##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q/A



---



AMENDMENT NO. 2



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the Quarterly Period Ended March 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | --------------------------------------------------------------------------------------------



For the transition period from              to
            .



Commission File Number 000-31081



---



TRIPATH TECHNOLOGY INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0407364                          
|(State or other jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



2560 Orchard Parkway

San Jose, California 95131

(Address of Principal Executive Office including (Zip Code)



(408) 750-3000

(Registrants telephone number, including area code)



---



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
(Exchange Act) 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 whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).     Yes ̈No  x



47,366,721 shares of the
Registrants common stock were outstanding as of April 22, 2004.



---



---

##### Table of Contents

TABLE OF CONTENTS



|                 |  |                                                                                                    |  |   
|---------------- |  | -------------------------------------------------------------------------------------------------- |  | --
|EXPLANATORY NOTE |  | 3                                                                                                 
|                 |  |                                                                                                   
|PART I.          |  | Financial Information                                                                              |  | 4 
|                 |  |                                                                                                   
|                 |  | Item 1. Financial Statements (unaudited)                                                           |  | 4 
|                 |  |                                                                                                   
|                 |  | Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                   |  | 4 
|                 |  |                                                                                                   
|                 |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 |  | 5 
|                 |  |                                                                                                   
|                 |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 |  | 6 
|                 |  |                                                                                                   
|                 |  | Notes to Condensed Interim Consolidated Financial Statements                                       |  | 7 
|                 |  |                                                                                                   
|                 |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations      |  | 18
|                 |  |                                                                                                   
|                 |  | Risk Factors                                                                                       |  | 22
|                 |  |                                                                                                   
|                 |  | Item 3. Quantitative and Qualitative Disclosures about Market Risk                                 |  | 32
|                 |  |                                                                                                   
|                 |  | Item 4. Controls and Procedures                                                                    |  | 32
|                 |  |                                                                                                   
|PART II.         |  | Other Information                                                                                  |  | 35
|                 |  |                                                                                                   
|                 |  | Item 6. Exhibits and Reports on Form 8-K                                                           |  | 35
|                 |  |                                                                                                   
|                 |  | Signature                                                                                          |  | 36
|                 |  |                                                                                                   
|                 |  | Exhibit Index                                                                                      |  | 37



2



---

##### Table of Contents

EXPLANATORY NOTE



This Report on
Form 10-Q/A (Form 10-Q/A) is being filed as Amendment No. 2 to our Report on Form 10-Q for the quarter ended March 31, 2004, which was filed with the Securities and Exchange Commission (SEC) on April 30, 2004 (the Original
Filing) and amended on May 21, 2004. We are filing this Amendment No. 2 to reflect restatements of certain financial information for the quarter ended March 31, 2004 (the Restatement) that was previously reported in the Original
Filing. For a more detailed description of the Restatement, see Note 13 Restatement of Previously Reported Quarterly and Transition Period Financial Information of the Notes to Condensed Interim Consolidated Financial Statements.



This Form 10-Q/A amends and restates Item 1. Financial
Statements, Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 4. Controls and Procedures of Part I of the Original Filing, in each case, as a result of, and to
reflect, the Restatement. In addition, we have added an additional risk factor related to our disclosure controls and procedures and our internal control over financial reporting.



3



---

##### Table of Contents

PART I. Financial Information



Item 1. Financial Statements



TRIPATH TECHNOLOGY INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

Unaudited



|                                                                                                                       |  |                        |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                       |  | March 31,2004 Restated |          |   | December 31,2003 |  
|ASSETS                                                                                                                 |  |                        |          |   |                  |   |          |  
|Current assets:                                                                                                        |  |                        |          |   |                  |   |          |  
|Cash, cash equivalents and restricted cash                                                                             |  | $                      | 9,183    |   |                  | $ | 9,612    |  
|Accounts receivable, net                                                                                               |  |                        | 2,692    |   |                  |   | 2,041    |  
|Inventories                                                                                                            |  |                        | 7,615    |   |                  |   | 5,574    |  
|Prepaid expenses and other current assets                                                                              |  |                        | 257      |   |                  |   | 263      |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|Total current assets                                                                                                   |  |                        | 19,747   |   |                  |   | 17,490   |  
|                                                                                                                       |  |                       
|Property and equipment, net                                                                                            |  |                        | 1,949    |   |                  |   | 1,897    |  
|Other assets                                                                                                           |  |                        | 83       |   |                  |   | 81       |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|Total assets                                                                                                           |  | $                      | 21,779   |   |                  | $ | 19,468   |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                   |  |                        |          |   |                  |   |          |  
|Current liabilities:                                                                                                   |  |                        |          |   |                  |   |          |  
|Accounts payable                                                                                                       |  | $                      | 4,742    |   |                  | $ | 4,069    |  
|Current portion of capital lease obligations                                                                           |  |                        | 477      |   |                  |   | 496      |  
|Current portion of deferred rent                                                                                       |  |                        | 140      |   |                  |   | 24       |  
|Accrued expenses                                                                                                       |  |                        | 922      |   |                  |   | 602      |  
|Deferred distributor revenue                                                                                           |  |                        | 2,005    |   |                  |   | 1,125    |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|Total current liabilities                                                                                              |  |                        | 8,286    |   |                  |   | 6,316    |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|Long term liabilities                                                                                                  |  |                        | 1,011    |   |                  |   | 1,232    |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|Commitments and contingencies (see Note 10)                                                                            |  |                        |          |   |                  |   |          |  
|                                                                                                                       |  |                       
|Stockholders equity:                                                                                                  |  |                        |          |   |                  |   |          |  
|Common stock, $0.001 par value, 100,000,000 shares authorized; 47,316,712 and 45,709,740 shares issued and outstanding |  |                        | 47       |   |                  |   | 45       |  
|Additional paid-in capital                                                                                             |  |                        | 194,254  |   |                  |   | 191,656  |  
|Deferred stock-based compensation                                                                                      |  |                        | (176     | ) |                  |   | (217     | )
|Accumulated deficit                                                                                                    |  |                        | (181,643 | ) |                  |   | (179,564 | )
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|Total stockholders equity                                                                                             |  |                        | 12,482   |   |                  |   | 11,920   |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                             |  | $                      | 21,779   |   |                  | $ | 19,468   |  
|                                                                                                                       |  |                        |          |   |                  |   |          |  



The accompanying notes
are an integral part of these condensed interim consolidated financial statements.



4



---

##### Table of Contents

TRIPATH TECHNOLOGY INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Unaudited



|                                                                        |  |                             |        |   |      |   |        |  
|----------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                        |  | Three Months EndedMarch 31, |       
|                                                                        |  | 2004 Restated               |        |   | 2003 |  
|Revenue                                                                 |  | $                           | 3,273  |   |      | $ | 2,952  |  
|Cost of revenue                                                         |  |                             | 2,373  |   |      |   | 2,207  |  
|                                                                        |  |                             |        |   |      |   |        |  
|Gross profit                                                            |  |                             | 900    |   |      |   | 745    |  
|                                                                        |  |                             |        |   |      |   |        |  
|Operating expenses:                                                     |  |                             |        |   |      |   |        |  
|Research and development                                                |  |                             | 1,718  |   |      |   | 1,978  |  
|Selling, general and administrative                                     |  |                             | 1,269  |   |      |   | 1,246  |  
|                                                                        |  |                             |        |   |      |   |        |  
|Total operating expenses                                                |  |                             | 2,987  |   |      |   | 3,224  |  
|                                                                        |  |                             |        |   |      |   |        |  
|Loss from operations                                                    |  |                             | (2,087 | ) |      |   | (2,479 | )
|Interest and other income, net                                          |  |                             | 8      |   |      |   | 2      |  
|                                                                        |  |                             |        |   |      |   |        |  
|Net loss                                                                |  | $                           | (2,079 | ) |      | $ | (2,477 | )
|                                                                        |  |                             |        |   |      |   |        |  
|                                                                        |  |                            
|Basic and diluted net loss per share                                    |  | $                           | (0.05  | ) |      | $ | (0.06  | )
|                                                                        |  |                             |        |   |      |   |        |  
|Number of shares used in computing basic and diluted net loss per share |  |                             | 45,266 |   |      |   | 41,352 |  
|                                                                        |  |                             |        |   |      |   |        |  





The accompanying notes are an integral part of these condensed interim consolidated financial statements.



5



---

##### Table of Contents

TRIPATH TECHNOLOGY INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited



|                                                                               |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                               |  | Three Months EndedMarch 31, |       
|                                                                               |  | 2004 Restated               |        |   | 2003 |  
|Cash flows from operating activities:                                          |  |                             |        |   |      |   |        |  
|Net loss                                                                       |  | $                           | (2,079 | ) |      | $ | (2,477 | )
|Adjustments to reconcile net loss to net cash used in operating activities:    |  |                             |        |   |      |   |        |  
|Depreciation and amortization                                                  |  |                             | 266    |   |      |   | 320    |  
|Deferred Rent                                                                  |  |                             | 52     |   |      |   |       |  
|Stock-based compensation                                                       |  |                             | 42     |   |      |   | (36    | )
|Changes in assets and liabilities:                                             |  |                             |        |   |      |   |        |  
|Accounts receivable                                                            |  |                             | (651   | ) |      |   | 239    |  
|Inventories                                                                    |  |                             | (2,041 | ) |      |   | 1,012  |  
|Prepaid expenses and other assets                                              |  |                             | 4      |   |      |   | 710    |  
|Accounts payable                                                               |  |                             | 673    |   |      |   | (1,106 | )
|Accrued expenses                                                               |  |                             | 320    |   |      |   | (20    | )
|Deferred distributor revenue                                                   |  |                             | 880    |   |      |   | 46     |  
|                                                                               |  |                             |        |   |      |   |        |  
|Net cash used in operating activities                                          |  |                             | (2,534 | ) |      |   | (1,312 | )
|                                                                               |  |                             |        |   |      |   |        |  
|Cash flows from investing activities:                                          |  |                             |        |   |      |   |        |  
|Purchase of property and equipment                                             |  |                             | (318   | ) |      |   | (13    | )
|                                                                               |  |                             |        |   |      |   |        |  
|Net cash used in investing activities                                          |  |                             | (318   | ) |      |   | (13    | )
|                                                                               |  |                             |        |   |      |   |        |  
|Cash flows from financing activities:                                          |  |                             |        |   |      |   |        |  
|                                                                               |  |                            
|Proceeds from issuance of common stock under ESPP and upon exercise of options |  |                             | 251    |   |      |   | 7      |  
|Proceeds from issuance of common stock upon exercise of warrants               |  |                             | 2,348  |   |      |   |       |  
|Principal payments on capital lease obligations                                |  |                             | (176   | ) |      |   | (48    | )
|                                                                               |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                            |  |                             | 2,423  |   |      |   | (41    | )
|                                                                               |  |                             |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                      |  |                             | (429   | ) |      |   | (880   | )
|Cash, cash equivalents, and restricted cash, beginning of period               |  |                             | 9,612  |   |      |   | 10,598 |  
|                                                                               |  |                             |        |   |      |   |        |  
|Cash, cash equivalents, and restricted cash, end of period                     |  | $                           | 9,183  |   |      | $ | 9,232  |  
|                                                                               |  |                             |        |   |      |   |        |  





The accompanying notes are an integral part of these condensed interim consolidated financial statements.



6



---

##### Table of Contents

Tripath Technology Inc.



Notes
to Condensed Interim Consolidated Financial Statements

(Unaudited)



1. Basis of Presentation



The unaudited condensed interim consolidated financial statements included herein have been prepared by Tripath Technology
Inc. (the Company) in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary to
state fairly the Companys financial position, results of operations and cash flows for the periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire year.



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 the disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.



The unaudited condensed interim consolidated financial statements include the
accounts of the Company and its wholly-owned Japanese subsidiary, which was incorporated in January 2001. All significant intercompany balances and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for
the Companys Japanese wholly-owned subsidiary. Assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars and the resulting gains or losses are included in Interest and other income,
net. Such gains or losses have not been material for any period presented.



The Companys consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred substantial losses and has experienced negative cash flow since inception and has an accumulated deficit of $181.6 million at March 31, 2004.



Beginning in August 2001, the Company instituted programs to reduce expenses including reducing headcount from 144 employees
at the end of July 2001 to 56 employees at the end of December 2003 and reducing employees salaries by 10%. In September 2002 the Company relocated its headquarters which reduced rent expense and canceled its D&O policy which reduced
insurance expense. These actions resulted in significant cost savings in 2003. The Company reduced its cash used in operating activities from approximately $13 million in 2002 to approximately $4 million in 2003.



During 2003, warrants were exercised which resulted in the Company receiving
proceeds totaling approximately $3.1 million. Subsequent to December 31, 2003 the Company received additional proceeds of approximately $2.3 million from the exercise of outstanding warrants. At March 31, 2004, the Company had working capital of
$11.8 million, including cash of $9.2 million.



Should the
Company require more cash during 2004 to fund its operations than is currently planned, management believes that such additional cash requirements could be met by first obtaining additional financing or by taking measures to reduce operating
expenses such as reducing headcount or canceling research and development projects. However, the Company may not be able to obtain additional funds on terms that would be favorable to its stockholders and the Company, or at all. The Companys
long term prospects are dependent upon obtaining sufficient financing as needed to fund current working capital needs and future growth, and ultimately on achieving profitability.



The Company believes that its existing working capital at March 31, 2004, together with proceeds from additional financings
or debt transactions, if necessary, will be sufficient to meet its operating, working capital,



7



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



investing and financing needs for at least the next twelve months. The Company has not made any adjustment to its consolidated financial statements as a
result of the outcome of the uncertainty described above.



2. Revenue recognition



The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition. The Company recognizes revenue when all of the following criteria
are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. The following policies apply to the Companys
major categories of revenue transactions.



Sales to OEM
Customers: Under the Companys standard terms and conditions of sale, title and risk of loss transfer to the customer at the time product is shipped to the customer, FOB shipping point, and revenue is recognized accordingly. The Company
accrues the estimated cost of post-sale obligations, including basic product warranties or returns, based on historical experience. The Company has experienced minimal warranty or other returns to date.



Sales to Distributors: Sales to distributors are made under
arrangements allowing limited rights of return, generally under product warranty provisions, stock rotation rights and price protection on products unsold by the distributor. In addition, the distributor may request special pricing and allowances
which may be granted subject to the companys approval. As a result of these return rights and potential pricing adjustments, the Company generally defers recognition of revenue until such time that the distributor sells product to its customer
based upon receipt of point-of-sale reports from the distributor.



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



3. Net loss per share



Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common
stock outstanding during the period. Diluted net loss per share is computed based on the weighted average number of common stock and dilutive potential common stock outstanding. The calculation of diluted net loss per share excludes potential common
stock if the effect is anti-dilutive. Potential common stock consist of incremental common stock issuable upon the exercise of stock options and common stock issuable upon the exercise of common stock warrants.



Total potential common stock of 8,912,000 and 10,338,000 shares were not
included in the diluted net loss per share calculation for the periods ended March 31, 2004 and 2003, respectively, because to do so would be anti-dilutive.



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



|                                     |  |                             |        |   |      |   |        |  
|------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                     |  | Three Months EndedMarch 31, |       
|                                     |  | 2004 Restated               |        |   | 2003 |  
|Numerator:                           |  |                             |        |   |      |   |        |  
|Net loss                             |  | $                           | (2,079 | ) |      | $ | (2,477 | )
|                                     |  |                             |        |   |      |   |        |  
|Denominator:                         |  |                             |        |   |      |   |        |  
|Weighted average common stock        |  |                             | 45,266 |   |      |   | 41,352 |  
|                                     |  |                             |        |   |      |   |        |  
|Basic and diluted net loss per share |  | $                           | (0.05  | ) |      | $ | (0.06  | )
|                                     |  |                             |        |   |      |   |        |  



8



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



4. Deferred stock-based compensation



The Company recognized deferred stock-based compensation in connection with
certain employee stock option grants and the issuance of restricted stock. The deferred stock-based compensation related to the employee stock option grants is being amortized over the vesting periods of the related options, generally four years,
using an accelerated basis while the deferred stock-based compensation related to the issuance of restricted stock is being amortized over two years on a straight line basis. The fair value per share used to calculate deferred stock-based
compensation was derived by reference to the share quoted price. Future compensation charges are subject to reduction for any employee who terminates employment prior to such employees option vesting date.



The Company has granted options to purchase shares of common stock to
consultants in exchange for services. The Company determined the value of the options granted to consultants based on the Black-Scholes option pricing model.



The following table sets forth, for each of the periods presented, the deferred stock-based compensation recorded and the amortization of deferred
stock-based compensation (in thousands):



|                                                  |  |                             |    |      |   |     |  
|------------------------------------------------- |  | --------------------------- | -- | ---- | - | --- | -
|                                                  |  | Three Months EndedMarch 31, |   
|                                                  |  | 2004                        |    | 2003 |  
|Deferred stock-based compensation                 |  | $                           | 1  |      | $ | (88 | )
|Amortization of deferred stock-based compensation |  | $                           | 42 |      | $ | (36 | )



Unamortized deferred
stock-based compensation at March 31, 2004 and December 31, 2003 was $176,000 and $217,000 respectively.



5. Accounting for stock-based compensation



The Company accounts for its stock-based compensation plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income for the periods ended March 31, 2004 and 2003, as all options granted under those
plans had an exercise price equal to the market value of the underlying common stock on the date of grant.



9



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



The following table illustrates the effect on net loss and loss per share as if the Company had
applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation to stock-based employee compensation.



|                                                                                                                                                                      |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                      |  | Three Months EndedMarch 31, |       
|                                                                                                                                                                      |  | 2004 Restated               |        |   | 2003 |  
|Net loss applicable to common stockholders, as reported                                                                                                               |  | $                           | (2,079 | ) |      | $ | (2,477 | )
|Total stock-based employee compensation expense (benefit) included in the net loss, determined under the recognition and measurement
principles of APB Opinion No. 25 |  |                             | 42     |   |      |   | (36    | )
|Total stock-based employee compensation expense determined under fair value based method for all awards                                                               |  |                             | (708   | ) |      |   | (94    | )
|                                                                                                                                                                      |  |                             |        |   |      |   |        |  
|Pro forma net loss applicable to common stockholders                                                                                                                  |  | $                           | (2,745 | ) |      | $ | (2,607 | )
|                                                                                                                                                                      |  |                             |        |   |      |   |        |  
|Loss per share:                                                                                                                                                       |  |                             |        |   |      |   |        |  
|Basicas reported                                                                                                                                                     |  | $                           | (0.05  | ) |      | $ | (0.06  | )
|                                                                                                                                                                      |  |                             |        |   |      |   |        |  
|Basicpro forma                                                                                                                                                       |  | $                           | (0.06  | ) |      | $ | (0.06  | )
|                                                                                                                                                                      |  |                             |        |   |      |   |        |  



6.
Cash, cash equivalents and restricted cash



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



The Company
has entered into Security Agreements with two financial institutions to provide collateral for outstanding standby letters of credit which totaled $0.8 million at March 31, 2004. At March 31, 2003, the Company had no restricted cash.



7. Concentration of credit risk and significant
customers



Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash equivalents. Substantially all of the Companys cash and cash equivalents are invested in highly-liquid money market funds with major financial institutions. The
Company sells its products principally to original equipment manufacturers. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses, as considered necessary by management. During the
quarters ended March 31, 2004 and 2003, the Company had minimal bad debts write-offs.



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



|           |  |                                            |   |  |      |  
|---------- |  | ------------------------------------------ | - |  | ---- | -
|           |  | % of Revenuefor the QuarterEnded March 31, |  
|           |  | 2004 Restated                              |   |  | 2003 |  
|Customer A |  | 40                                         | % |  | 21   | %
|Customer B |  | 13                                         | % |  | 11   | %
|Customer C |  |                                           |   |  | 25   | %



10



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



The Companys accounts receivable were concentrated with two customers at March 31, 2004
representing 71% and 10% of aggregate gross receivables and with three customers at December 31, 2003 representing 49%, 19%, and 15% of aggregate gross receivables.



8. Inventories



Inventories are stated at the lower of cost or market. This policy requires the Company to make estimates regarding the
market value of the Companys inventory, including an assessment of excess or obsolete inventory. The Company determines excess and obsolete inventory based on an estimate of the future demand and estimated selling prices for the Companys
products within a specified time horizon, generally 12 months. The estimates the Company uses for expected demand are also used for near-term capacity planning and inventory purchasing and are consistent with the Companys revenue forecasts.
Actual demand and market conditions may be different from those projected by the Companys management. If the Companys unit demand forecast is less than the Companys current inventory levels and purchase commitments during the
specified time horizon, or if the estimated selling price is less than the Companys inventory value, the Company will be required to take additional excess inventory charges or write-downs to net realizable value which will decrease the
Companys gross margin and net operating results in the future.



Inventories are comprised of the following (in thousands):



|                               |  |                        |       |                  |   |      
|------------------------------ |  | ---------------------- | ----- | ---------------- | - | -----
|                               |  | March 31,2004 Restated |       | December 31,2003
|Raw materials                  |  | $                      | 2,709 |                  | $ | 1,692
|Work-in-process                |  |                        | 481   |                  |   | 1,007
|Finished goods                 |  |                        | 3,214 |                  |   | 2,229
|Inventory held by distributors |  |                        | 1,211 |                  |   | 646  
|                               |  |                        |       |                  |   |      
|Total                          |  | $                      | 7,615 |                  | $ | 5,574
|                               |  |                        |       |                  |   |      



9.
Segment and geographic information



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



The following is a geographic breakdown of the Companys sales by shipping destination for the following periods:



|              |  |                             |       |      |   |      
|------------- |  | --------------------------- | ----- | ---- | - | -----
|              |  | Three Months EndedMarch 31,
|              |  | 2004 Restated               |       | 2003
|United States |  | $                           | 529   |      | $ | 171  
|Japan         |  |                             | 2,126 |      |   | 1,239
|Singapore     |  |                             |      |      |   | 307  
|Taiwan        |  |                             | 98    |      |   | 442  
|China         |  |                             | 141   |      |   | 274  
|Europe        |  |                             | 340   |      |   |     
|Rest of world |  |                             | 39    |      |   | 519  
|              |  |                             |       |      |   |      
|              |  | $                           | 3,273 |      | $ | 2,952
|              |  |                             |       |      |   |      



11



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



Approximately 97% and 78% of the Companys total revenue for the three months ended March 31,
2004 and March 31, 2003, respectively, was derived from sales to end customers based outside the United States.



10. Commitments and contingencies



Lease commitments: The Company leases office space and equipment under non-cancelable operating leases. The Company also has a capital lease for research
and development related software and a capital lease for manufacturing test equipment.



The Companys total commitments on its operating and capital leases and inventory purchases as of March 31, 2004, were as follows (in thousands):



|                                                   |  |                  |       |                |   |      |                              |  |   |      
|-------------------------------------------------- |  | ---------------- | ----- | -------------- | - | ---- | ---------------------------- |  | - | -----
|As of March 31, 2004                               |  | Operating Leases |       | Capital Leases |   |      | InventoryPurchaseCommitments
|2004                                               |  | $                | 753   |                | $ | 380  |                              |  | $ | 3,548
|2005                                               |  |                  | 1,083 |                |   | 473  |                              |  |   |     
|2006                                               |  |                  | 1,046 |                |   | 64   |                              |  |   |     
|2007                                               |  |                  | 270   |                |   | 43   |                              |  |   |     
|                                                   |  |                  |       |                |   |      |                              |  |   |      
|Total minimum lease payments                       |  | $                | 3,152 |                |   | 960  |                              |  | $ | 3,548
|                                                   |  |                  |       |                |   |      |                              |  |   |      
|Less: amount representing interest                 |  |                  |       |                |   | (81  | )                            |  |   |      
|                                                   |  |                  |       |                |   |      |                              |  |   |      
|Present value of minimum lease payments            |  |                  |       |                |   | 879  |                              |  |   |      
|Less: current portion of capital lease obligations |  |                  |       |                |   | (477 | )                            |  |   |      
|                                                   |  |                  |       |                |   |      |                              |  |   |      
|Long-term capital lease obligations                |  |                  |       |                | $ | 402  |                              |  |   |      
|                                                   |  |                  |       |                |   |      |                              |  |   |      



Contingencies: From
time to time, in the normal course of business, various claims could be made against the Company. At March 31, 2004, there were no pending claims the outcome of which is expected to result in a material adverse effect on the financial position or
results of operations of the Company.



11.
Guarantees



In November 2002, the FASB issued FIN No.
45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Othersan interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34. The following is a
summary of the Companys agreements that the Company has determined are within the scope of FIN 45.



The Company provides a limited warranty for up to one year for any defective products. During the quarter ended March 31, 2004 and for the year ended
December 31, 2003, warranty expense was insignificant. The Company has a reserve for warranty costs of $30,000, which has not changed in the past quarter.



The Company has entered into Security Agreements with two financial institutions to provide collateral for outstanding standby letters of credit which
totaled $0.8 million at March 31, 2004.



Pursuant to its
bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officers or
directors lifetime. To date, the Company has not incurred any costs as there have been no lawsuits or claims that would invoke these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of
March 31, 2004.



12



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



The Company is self-insured for these and similar claims. The Company enters into indemnification
provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors and customers, its sublandlord and (ii) its agreements with investors. Under these provisions the Company has
agreed to generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Companys activities or, in some cases, as a result of the indemnified partys activities
under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the
underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. To date, the Company has not incurred any costs as there have been no lawsuits or claims
related to these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2004.



12. Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January
31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company adopted FIN 46 on January 1, 2003. The
adoption of this standard did not have a material impact on the Companys consolidated financial statements as the Company had no interest in any variable interest entities.



In June 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003.
Adoption of this statement did not have a material impact on the Companys consolidated financial statements, as the Company has not entered into any derivative contracts.



In June 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issue classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this statement did not have a material impact on the Companys
consolidated financial statements.



13.
Restatement of Previously Reported Quarterly and Transition Report Financial Information



As originally described in the Companys Current Report on Form 8-K dated October 18, 2004 and filed with the Securities and Exchange Commission on
October 22, 2004 (the Prior 8-K), the Companys Audit Committee initiated an internal investigation regarding certain purported product returns (the Product Returns) to one of the Companys distributors, Macnica
Japan (Macnica), by its customers. The Audit Committee investigation and discussion included a review of the Companys compliance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 Revenue Recognition in
Financial Statements (SAB 104) as



13



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



applied to the circumstances surrounding the Product Returns. Under SAB 104, a requirement for revenue recognition is that all of the following criteria must
be met: (1) there is persuasive evidence that an arrangement exists, (2) delivery of goods has occurred, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. In accordance with SAB 104, the Companys
revenue recognition policy, for sales to distributors, requires that the Company defer recognition of revenue until such time that the distributor sells products to its customers based upon receipt of point-of-sales reports from the distributor. As
of the Audit Committees determination on January 25, 2005, the internal investigation revealed that approximately $1.4 million of a sale of the Companys product to Macnica did not meet the foregoing criteria because the Companys
Country Manager for the Japan Sales Office (who is no longer employed by the Company) had agreed that Macnica could return the product to the Company at Macnicas discretion. The Audit Committee determined that this former employee had agreed
to a term of sale that was outside of the Companys standard practices and was not referenced in the documentation related to the sale submitted to the Companys finance department. Given the discovery of this arrangement for Macnica to
return the product, the Companys Audit Committee concluded that the Company should restate certain financial information that was previously reported in the Companys Form 10-Q for the quarter ended June 30, 2004, filed with the
Securities and Exchange Commission on August 6, 2004 (the June 2004 Form 10-Q) to properly reflect its revenue and related financial information for the referenced periods (the Initial Restatement). Accordingly, the Company
advised in the Prior 8-K that the Consolidated Statement of Operations for the three months and six months ended June 30, 2004 and the Consolidated Balance Sheet as of June 30, 2004 included in the June 2004 Form 10-Q should no longer be relied upon
because of errors in such financial statements. The financial impact of the Initial Restatement was reflected in the Companys Transition Report on Form 10-K/T for the transition period ended September 30, 2004 filed with the Securities and
Exchange Commission on February 3, 2005 (the Transition Report).



The Audit Committee directed that the internal investigation continue following reporting of the Initial Restatement. As a result of this further investigation, on May 5, 2005 the Audit Committee determined that
additional sale transactions with Macnica, as well as with an additional distributor of the Company, Uniquest, did not meet the Companys revenue recognition criteria and the requirements of SAB 104. In certain circumstances, the same former
employee of the Company had agreed that Macnica could return the referenced product at Macnicas discretion. This former employee had on these occasions agreed to a term of sale that was outside of the Companys standard practices and was
not referenced in the documentation related to the sale submitted to the Companys finance department. In addition, the Audit Committee determined that, in certain other circumstances, Macnica had shipped product not to end customers but to
other distributors and the Company had relied on point-of-sales reports submitted to the Company by Macnica that indicated the referenced product had been shipped to an end customer of Macnica when such product had only been shipped to other
distributors. Recognition of revenue on sales between distributors instead of to the end customers is not permitted under the Companys revenue recognition policies. Further, the Audit Committee determined that certain sales transactions with
Uniquest did not meet the Companys revenue recognition criteria and the requirements of SAB 104 because in certain circumstances, employees of Uniquest had incorrectly reported to the Company the date of shipments to end customers.



As a result, the Audit Committee concluded on May 5, 2005 that the Company
should restate certain financial information (the Additional Restatement) that was previously reported in the Companys Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and December 31, 2004
as well as certain financial information for the quarter and transition period ended September 30, 2004 that was previously reported in the Companys Transition Report. The Additional Restatement was based on the Audit Committees
conclusion on such date that the Consolidated Balance Sheets as of March 31, 2004, June 30, 2004, September 30, 2004 and



14



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



December 31, 2004 and the related Consolidated Statements of Operations for the three months ended March 31, 2004, the three and six months ended June 30,
2004, the nine month transition period ended September 30, 2004 and the three months ended December 31, 2004 should no longer be relied upon because of errors in such financial statements. The Additional Restatement was originally described in our
Current Report on Form 8-K dated May 5, 2005 and filed with the Securities and Exchange Commission on May 11, 2005.



Following receipt of a final report on the internal investigation, the Audit Committee determined that the internal investigation had been completed on
June 15, 2005.



15



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



The following tables provide a reconciliation of amounts previously reported in the Companys
Form 10-Q for the quarter ended March 31, 2004 with amounts adjusted for the restatement.



CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

(in thousands, except per share data)



|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | --------------------------------- | ------ | - | ----------------------------------- | - | ---- | ---------------------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                      |  | Three Months Ended March 31, 2004 |        |   | Three Months EndedDecember 31, 2003 |   |      | Six Months Ended March 31, 2004 Restated | 
|                                                                      |  | PreviouslyReported (1)            |        |   | RestatementAdjustment               |   |      | RestatedTotal                            |  |   |       
|Revenue                                                               |  | $                                 | 4,166  |   |                                     | $ | (893 | )(2)                                     |  | $ | 3,273  |   |  | $ | 4,126  |   |  | $ | 7,399  |  
|Cost of revenue                                                       |  |                                   | 2,972  |   |                                     |   | (599 | )(3)                                     |  |   | 2,373  |   |  |   | 2,769  |   |  |   | 5,142  |  
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Gross profit (loss)                                                   |  |                                   | 1,194  |   |                                     |   | (294 | )                                        |  |   | 900    |   |  |   | 1,357  |   |  |   | 2,257  |  
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Operating expenses:                                                   |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Research and development                                              |  |                                   | 1,718  |   |                                     |   |     |                                          |  |   | 1,718  |   |  |   | 1,669  |   |  |   | 3,387  |  
|Selling, general and administrative                                   |  |                                   | 1,269  |   |                                     |   |     |                                          |  |   | 1,269  |   |  |   | 1,082  |   |  |   | 2,351  |  
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Total operating expenses                                              |  |                                   | 2,987  |   |                                     |   |     |                                          |  |   | 2,987  |   |  |   | 2,751  |   |  |   | 5,738  |  
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Loss from operations                                                  |  |                                   | (1,793 | ) |                                     |   |      |                                          |  |   | (2,087 | ) |  |   | (1,394 | ) |  |   | (3,481 | )
|Interest and other income (expense), net                              |  |                                   | 8      |   |                                     |   |     |                                          |  |   | 8      |   |  |   | 8      |   |  |   | 16     |  
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Net loss                                                              |  | $                                 | (1,785 | ) |                                     | $ | (294 | )                                        |  | $ | (2,079 | ) |  | $ | (1,386 | ) |  | $ | (3,465 | )
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Basic and diluted net loss per share                                  |  | $                                 | (0.04  | ) |                                     |   |      |                                          |  | $ | (0.05  | ) |  | $ | (0.03  | ) |  | $ | (0.07  | )
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  
|Number of shares used to compute basic and diluted net loss per share |  |                                   | 45,266 |   |                                     |   |      |                                          |  |   | 45,266 |   |  |   | 43,853 |   |  |   | 46,845 |  
|                                                                      |  |                                   |        |   |                                     |   |      |                                          |  |   |        |   |  |   |        |   |  |   |        |  



16



---

##### Table of Contents

Tripath Technology Inc.



Notes to Condensed Interim Consolidated Financial Statements(Continued)

(Unaudited)



CONSOLIDATED BALANCE SHEET (UNAUDITED)

(in thousands)



|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|-------------------------------------------- |  | ----------------------- | -------- | - | ---------------------- | - | ---- | -------------- |  | - | -------- | -
|                                             |  | March 31, 2004          |         
|                                             |  | Previously Reported (1) |          |   | Restatement Adjustment |   |      | Restated Total | 
|ASSETS                                       |  |                         |          |   |                        |   |      |                |  |   |          |  
|Current assets:                              |  |                         |          |   |                        |   |      |                |  |   |          |  
|Cash, cash equivalents and restricted cash   |  | $                       | 9,183    |   |                        | $ |     |                |  | $ | 9,183    |  
|Accounts receivable, net                     |  |                         | 2,692    |   |                        |   |     |                |  |   | 2,692    |  
|Inventories, net                             |  |                         | 7,016    |   |                        |   | 599  | (3)            |  |   | 7,615    |  
|Prepaid expenses and other current assets    |  |                         | 257      |   |                        |   |     |                |  |   | 257      |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|Total current assets                         |  |                         | 19,148   |   |                        |   | 599  |                |  |   | 19,747   |  
|Property and equipment, net                  |  |                         | 1,949    |   |                        |   |     |                |  |   | 1,949    |  
|Other assets                                 |  |                         | 83       |   |                        |   |     |                |  |   | 83       |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|Total assets                                 |  | $                       | 21,180   |   |                        | $ | 599  |                |  | $ | 21,779   |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY         |  |                         |          |   |                        |   |      |                |  |   |          |  
|Current liabilities:                         |  |                         |          |   |                        |   |      |                |  |   |          |  
|Accounts payable                             |  | $                       | 4,742    |   |                        | $ |     |                |  | $ | 4,742    |  
|Current portion of capital lease obligations |  |                         | 477      |   |                        |   |     |                |  |   | 477      |  
|Current portion of deferred rent             |  |                         | 140      |   |                        |   |     |                |  |   | 140      |  
|Accrued expenses                             |  |                         | 922      |   |                        |   |     |                |  |   | 922      |  
|Deferred distributor revenue                 |  |                         | 1,112    |   |                        |   | 893  | (2)            |  |   | 2,005    |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|Total current liabilities                    |  |                         | 7,393    |   |                        |   | 893  |                |  |   | 8,286    |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|Long term liabilities:                       |  |                         | 1,011    |   |                        |   |     |                |  |   | 1,011    |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|Stockholders equity:                        |  |                         |          |   |                        |   |      |                |  |   |          |  
|Common stock                                 |  |                         | 47       |   |                        |   |     |                |  |   | 47       |  
|Additional paid-in capital                   |  |                         | 194,254  |   |                        |   |     |                |  |   | 194,254  |  
|Deferred stock-based compensation            |  |                         | (176     | ) |                        |   |     |                |  |   | (176     | )
|Accumulated deficit                          |  |                         | (181,349 | ) |                        |   | (294 | )              |  |   | (181,643 | )
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|Total stockholders equity                   |  |                         | 12,776   |   |                        |   | (294 | )              |  |   | 12,482   |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  
|Total liabilities and stockholders equity   |  | $                       | 21,180   |   |                        | $ | 599  |                |  | $ | 21,779   |  
|                                             |  |                         |          |   |                        |   |      |                |  |   |          |  

---

|(1) | As previously reported in the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
|--- | -----------------------------------------------------------------------------------------------------------

|(2) | Reflects the deferral of revenue of approximately $893,000 relating to products subject to a right of return.
|--- | -------------------------------------------------------------------------------------------------------------

|(3) | Reflects an increase in inventory of $599,000 relating to the deferred cost associated with the deferred revenue.
|--- | -----------------------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



This report contains forward looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) and information relating to us that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. In addition, when used in this report, the words
likely, will, suggests, target, may, would, could, anticipate, believe, estimate, expect, intend,
plan, predict, and similar expressions and their variants, as they relate to us or our management, may identify forward looking statements. Such statements reflect our judgment as of the date of this quarterly report on Form
10-Q with respect to future events, the outcome of which are subject to certain known and unknown risks and uncertainties, including the factors discussed under the caption Risk Factors, and those discussed elsewhere in this quarterly
report on Form 10-Q, which may have a significant impact on our business, operating results or financial condition. Investors are cautioned that these forward looking statements are inherently uncertain. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Although we believe that the expectations reflected in these forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward looking statements. All forward
looking statements included in this report are based on information available to us as of the date of this report. We undertake no obligation to update or revise any forward looking statements, whether as a result of new information, future events
or otherwise, unless we are required to do so by law.



The
following discussion and analysis should be read in connection with the condensed consolidated financial statements and the notes thereto included in Item 1 in this quarterly report and our annual report on Form 10-K for the year ended December 31,
2003.



Critical Accounting Policies



Use of Estimates: Managements discussion and analysis of
financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to product returns, warranty obligations, bad debts, inventories, accruals, stock options, warrants, and income taxes (including the valuation allowance for deferred taxes). We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions. Material differences may occur in our results of operations for any period if we made different judgments or utilized different estimates.



Revenue Recognition: The Company recognizes revenue in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition in Financial Statements. The Company recognizes revenue when all of the following criteria are met: 1) there
is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. The following policies apply to the Companys major categories of
revenue transactions.



Sales to OEM Customers: Under the
Companys standard terms and conditions of sale, title and risk of loss transfer to the customer at the time product is shipped to the customer, FOB shipping point, and revenue is recognized accordingly. The Company accrues the estimated cost
of post-sale obligations, including basic product warranties or returns, based on historical experience. The Company has experienced minimal warranty or other returns to date.



18



---

##### Table of Contents

Sales to Distributors: Sales to distributors are made under arrangements allowing limited
rights of return, generally under product warranty provisions, stock rotation rights and price protection on products unsold by the distributor. In addition, the distributor may request special pricing and allowances which may be granted subject to
the companys approval. As a result of these return rights and potential pricing adjustments, the Company generally defers recognition of revenue until such time that the distributor sells product to its customer based upon receipt of
point-of-sale reports from the distributor.



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



Allowance for Doubtful Accounts: The Company provides an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectibility. The collectibility of the Companys
receivables is evaluated based on a variety of factors, including the length of time receivables are past due, indication of the customers willingness to pay, significant one-time events and historical experience. An additional reserve for
individual accounts is recorded when the Company becomes aware of a customers inability to meet its financial obligations, such as in the case of bankruptcy filings or substantial deterioration in the customers operating results or
financial position. If circumstances related to the Companys customers change, estimates of the recoverability of receivables would be further adjusted.



Inventories: Inventories are stated at the lower of cost or market. This policy requires us to make estimates
regarding the market value of our inventory, including an assessment of excess or obsolete inventory. We determine excess and obsolete inventory based on an estimate of the future demand and estimated selling prices for our products within a
specified time horizon, generally 12 months. The estimates we use for expected demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. Actual demand and market conditions may be
different from those projected by our management. If our unit demand forecast is less than our current inventory levels and purchase commitments during the specified time horizon, or if the estimated selling price is less than our inventory value,
we will be required to take additional excess inventory charges or write-downs to net realizable value, which will decrease our gross margin and net operating results in the future.



Results of Operations



Three months ended March 31, 2004 and 2003



Revenue. Revenue for the three months ended March 31, 2004 was $3.3 million, an increase of $0.3 million or 10% over revenues of $3.0 million for
the three months ended March 31, 2003. The increase in revenue resulted primarily from an increase in sales of our TA2020, and TLD4012 products which reflects growth in the flat panel TV, gaming, automotive and communications markets.



Sales to Kyoshin Technosonic Co., Ltd., (KTS), Samsung and Alcatel accounted
for approximately 40%, 13% and 9%, respectively, of revenue in the three months ended March 31, 2004 and 21%, 11%, and 4%, respectively, in the corresponding prior year quarter. Sales to our five largest customers represented approximately 71% of
revenue in the three months ended March 31, 2004 and 68% of revenue in the three months ended March 31, 2003.



Gross Profit. Gross profit for the three months ended March 31, 2004 was $0.9 million or 27%, compared with a gross profit of $0.7 million or 25%
for the three months ended March 31, 2003. The increase in the gross profit for the three months ended March 31, 2004 reflects ongoing product cost reduction efforts, increased unit volumes for a number of our products as well as sales of higher
margin products.



Research and Development. Research and
development expenses for the three months ended March 31, 2004 were $1.7 million, a decrease of $0.3 million from $2.0 million for the three months ended March 31, 2003. The year over year decrease for the three month periods resulted primarily from
a decrease in allocated expenses related to rent, insurance, legal fees and depreciation. We anticipate that our R&D expenses will increase in fiscal 2004.



19



---

##### Table of Contents

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the
three months ended March 31, 2004 were $1.3 million, an increase of $0.1 million from $1.2 million for the three months ended March 31, 2003. The slight increase in selling, general and administrative expenses is mostly due to the fluctuation
in stock-based compensation. We anticipate that our S,G&A expenses will increase in fiscal 2004, including expenses for legal and financial compliance costs related to the Sarbanes-Oxley Act of 2002 and increased insurance costs.



Liquidity and Capital Resources



Since our inception, we have financed our operations through the sale of our
equity securities, primarily the sale of preferred stock, through our initial public offering on August 1, 2000 and through a private placement in January 2002. Net proceeds to us as a result of our initial public offering, our private placement and
subsequent stock warrant exercises were approximately $45.4 million, $19.9 million and $5.4 million, respectively.



Net cash used by operating activities increased to $2.5 million for the quarter ended March 31, 2004 from $1.3 million for the quarter ended March 31,
2003. The increase was mainly due to an increase in inventory of $2.8 million and an increase in accounts receivable of $1.5 million partially offset by an increase in accounts payable and accrued expenses of $3.5 million and a decrease in the net
loss of $692,000.



Cash used in investing activities was
$318,000 for the quarter ended March 31, 2004 compared to $13,000 for the quarter ended March 31, 2003. The increase was due to an increase in purchase of property and equipment.



Cash provided by financing activities increased to $2.4 million for the quarter ended March 31, 2004 from cash used of
$41,000 for the quarter ended March 31, 2003. The increase was due primarily to the proceeds received from the exercise of warrants which are summarized below.



On January 24, 2002, we completed a financing in which we raised $21 million in gross proceeds through a private placement of non-voting Series A
Preferred Stock and warrants, at $30 per unit to a group of investors. At a Special Meeting of Stockholders held on March 7, 2002, our stockholders approved the issuance and sale of the Series A Preferred Stock and warrants, which then automatically
converted into 13,999,000 shares of common stock and warrants to purchase 3,303,760 shares of common stock. This included unregistered warrants that were issued to the placement agent for the financing transaction to purchase 503,960 shares of our
common stock. The 2,799,800 registered warrants had a term of three years and an effective Common Stock exercise price of $1.95 per share, whereas 419,968 of the 503,960 warrants issued to the placement agent had an effective Common Stock exercise
price of $1.50 per share. The remainder of the warrants issued to the placement agent had an effective Common Stock exercise price of $1.95 per share.



During the year ended December 31, 2003, warrants were exercised which resulted in the issuance of 1,896,226 shares of our common stock with proceeds
totaling approximately $3.1 million. The warrants issued to the placement agent were exercised on a net issuance basis resulting in 300,438 shares of our common stock being issued to the placement agent.



The warrant agreement contained a provision for the mandatory exercise of the
warrants if our common stock traded at $5.85 or higher for 20 out of 30 trading days. At the close of business on January 2, 2004 our common stock had traded at $5.85 or higher for 20 consecutive days and we were able to invoke the provision for the
mandatory exercise of all outstanding warrants issued in connection with the January 2002 financing. All outstanding warrants were exercised in January 2004 resulting in the issuance of an additional 1.2 million shares of common stock. We received
proceeds of approximately $2.3 million from the exercise of these warrants.



20



---

##### Table of Contents

Our total commitments on our operating and capital leases and inventory purchases as of March 31, 2004,
were as follows (in thousands):



|                                                   |  |                 |       |               |   |      |                              |  |        |       |  |   |      
|-------------------------------------------------- |  | --------------- | ----- | ------------- | - | ---- | ---------------------------- |  | ------ | ----- |  | - | -----
|As of March 31, 2004                               |  | OperatingLeases |       | CapitalLeases |   |      | InventoryPurchaseCommitments |  | Totals
|2004                                               |  | $               | 753   |               | $ | 380  |                              |  | $      | 3,548 |  | $ | 4,681
|2005                                               |  |                 | 1,083 |               |   | 473  |                              |  |        |      |  |   | 1,556
|2006                                               |  |                 | 1,046 |               |   | 64   |                              |  |        |      |  |   | 1,110
|2007                                               |  |                 | 270   |               |   | 43   |                              |  |        |      |  |   | 313  
|2008 and beyond                                    |  |                 |      |               |   |     |                              |  |        |      |  |   |     
|                                                   |  |                 |       |               |   |      |                              |  |        |       |  |   |      
|Total minimum lease payments                       |  | $               | 3,152 |               |   | 960  |                              |  | $      | 3,548 |  | $ | 7,660
|                                                   |  |                 |       |               |   |      |                              |  |        |       |  |   |      
|Less: amount representing interest                 |  |                 |       |               |   | (81  | )                            |  |        |       |  |   |      
|                                                   |  |                 |       |               |   |      |                              |  |        |       |  |   |      
|Present value of minimum lease payments            |  |                 |       |               |   | 879  |                              |  |        |       |  |   |      
|Less: current portion of capital lease obligations |  |                 |       |               |   | (477 | )                            |  |        |       |  |   |      
|                                                   |  |                 |       |               |   |      |                              |  |        |       |  |   |      
|Long-term capital lease obligations                |  |                 |       |               | $ | 402  |                              |  |        |       |  |   |      
|                                                   |  |                 |       |               |   |      |                              |  |        |       |  |   |      



We expect our future
liquidity and capital requirements will fluctuate depending on numerous factors including: market acceptance and demand for current and future products, the timing of new product introductions and enhancements to existing products, the success of
on-going efforts to reduce our manufacturing costs as well as operating expenses and need for working capital for such items as inventory and accounts receivable.



We have incurred substantial losses and have experienced negative cash flow since inception and have an accumulated deficit
of $181.6 million at March 31, 2004. Beginning in August 2001, we instituted programs to reduce expenses including reducing headcount from 144 employees at the end of July 2001 to 56 employees at the end of December 2003 and reducing employees
salaries by 10%. In September 2002 we relocated our headquarters, which reduced rent expense and canceled our D&O policy, which reduced insurance expense. These actions resulted in significant cost savings in 2003. We reduced our cash used in
operating activities from approximately $13 million in 2002 to approximately $4 million in 2003.



During 2003, warrants were exercised which resulted in us receiving proceeds totaling approximately $3.1 million. At December 31, 2003, we had working
capital of $11.2 million, including cash of $9.6 million. Subsequent to December 31, 2003 we received proceeds of approximately $2.3 million from the exercise of outstanding warrants.



We may need to raise additional funds to finance our activities through public or private equity or debt financings, the
formation of strategic partnerships or alliances with other companies or through bank borrowings with existing or new banks. We may not be able to obtain additional funds on terms that would be favorable to our stockholders and us, or at all. In
such instance, we will take measures to reduce our operating expenses, such as reducing headcount or canceling selected research and development projects. Without sufficient capital to fund our operations, we will no longer be able to continue as a
going concern. We believe, based on our current cash balance as well as our ability to implement the aforementioned measures, if needed, that we will have liquidity sufficient to meet our operating, working capital and financing needs for the next
twelve months and perhaps beyond. Our long-term prospects are dependent upon obtaining sufficient financing as needed to fund current working capital needs and future growth, and ultimately on achieving profitability.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a



21



---

##### Table of Contents

controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15, 2003. We adopted FIN 46 on January 1, 2003. The adoption of this standard did not have a material impact on our consolidated financial statements as we have no interest
in any variable interest entities.



In June 2003, the FASB
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging
activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. Adoption of this statement did not have a material impact on our consolidated financial statements, as we have not entered into any derivative contracts.



In June 2003, the FASB issued SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issue classifies and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this statement
did not have a material impact on our consolidated financial statements.



Risk Factors



Set forth below and
elsewhere in this quarterly report and in the other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking
statements contained in this quarterly report. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this quarterly report and our other public filings.



Our limited operating history and dependence on new technologies make it difficult to
evaluate our prospects and future products.



We were
incorporated in July 1995, began shipping products in 1998 and became a public reporting company in August 2000. Accordingly, we have limited historical financial information and operating history upon which you may evaluate our products and us. Our
prospects must be considered in the light of the risks, challenges and difficulties frequently encountered by companies in their early stage of development, particularly companies in intensely competitive and rapidly evolving markets such as the
semiconductor industry. We cannot be sure that we will be successful in addressing these risks and challenges.



We have a history of losses and may never achieve or sustain profitability.



As of March 31, 2004, we had an accumulated deficit of $181.6 million. We incurred net losses of approximately $7.2 million in 2003 and $19.3 million
(before accretion on preferred stock of $14.9 million) in 2002. We may continue to incur net losses and these losses may be substantial. Furthermore, we may continue to generate significant negative cash flow in the future. We will need to generate
substantially higher revenue to achieve and sustain profitability and positive cash flow. Our ability to generate future revenue and achieve profitability will depend on a number of factors, many of which are described throughout this section. If we
are unable to achieve or maintain profitability, we will be unable to build a sustainable business. In this event, our share price and the value of your investment would likely decline and we might be unable to continue as a going concern.



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



Because we have had
losses, we have funded our operating activities to date from the sale of securities, including our most recent financing in January 2002 as well as from the proceeds from the related exercise of



22



---

##### Table of Contents

warrants issued in connection with the 2002 financing. However, to grow our business significantly, we will need additional capital. We cannot be certain
that any such financing will be available on acceptable terms, or at all. Moreover, additional equity financing, if available, would likely be dilutive to the holders of our common stock, and debt financing, if available, would likely involve
restrictive covenants. If we cannot raise sufficient additional capital, it would adversely affect our ability to achieve our business objectives and to continue as a going concern.



Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and
investors, which may cause our share price to decline.



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



| |  |  | level of sales and recognition of revenue;
| | - |  | ------------------------------------------



| |  |  | mix of high and low margin products;
| | - |  | ------------------------------------



| |  |  | availability and pricing of wafers;
| | - |  | -----------------------------------



| |  |  | timing of introducing new products, including, but not limited to, the introduction of new products based on the lower cost Godzilla architecture, lower cost versions of
existing products, fluctuations in manufacturing yields and other problems or delays in the fabrication, assembly, testing or delivery of products; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | rate of development of target markets.
| | - |  | --------------------------------------



A large portion of our operating expenses, including salaries, rent and capital lease expenses, are fixed. If we experience a shortfall in revenues
relative to our expenses, we may be unable to reduce our expenses quickly enough to offset the reduction in revenues during that accounting period, which would adversely affect our operating results. Fluctuations in our operating results may also
result in fluctuations in our common stock price. If the market price of our stock is adversely affected, we may experience difficulty in raising capital or making acquisitions. In addition, we may become the object of securities class action
litigation. As a result, we do not believe that period-to-period comparisons of our revenues and operating results are necessarily meaningful. One should not rely on the results of any one quarter as an indication of future performance.



Our stock price may be subject to significant volatility.



The stock prices for many technology companies have recently experienced
large fluctuations, which may or may not be directly related to the operating performance of the specific companies. For example, since the beginning of fiscal 2003, our Common Stock had closing sales prices on Nasdaq as low as $0.17 and as high as
$8.20 per share. Broad market fluctuations as well as general economic conditions may cause our stock price to decline. We believe that fluctuations of our stock price may continue to be caused by a variety of factors, including:



| |  |  | announcements of developments related to our business;
| | - |  | ------------------------------------------------------



| |  |  | fluctuations in our financial results;
| | - |  | --------------------------------------



| |  |  | general conditions in the stock market or around the world, terrorism or developments in the semiconductor and capital equipment industry and the general economy;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sales or purchases of our common stock in the marketplace;
| | - |  | ----------------------------------------------------------



| |  |  | announcements of our technological innovations or new products or enhancements or those of our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | developments in patents or other intellectual property rights;
| | - |  | --------------------------------------------------------------



| |  |  | developments in our relationships with customers and suppliers;
| | - |  | ---------------------------------------------------------------



23



---

##### Table of Contents

| |  |  | a shortfall or changes in revenue, gross margins or earnings or other financial results from analysts expectations or an outbreak of hostilities or natural disasters; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquisition or merger activity and the success in implementing such acquisitions.
| | - |  | ---------------------------------------------------------------------------------



Our product shipment patterns make it difficult to predict our quarterly revenues.



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



Our customers may cancel or defer
product orders, which could result in excess inventory.



Our sales are generally made pursuant to individual purchase orders that may be canceled or deferred by customers on short notice without significant penalty. Thus, orders in backlog may not result in future revenue. In the past, we have
had cancellations and deferrals by customers. Any cancellation or deferral of product orders could result in us holding excess inventory, or result in obsolete inventory over time, which could seriously harm our profit margins and restrict our
ability to fund our operations. For example, during the quarter ended March 31, 2002, we recorded a provision for excess inventory of approximately $5.0 million. Our inventory and purchase commitments are based on expected demand and not necessarily
built for firm purchase commitments for our customers. Because of the required delivery lead time, we need to carry a high level of inventory in comparison to past sales. We recognize revenue upon shipment of products to the end customer. Although
we have not experienced customer refusals to accept shipped products or material difficulties in collecting accounts receivable, such refusals or collection difficulties are possible and could result in significant charges against income, which
could seriously harm our revenues and our cash flow.



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



A relatively small number of customers have accounted for most of our revenues to date. Any reduction or delay in sales of our products to one or more of
these key customers could seriously reduce our sales volume and revenue and adversely affect our operating results. Our top five end customers accounted for 71% of revenue in the three months ended March 31, 2004. In particular, sales to three large
customers, Kyoshin Technosonic Co. Ltd., (KTS), Samsung and Alcatel, accounted for 40%, 13% and 9%, respectively, of revenue for the quarter ended March 31,2004 and 21%, 11% and 4%, respectively, in the corresponding quarter ended March 31, 2003.
Our top five end customers accounted for 68% of revenue in 2003 and 67% of revenue in 2002. Our primary customers in 2003 were Kyoshin Technosonic Co., Ltd. (KTS), Samsung Electronics Co., Ltd. (Samsung), and Apple Computer Inc. (Apple)
representing 24%, 18% and 15% of revenue, respectively. We expect that we will continue to rely on the success of our largest customers and on our success in selling our existing and future products to those customers in significant quantities.
However, we cannot be sure that we will retain our largest customers or that we will be able to obtain additional key customers or replace key customers we may lose or who may reduce their purchases.



We currently rely on sales of four products for a significant portion of our revenue, and
the failure of these products to be successful in the future could substantially reduce our sales.



We currently rely on sales of our TA1101B, TA2020, TA2024 digital audio amplifier products and TLD4012 DSL line driver to generate a significant portion
of our revenue. Sales of these products amounted to 91% of our revenue for the quarter ended March 31, 2004, 87% of our revenue in 2003 and 96% of our revenue in 2002. We have developed additional products and plan to introduce more products in the
future, but there can be no assurance that these products will be commercially successful. Consequently, if our existing products are not successful, our sales could decline substantially.



24



---

##### Table of Contents

Our lengthy sales cycle makes it difficult for us to predict if or when a sale will be made, to forecast our revenue
and to budget expenses, which may cause fluctuations in our quarterly results.



Because of our lengthy sales cycles, we may continue to experience a delay between incurring expenses for research and development, sales and marketing and general and administrative efforts, as well as incurring
investments in inventory, and the generation of revenue, if any, from such expenditures. In addition, the delays inherent in such a lengthy sales cycle raise additional risks of customer decisions to cancel or change product plans, which could
result in our loss of anticipated sales. Our new products are generally incorporated into our customers products or systems at the design stage. To try and have our products selected for design into new products of current and potential
customers, commonly referred to as design wins, often requires significant expenditures by us without any assurance of success. Once we have achieved a design win, our sales cycle will start with the test and evaluation of our products by the
potential customer and design of the customers equipment to incorporate our products. Generally, different parts have to be redesigned to incorporate our devices successfully into our customers products.



The sales cycle for the test and evaluation of our products can range from a
minimum of three to six months, and it can take a minimum of an additional six to nine months before a customer commences volume production of equipment that incorporates our products. Achieving a design win provides no assurance that such customer
will ultimately ship products incorporating our products or that such products will be commercially successful. Our revenue or prospective revenue would be reduced if a significant customer curtails, reduces or delays orders during our sales cycle,
or chooses not to release products incorporating our products.



Our ability
to achieve revenue growth will be harmed if we are unable to persuade electronic systems manufacturers to adopt our new amplifier technology.



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



We currently depend on consumer electronics markets that are typically characterized by
aggressive pricing, frequent new product introductions and intense competition.



A substantial portion of our current revenue is generated from sales of products that address the consumer electronics markets, including home theater, computer audio, flat panel TV, gaming, professional amplifiers,
set-top box, AV receivers and the automotive audio markets. These markets are characterized by frequent new product introductions, declining prices and intense competition. Pricing in these markets is aggressive, and we expect pricing pressure to
continue. In the computer audio segment, our success depends on consumer awareness and acceptance of existing and new products by our customers and consumers, in particular, the elimination of externally-powered speakers. In the automotive audio
segment, we face pressure from our customers to deliver increasingly higher-powered solutions under significant engineering limitations due to the size constraints in car dashboards. In addition, our ability to obtain prices higher than the prices
of traditional amplifiers will depend on our ability to educate manufacturers and their customers about the benefits of our products. Failure of our customers and consumers to accept our existing or new products will seriously harm our operating
results.



The cyclical nature of the semiconductor industry could create
fluctuations in our operating results.



The semiconductor
industry has historically been cyclical and characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing
product cycles and declines in general economic conditions.



25



---

##### Table of Contents

Industry downturns have been characterized by diminished product demand, production overcapacity and accelerated decline in average selling prices, and in
some cases have lasted for more than a year. The industry experienced a downturn of this type in 1997 and 1998, and began experiencing a downturn again in 2001. In addition, we may determine to lower our prices of our products to increase or
maintain market share, which would likely harm our operating results. The semiconductor industry also periodically experiences increased demand and production capacity constraints. As a result, we have experienced and may experience in the future
substantial period-to-period fluctuations in our results of operations due to general semiconductor industry conditions, overall economic conditions or other factors, many of which are outside our control. Due to these risks, you should not rely on
period-to-period comparisons to predict our future performance.



We may
experience difficulties in the introduction of new or enhanced products, including but not limited to the new Godzilla architecture products, that could result in significant, unexpected expenses or delay their launch, which would harm
our business.



Our failure or our customers failure
to develop and introduce new products successfully and in a timely manner would seriously harm our ability to generate revenues. Consequently, our success depends on our ability to develop new products for existing and new markets, introduce such
products in a timely and cost-effective manner and to achieve design wins. The development of these new devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products. The
successful introduction of a new product may currently take up to 18 months. Successful product development and introduction depends on a number of factors, including:



| |  |  | accurate prediction of market requirements and evolving standards;
| | - |  | ------------------------------------------------------------------



| |  |  | accurate new product definition;
| | - |  | --------------------------------



| |  |  | timely completion and introduction of new product designs;
| | - |  | ----------------------------------------------------------



| |  |  | availability of foundry capacity;
| | - |  | ---------------------------------



| |  |  | achieving acceptable manufacturing yields;
| | - |  | ------------------------------------------



| |  |  | market acceptance of our products and our customers products; and
| | - |  | ------------------------------------------------------------------



| |  |  | market competition.
| | - |  | -------------------



We cannot guarantee success with regard to these factors.



Neither our disclosure controls and procedures nor our internal control over financial reporting can prevent all errors or fraud, and in the past these controls and
procedures were not effective and resulted in restatements to our financial results.



Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that all misstatements due to error or fraud, if any, may occur and
not be detected on a timely basis. These inherent limitations include the possibility that judgments in decision-making can be faulty and that breakdowns can occur because of errors or mistakes. Our controls and procedures can also be circumvented
by the individuals acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can
be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Furthermore, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with



26



---

##### Table of Contents

policies or procedures. While we seek to design our controls and procedures to provide reasonable assurance that information required to be disclosed in our
periodic filings is timely disclosed, these inherent limitations expose us to breakdowns in such controls and procedures. For example, while our certifying officers believed that the design of our controls and procedures would ensure that material
information related to the Company would be made known to them on a timely basis, in light of the circumstances underlying the Initial Restatement and Additional Restatement, these controls and procedures for the financial statement periods covered
by the Initial Restatement and Additional Restatement were not effective. We have made certain changes to our internal control over financial reporting regarding the review of sales orders designed to address these circumstances, although even these
improvements to our controls and procedures cannot ensure that all errors or fraud will be prevented.



We depend on three outside foundries for our semiconductor device manufacturing requirements.



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



| |  |  | the lack of guaranteed wafer supply;
| | - |  | ------------------------------------



| |  |  | limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the unavailability of or delays in obtaining access to key process technologies.
| | - |  | --------------------------------------------------------------------------------



In addition, the manufacture of integrated circuits is a highly complex and technologically demanding process. Although we
work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries have from time to time experienced lower than anticipated manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies.



We provide our foundries with continuous forecasts of our production requirements; however, the ability of each foundry to provide us with semiconductor devices is limited by the foundrys available capacity. In many cases, we place
our orders on a purchase order basis, and foundries may allocate capacity to the production of other companies products while reducing the deliveries to us on short notice. In particular, foundry customers that are larger and better financed
than us or that have long-term agreements with our foundries may cause such foundries to reallocate capacity in a manner adverse to us. While capacity at our foundries has been available during the last several years, the cyclical nature of the
semiconductor industry could result in capacity limitations in a cyclical upturn or otherwise.



If we use a new foundry, several months would be typically required to complete the qualification process before we can begin shipping products from the new foundry. In the event any of our current foundries suffers
any damage or destruction to their respective facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner. Even our current
outside foundries would need to have certain manufacturing processes qualified in the event of disruption at another foundry, which we may not be able to accomplish in a timely enough manner to prevent an interruption in supply of the affected
products.



If we encounter shortages or delays in obtaining
semiconductor devices for our products in sufficient quantities when required, delivery of our products could be delayed, resulting in customer dissatisfaction and decreased revenues.



27



---

##### Table of Contents

We depend on third-party subcontractors for most of our semiconductor assembly and testing requirements and any
unexpected interruption in their services could cause us to miss scheduled shipments to customers and to lose revenues.



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



Failure to transition our products to more effective and/or increasingly smaller semiconductor chip sizes and packaging could cause us to lose our competitive advantage and reduce our gross margins.



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



Our international operations subject us to risks inherent in doing business on an
international level that could harm our operating results.



We currently obtain almost all of our manufacturing, assembly and test services from suppliers located outside the United States and may expand our manufacturing activities abroad. Approximately 96% of our total revenue for the quarter
ended March 31, 2004, was derived from sales to end customers based outside the United States. In 2003 and 2002, 78% and 61%, respectively, of our total revenue was derived from sales to end customers based outside of the United States. In addition,
we often ship products to our domestic customers international manufacturing divisions and subcontractors.



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



| |  |  | political, social and economic instability;
| | - |  | -------------------------------------------



| |  |  | trade restrictions and tariffs;
| | - |  | -------------------------------



| |  |  | the imposition of governmental controls;
| | - |  | ----------------------------------------



| |  |  | exposure to different legal standards, particularly with respect to intellectual property;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | import and export license requirements;
| | - |  | ---------------------------------------



| |  |  | unexpected changes in regulatory requirements; and
| | - |  | --------------------------------------------------



| |  |  | difficulties in collecting receivables.
| | - |  | ---------------------------------------



28



---

##### Table of Contents

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



If we are not
successful in developing and marketing new and enhanced products for the DSL high speed communications markets that keep pace with technology and our customers needs, our operating results will suffer.



The market for our DSL products is new and emerging, and is characterized by
rapid technological advances, intense competition and a relatively small number of potential customers. This will likely result in price erosion on existing products and pressure for cost-reduced future versions. We recently started to ship our
TA4012 DSL line driver in volume and are in the sampling phase of our new dual channel line driver. Implementation of our products requires manufacturers to accept our technology and redesign their products. If potential customers do not accept our
technology or experience problems implementing our devices in their products, our products could be rendered obsolete and our business would be harmed. If we are unsuccessful in introducing future products with enhanced performance, our ability to
achieve revenue growth will be seriously harmed.



We may experience
difficulties in the development and introduction of a new amplifier product for use in the cellular phone market, which could result in significant expenses or delay in its launch.



We are currently developing an amplifier product for use in the cellular phone market. We currently have no design wins or
customers for this product. We may not introduce our amplifier product for the cellular phone market on time, and this product may never achieve market acceptance. Furthermore, competition in this market is likely to result in price reductions,
shorter product life cycles, reduced gross margins and longer sales cycles compared with what we have experienced to date with our other products.



Intense competition in the semiconductor industry and in the consumer electronics and communications markets could prevent us from achieving or sustaining
profitability.



The semiconductor industry and the
consumer audio and communications markets are highly competitive. We compete with a number of major domestic and international suppliers of semiconductors in the consumer electronics and communications markets. We also may face competition from
suppliers of products based on new or emerging technologies. Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, access to larger customer bases
and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. As a result, such competitors may be able to adapt more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the promotion and sale of their products than us. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential
customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, existing or new competitors may in the future
develop technologies that more effectively address the transmission of digital information through existing analog infrastructures at a lower cost or develop new technologies that may render our technology obsolete. There can be no assurance that we
will be able to compete successfully in the future against our existing or potential competitors, or that our business will not be harmed by increased competition.



Our products are complex and may have errors and defects that are detected only after deployment in customers products, which may
harm our business.



Products such as those that we offer
may contain errors and defects when first introduced or as new versions are released. We have in the past experienced such errors and defects, in particular in the development stage of a



29



---

##### Table of Contents

new product. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage our reputation and seriously harm our ability to retain our existing customers and to attract new customers and therefore impact our revenues. Moreover, such errors and defects could cause problems,
interruptions, delays or a cessation of sales to our customers. Alleviating such problems may require substantial redesign, manufacturing and testing which would result in significant expenditures of capital and resources. Despite testing conducted
by us, our suppliers and our customers, we cannot be sure that errors and defects will not be found in new products after commencement of commercial production. Such errors and defects could result in additional development costs, loss of, or delays
in, market acceptance, diversion of technical and other resources from our other development efforts, product repair or replacement costs, claims by our customers or others against us or the loss of credibility with our current and prospective
customers. Any such event could result in the delay or loss of market acceptance of our products and would likely harm our business.



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



We may not be successful in retaining executive officers and other key management and technical personnel. A high level of
technical expertise is required to support the implementation of our technology in our existing and new customers products. In addition, the loss of the management and technical expertise of Dr. Adya S. Tripathi, our founder, president
and chief executive officer, could seriously harm us. We do not have any employment contracts with our employees.



Our intellectual property and proprietary rights may be insufficient to protect our competitive position.



Our business depends, in part, on our ability to protect our intellectual
property. We rely primarily on patent, copyright, trademark and trade secret laws to protect our proprietary technologies. We cannot be sure that such measures will provide meaningful protection for our proprietary technologies and processes. As of
March 31, 2004, we have 33 issued United States patents, and 11 additional United States patent applications which are pending. In addition, we have 16 international patents issued and an additional 24 international patents pending. We cannot be
sure that any patent will issue as a result of these applications or future applications or, if issued, that any claims allowed will be sufficient to protect our technology. In addition, we cannot be sure that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder would provide us meaningful protection. The failure of any patents to provide protection to our technology would make it easier for our competitors to offer similar
products. In connection with our participation in the development of various industry standards, we may be required to agree to license certain of our patents to other parties, including our competitors, that develop products based upon the adopted
standards.



We also generally enter into confidentiality
agreements with our employees and strategic partners, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products, services or technology without authorization, develop similar technology independently or design around our patents. In addition, effective copyright, trademark and trade secret protection may be unavailable or limited
in certain foreign countries. Some of our customers have entered into agreements with us pursuant to which such customers have the right to use our proprietary technology in the event we default in our contractual obligations, including product
supply obligations, and fail to cure the default within a specified period of time.



We may be subject to intellectual property rights disputes that could divert managements attention and could be costly.



The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, we may receive in the
future notices of claims of infringement, misappropriation or misuse of other parties proprietary rights. We cannot be sure that we will prevail in these actions, or that other actions alleging infringement by us of third-party patents,
misappropriation or misuse by us of third-party trade



30



---

##### Table of Contents

secrets or the invalidity of one or more patents held by us will not be asserted or prosecuted against us, or that any assertions of infringement,
misappropriation or misuse or prosecutions seeking to establish the invalidity of our patents will not seriously harm our business. For example, in a patent or trade secret action, an injunction could be issued against us requiring that we withdraw
particular products from the market or necessitating that specific products offered for sale or under development be redesigned. We have also entered into certain indemnification obligations in favor of our customers and strategic partners that
could be triggered upon an allegation or finding of our infringement, misappropriation or misuse of other parties proprietary rights. Irrespective of the validity or successful assertion of such claims, we would likely incur significant costs
and diversion of our management and personnel resources with respect to the defense of such claims, which could also seriously harm our business. If any claims or actions are asserted against us, we may seek to obtain a license under a third
partys intellectual property rights. We cannot be sure that under such circumstances a license would be available on commercially reasonable terms, if at all. Moreover, we often incorporate the intellectual property of our strategic customers
into our designs, and we have certain obligations with respect to the non-use and non-disclosure of such intellectual property.



We cannot be sure that the steps taken by us to prevent our, or our customers, misappropriation or infringement of intellectual property will be
successful.



The facilities of several of our key manufacturers and the
majority of our customers are located in geographic regions with increased risks of natural disasters.



Several key manufacturers and a majority of customers are located in the Pacific Rim region. The risk of earthquakes in this region, particularly in
Taiwan, is significant due to the proximity of major earthquake fault lines. Earthquakes, fire, flooding and other natural disasters in the Pacific Rim region likely would result in the disruption of our foundry partners assembly and testing
capacity and the ability of our customers to purchase our products. Labor strikes or political unrest in these regions would likely also disrupt operations of our foundries and customers. Any disruption resulting from such events could cause
significant delays in shipments of our products until we are able to shift our manufacturing, assembly and testing from the affected contractor to another third party vendor. We cannot be sure that such alternative capacity could be obtained on
favorable terms, if at all. Moreover, any such disruptions could also cause significant decreases in our sales to these customers until our customers resume normal purchasing volumes.



Terrorist attacks and threats, and government responses thereto, may negatively impact all aspects of our operations, revenues, costs and
stock price.



The threat of terrorist attacks involving
the United States, the instability in the Middle East, a decline in consumer confidence and continued economic weakness and geo-political instability have had a substantial adverse effect on the economy. If consumer confidence does not recover, our
revenues may be adversely affected for fiscal 2004 and beyond. Moreover, any further terrorist attacks involving the U.S., or any additional U.S. military actions overseas may disrupt our operations or those of our customers and suppliers. These
events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm our sales. Any of these events could increase volatility in the U.S. and world
financial markets which could harm our stock price and may limit the capital resources available to us and our customers or suppliers. This could have a significant impact on our operating results, revenues and costs and may result in increased
volatility in the market price of our common stock.



We are subject to
anti-takeover provisions that could delay or prevent an unfriendly acquisition of our company.



Provisions of our restated certificate of incorporation, equity incentive plans, bylaws and Delaware law may discourage transactions involving an
unfriendly change in corporate control. In addition to the foregoing, the stockholdings of our officers, directors and persons or entities that may be deemed affiliates and the ability of our



31



---

##### Table of Contents

board of directors to issue preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a third party
from acquiring us and may adversely affect the voting and other rights of holders of our common stock.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments
without significantly increasing risk of loss. Some of the securities that we may acquire in the future may be subject to market risk for changes in interest rates. To mitigate this risk, we plan to maintain a portfolio of cash equivalents and
short-term investments in a variety of securities, which may include commercial paper, money market funds, government and non-government debt securities. We manage the sensitivity of our results of operations to these risks by maintaining a
conservative portfolio, which is comprised solely of highly-rated, short-term investments. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes. Currently we are exposed to minimal
market risks. Due to the short-term and liquid nature of our portfolio, if interest rates were to fluctuate by 10% from rates at March 31, 2004 and March 31, 2003, our financial position and results of operations would not be materially affected.



Item 4. Controls and Procedures



Controls
Evaluation and Related CEO and CFO Certifications



We have
evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. The
controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) and has allowed us to make conclusions, as set forth below, regarding the
state of our disclosure controls and procedures.



Attached as
exhibits to this Quarterly Report are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls
evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.



Disclosure Controls and Procedures



Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed under
the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Our disclosure controls and procedures are also
designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosure. Our disclosure controls include components of our internal control over
financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting
principles in the U.S. To the extent that components of our internal control over financial reporting are included within our disclosure controls, they are included in the scope of our quarterly controls evaluation.



Limitations on the Effectiveness of Controls



Management, including our CEO and CFO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well



32



---

##### Table of Contents

conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. Furthermore, the
design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of
controls can provide absolute assurance that all misstatements due to error or fraud, if any, may occur and not be detected on a timely basis. These inherent limitations include the possibility that judgments in decision-making can be faulty and
that breakdowns can occur because of errors or mistakes. Our disclosure controls and procedures can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design
of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Furthermore,
controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.



Scope of the Controls Evaluation



The evaluation of our disclosure controls and procedures included a review of the controls objectives and design, the Companys implementation
of the controls and the effect of the controls on the information generated for use in this Quarterly Report. During the evaluation of our controls and procedures, we looked to identify data errors, control problems or acts of fraud and confirm that
appropriate corrective action (including process improvements) was being undertaken. This evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the disclosure
controls and procedures can be reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures made in our Transition Report on Form 10-K/T. The overall goal of the evaluation activity is to monitor our disclosure controls and
procedures, and to modify them as necessary. We intend to maintain our disclosure controls and procedures as a dynamic system that changes as conditions warrant.



We also considered whether our evaluation identified any significant deficiencies or material
weaknesses in our internal control over financial reporting, and whether we identified any acts of fraud involving personnel with a significant role in our internal control over financial reporting. Emphasis was placed on this information as
it was important both for the controls evaluation and because Item 5 in the certifications of the CEO and CFO requires that they disclose that information to our Board of Directors Audit Committee and to our independent auditors. In the
professional auditing literature, significant deficiencies are defined as a control deficiency, or combination of deficiencies, that adversely affects our ability to initiate, authorize, record, process or report external financial data
reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of our financial statements that is more than inconsequential will not be prevented or detected. Auditing
literature defines material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be
prevented or detected.



As previously disclosed in our
current report on Form 8-K dated October 18, 2004 and filed on October 22, 2004, in October 2004, our former independent registered public accountants, BDO Seidman LLP (BDO) provided our Audit Committee with a letter citing what BDO
asserted are two material weaknesses over our internal financial controls: one regarding the lack of effectiveness of our Audit Committee and the other regarding the lack of controls in place to estimate distributor returns in accordance
with SFAS No. 48. In response to this letter, we added an additional independent member to its Board of Directors and Audit Committee who the Board of Directors determined was an Audit Committee Financial Expert, as such term is defined under rules
promulgated by the Securities and Exchange Commission. We believe that there is no material weakness regarding the effectiveness of its Audit Committee following the appointment of such new member. In addition, the Audit Committee instructed our
Chief Financial Officer to conduct an internal investigation as to the verbal concerns raised by BDO regarding the appropriate accounting for approximately $1.3 million of product that, upon our inquiries, one of our distributors, Macnica, reported
had been returned to Macnica by Macnicas customers. The audit committee investigation and discussion that is described above in



33



---

##### Table of Contents

Note 13 to our condensed interim consolidated financial statements Restatements of Previously Reported Quarterly and Transition Period Financial
Information included a review of the Companys compliance with Securities and Exchange Commission Staff Accounting Bulleting No. 104 Revenue Recognition in Financial Statements (SAB 104) as applied to the
circumstances surrounding the Product Returns (as defined above in Note 13 to the condensed interim consolidated financial statements). Under SAB 104, a requirement for revenue recognition is that all of the following criteria must be met: (1) there
is persuasive evidence that an arrangement exists, (2) delivery of goods has occurred, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. In addition, pursuant to the Companys revenue recognition
policy, for sales to distributors, the Company defers recognition of revenue until such time that the distributor sells products to its customers based upon receipt of point-of-sales reports from the distributor. In limited circumstances, revenue
may be recognized when sold to a distributor if the distributor acknowledges in writing that there is no right of return and such sale also otherwise meets the SAB 104 requirements. The internal investigation revealed that approximately $1.4
million of a sale of the Companys product to Macnica did not meet the foregoing criteria because a former employee of the Company had agreed that Macnica would return the product at Macnicas discretion, which forms the basis of the
Restatement. This former employee had on this occasion agreed to a term of sale that was outside of the Companys standard practices and was not referenced in the documentation related to the sale submitted to the Companys finance
department. Given the discovery of this arrangement for Macnica to return the product, the Audit committee concluded on January 25, 2005 that the Company should restate certain financial information that was previously reported in the Companys
Form 10-Q for the quarter ended June 30, 2004 filed with the Securities and Exchange Commission on August 6, 2004 (the Initial Restatement). Following further investigation, the Audit Committee concluded on May 5, 2005 that the Company
should restate the financial statements (the Additional Restatement) that were previously included in its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004, and December 31, 2004 as well as
the financial statements for the nine-month transition period ended September 30, 2004 previously included in its Transition Report on Form 10-K/T. For more information regarding the Initial Restatement and the Additional Restatement, please see
Note 13 to our condensed interim consolidated financial statements, Restatement of Previously Reported Quarterly and Transition Period Financial Information included elsewhere in this Form 10-Q/A. In addition, the Audit Committee
approved certain changes to the Companys internal control over financial reporting as an additional remedial action.



Changes in Internal Control Over Financial Reporting.



Following the end of the period covered by this Quarterly Report on Form 10-Q, we determined that certain changes were warranted in our internal control
over financial reporting regarding the review of sales orders. As a result, we have implemented a requirement that our sales personnel, including those managing our distributor relationships, certify in writing to our finance department that all
arrangements relating to sales transactions are contained in the operative sales agreement or related purchase order provided to our finance department. In addition, the point-of-sale reports from our distributors, which are used as part of our
revenue recognition policies and indicate shipment by the distributor of our products, include attestation that there are no arrangements related to rights of return, pricing, discounting, or other marketing concessions that are not contained in the
operative sales agreement or related purchase order for the sale transaction and that there is a corresponding valid purchase order from the end customer for the sale of the product that is the subject of the point-of-sale report. Going forward,
before sales from distributors are recognized, the distributor will certify to us that the final sales agreement and/or invoice include all of the terms related to the sale and return of our products and that copies of such agreements and/or
invoices are delivered to us at the same time as the order confirmation.



Conclusions



Based upon the evaluation
of the effectiveness of our disclosure controls and procedures, our CEO and CFO believed that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective to provide reasonable assurance that
material information required to be included in our Exchange Act reports, including this Quarterly Report on Form 10-Q is made known to management, including the CEO



34



---

##### Table of Contents

and CFO, on a timely basis. There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2004,
that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



While we seek to design our controls and procedures to provide reasonable assurance that information required to be disclosed in our periodic filings is
timely disclosed, inherent limitations expose us to breakdowns in such controls and procedures. While our certifying officers believed that the design of our controls and procedures would ensure that material information related to the Company would
be made known to them on a timely basis, in light of the circumstances underlying the Initial Restatement and the Additional Restatement, these controls and procedures for the financial statement periods covered by the Initial Restatement and the
Additional Restatement were not effective. We have made certain changes to our internal control over financial reporting regarding the review of sales orders designed to address these circumstances, as further described above, although even these
improvements to our controls and procedures cannot ensure that all errors or fraud will be prevented.



PART II. Other Information



Item 6. Exhibits and Reports on Form 8-K



|(a) | Exhibits
|--- | --------



See Exhibit Index.



|(b) | Reports on Form 8-K
|--- | -------------------



On January 29, 2004, we furnished a current report on Form 8-K under Item 12, describing and furnishing the press release announcing our earnings for the
quarter and fiscal year ended December 31, 2003, which press release included our condensed consolidated balance sheets and statements of operations for the period.



35



---

##### Table of Contents

SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned, thereunto duly authorized.



TRIPATH TECHNOLOGY INC.Date: July 27, 2005By:

/s/    JEFFREY L.
GARONJeffrey L. Garon Vice President, Finance and Chief Financial Officer Principal Financial and Accounting Officer




36



---

##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                              
|10.1        |  | Security Agreement dated March 8, 2004 between Tripath Technology Inc. and Union Bank of California, N.A. (incorporated by reference to Exhibit 10.1 of Tripaths quarterly report on Form
10-Q/A, filed on May 21, 2004)
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                       
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                       
|            | 
|32.1        |  | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                           



37