. 4 thereto filed November 16, 1995, which Registration
    Statement became effective November 16, 1995.
 
(2) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed March 16, 1996.
 
(3) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed June 14, 1996.
 
(4) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed June 16, 1997.
 
(5) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed August 28, 1997.
 
(6) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-K filed January 29, 1998.
 
(7) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed June 15, 1998.
 
(8) Incorporated by reference to exhibit filed with the Registrant's Report on
    Form 10-Q filed September 11, 1998.
 
 *  Pursuant to Rule 406(b) under the Securities Act of 1933, confidential
    treatment has been granted to certain portions of this exhibit, which
    portions have been deleted and filed separately with the Securities and
    Exchange Commission.
 
 ** Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
    confidential treatment has been granted to certain portions of this exhibit,
    which portions have been deleted and filed separately with the Securities
    and Exchange Commission.
 
                                       E-3