**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

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| **(Mark  One)**                                   |
|---------------------------------------------------|
|                                              |   |
| **ý**                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                              |   |
| **For the Quarterly Period Ended March 31, 2003** |
|                                              |   |
| **OR**                                            |
|                                              |   |
| **o**                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE  ACT OF 1934** |
|                                                   |  |  |

 

**Forthe transition period from                  to                  .**

 

**CommissionFile Number 000-31081**

 

**TRIPATHTECHNOLOGY INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    |   | **77-0407364**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification 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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 (“Exchange Act”) during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ýNo o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). Yes o No ý

 

41,360,894 shares of the Registrant’s common stock were outstanding asof May 14, 2003.

 

 

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TABLE OF CONTENTS

 
| PART I. Financial Information                     |
|---------------------------------------------------|
|                                              |
|                                              | Item 1. Financial Statements (unaudited) |
|                                              |   |
|                                              |   | Condensed Consolidated Balance Sheets as of March 31, 2003 and  December 31, 2002 |
|                                              |   |   |
|                                              |   | Condensed Consolidated Statements of  Operations for the three months ended March 31, 2003 and 2002 |
|                                              |   |   |
|                                              |   | Condensed Consolidated Statements of Cash Flows for the three months  ended March 31, 2003 and 2002 |
|                                              |   |   |
|                                              |   | Notes to Condensed Interim Consolidated  Financial Statements |
|                                              |   |   |
|                                              | Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                                              |   |
|                                              | Item 3. Quantitative and Qualitative  Disclosures about Market Risk |
|                                              |   |
|                                              | Item 4. Controls and Procedures |
|                                              |   |
| PART II. Other Information                        |
|                                              |
|                                              | Item 1. Legal Proceedings |
|                                              |   |
| Item 2. Changes in Securities and Use of Proceeds |
|                                              |   |
|                                              | Item 3. Defaults upon Senior Securities |
|                                              |   |
|                                              | Item 4. Submission of Matters to a Vote of Security Holders |
|                                              |   |
|                                              | Item 5. Other Information |
|                                              |   |
|                                              | Item 6. Exhibits and Reports on Form 8-K |
|                                              |   |
|                                              | Signature |
|                                              |   |
|                                              | Certifications |
|                                              |   |
|                                              | Exhibit  Index |

 

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**PARTI.**    **Financial****Information**

** **

**Item1. Financial****Statements**

**TRIPATH TECHNOLOGY INC.**

**CONDENSEDCONSOLIDATED BALANCE****SHEETS**

(in thousands, except share data)

Unaudited

 
|                                                                                                                     |   | **March 31,  2003** |       | **December 31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                   |   |                | ** ** |                        | ** ** |
| Current  assets:                                                                                                         |   |                |       |                        |       |
| Cash and  cash equivalents                                                                                               |   | $                   | 9,232      |                        | $          | 10,112 |   |
| Restricted  cash                                                                                                         |   | —              |       | 486                         |       |
| Accounts  receivable, net                                                                                                |   | 1,232               |       | 1,471                       |       |
| Inventories                                                                                                              |   | 4,240               |       | 5,252                       |       |
| Prepaid  expenses and other current assets                                                                               |   | 108                 |       | 706                         |       |
|                                                                                                                     |   |                |       |                        |       |
| Total  current assets                                                                                                    |   | 14,812              |       | 18,027                      |       |
|                                                                                                                     |   |                |       |                        |       |
| Property and  equipment, net                                                                                             |   | 2,167               |       | 2,474                       |       |
| Other assets                                                                                                             |   | 72                  |       | 184                         |       |
| Total assets                                                                                                             |   | $                   | 17,051     |                        | $          | 20,685 |   |
|                                                                                                                     |   |                |       |                        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                               |   |                |       |                        |       |
| Current  liabilities:                                                                                                    |   |                |       |                        |       |
| Accounts  payable                                                                                                        |   | $                   | 1,289      |                        | $          | 2,395 |   |
| Current  portion of capital lease obligations                                                                            |   | 250                 |       | 225                         |       |
| Accrued  expenses                                                                                                        |   | 872                 |       | 1,070                       |       |
| Deferred  distributor revenue                                                                                            |   | 672                 |       | 626                         |       |
| Total  current liabilities                                                                                               |   | 3,083               |       | 4,316                       |       |
|                                                                                                                     |   |                |       |                        |       |
| Long term  liabilities                                                                                                   |   | 1,038               |       | 933                         |       |
| Commitments  and contingencies (see Note 11)                                                                             |   |                |       |                        |       |
| Stockholders’  equity:                                                                                              |   |                |       |                        |       |
|                                                                                                                     |   |                |       |                        |       |
| Common  stock, $0.001 par value, 100,000,000 shares authorized; 41,357,145 and  41,326,760 shares issued and outstanding |   | 41                  |       | 41                          |       |
| Additional  paid-in capital                                                                                              |   | 187,754             |       | 187,835                     |       |
| Deferred  stock-based compensation                                                                                       |   | (39                 | )          | (91                         | )          |
| Accumulated  deficit                                                                                                     |   | (174,826            | )          | (172,349                    | )          |
| Total  stockholders’ equity                                                                                         |   | 12,930              |       | 15,436                      |       |
|                                                                                                                     |   |                |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                         |   | $                   | 17,051     |                        | $          | 20,685 |   |

 

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

 

1

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**TRIPATH TECHNOLOGY INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share data)

Unaudited

 
| ** **

                                                        |   | **Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                     |   | **2003**                          |   | **2002** |   |
| Revenue                                                                  |   | $                                 | 2,952  |   | $ | 4,555 |   |
| Cost of  revenue                                                         |   | 2,207                             |   | 8,554 |   |
|                                                                     |   |                              |   |   |   |
| Gross profit  (loss)                                                     |   | 745                               |   | (3,999 | ) |
|                                                                     |   |                              |   |   |   |
| Operating  expenses:                                                     |   |                              |   |   |   |
| Research and development                                                 |   | 1,978                             |   | 3,549 |   |
| Selling, general and administrative                                      |   | 1,246                             |   | 1,807 |   |
|                                                                     |   |                              |   |   |   |
| Total  operating expenses                                                |   | 3,224                             |   | 5,356 |   |
|                                                                     |   |                              |   |   |   |
| Loss from  operations                                                    |   | (2,479                            | )      | (9,355 | ) |
| Interest and  other income, net                                          |   | 2                                 |   | 48 |   |
|                                                                     |   |                              |   |   |   |
| Net loss                                                                 |   | (2,477                            | )      | (9,307 | ) |
|                                                                     |   |                              |   |   |   |
| Accretion on  preferred stock                                            |   | —                            |   | (14,952 | ) |
|                                                                     |   |                              |   |   |   |
| Net loss  applicable to common stockholders                              |   | $                                 | (2,477 | ) | $ | (24,259 | ) |
|                                                                     |   |                              |   |   |   |
| Basic and  diluted net loss per share applicable to common stockholders  |   | $                                 | (0.06  | ) | $ | (0.78 | ) |
|                                                                     |   |                              |   |   |   |
| Number of  shares used in computing basic and diluted net loss per share |   | 41,352                            |   | 31,193 |   |

 

Stock-based compensation included in:

 
|                                 |   | **Three Months Ended  March 31,** |   |
|--------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2003**                          |   | **2002** |   |
| Cost of  revenue                     |   | $                                 | 2      |   | $ | 13 |   |
| Research and  development            |   | 17                                |   | 212 |   |
| Selling,  general and administrative |   | (55                               | )      | 122 |   |
|                                 |   |                              |   |   |   |
| Total  stock-based compensation      |   | $                                 | (36    | ) | $ | 347 |   |

 

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

 

2

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**TRIPATH TECHNOLOGY INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

Unaudited
|                                                                         |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                         |   | **2003**                               |   | **2002** |   |
| Cash flows  from operating activities:                                       |   |                                   |   |   |   |
| Net loss                                                                     |   | $                                      | (2,477 | ) | $ | (9,307 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                   |   |   |   |
| Depreciation and amortization                                                |   | 320                                    |   | 358 |   |
| Allowance for doubtful accounts                                              |   | —                                 |   | 127 |   |
| Provision for excess inventory                                               |   | —                                 |   | 4,977 |   |
| Stock-based compensation                                                     |   | (36                                    | )      | 347 |   |
| Changes in assets and liabilities:                                           |   |                                   |   |   |   |
| Accounts receivable                                                          |   | 239                                    |   | (1,098 | ) |
| Inventories                                                                  |   | 1,012                                  |   | 1,714 |   |
| Prepaid expenses and other assets                                            |   | 710                                    |   | 114 |   |
| Accounts payable                                                             |   | (1,106                                 | )      | (250 | ) |
| Accrued expenses                                                             |   | (20                                    | )      | (120 | ) |
| Deferred distributor revenue                                                 |   | 46                                     |   | (103 | ) |
|                                                                         |   |                                   |   |   |   |
| Net cash used in operating activities                                        |   | (1,312                                 | )      | (3,241 | ) |
|                                                                         |   |                                   |   |   |   |
| Cash flows  from investing activities:                                       |   |                                   |   |   |   |
| Sale of short-term investments                                               |   | —                                 |   | 1,100 |   |
| Restricted cash                                                              |   | 486                                    |   | — |   |
| Purchase of property and equipment                                           |   | (13                                    | )      | (59 | ) |
|                                                                         |   |                                   |   |   |   |
| Net cash provided by investing activities                                    |   | 473                                    |   | 1,041 |   |
|                                                                         |   |                                   |   |   |   |
| Cash flows  from financing activities:                                       |   |                                   |   |   |   |
| Proceeds from issuance of common stock, net                                  |   | 7                                      |   | 19,746 |   |
| Principal payments on capital lease  obligations                             |   | (48                                    | )      | (87 | ) |
|                                                                         |   |                                   |   |   |   |
| Net cash provided by (used in) financing  activities                         |   | (41                                    | )      | 19,659 |   |
|                                                                         |   |                                   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | (880                                   | )      | 17,459 |   |
| Cash and cash equivalents, beginning of period                               |   | 10,112                                 |   | 3,997 |   |
|                                                                         |   |                                   |   |   |   |
| Cash and cash equivalents, end of period                                     |   | $                                      | 9,232  |   | $ | 21,456 |   |

 

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

 

3

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**Tripath Technology Inc.**

**Notes to Condensed Interim Consolidated Finan****cial Statements**

**(Unaudited)**

 

1.                                       Basisof Presentation

 

The unaudited condensed interim consolidated financial statementsincluded herein have been prepared by Tripath Technology Inc. (the “Company”)in accordance with accounting principles generally accepted in the UnitedStates of America and reflect all adjustments, consisting of normal recurringadjustments, which in the opinion of management are necessary to state fairlythe Company’s financial position, results of operations and cash flows for theperiods presented. These interim financial statements should be read inconjunction with the consolidated financial statements and footnotes theretoincluded in the Company’s Annual Report on Form 10-K, as amended, for the yearended December 31, 2002.  Our fiscalyear-end and fourth quarter ends on December 31, whereas our first, second andthird quarter ends on the Sunday closest to the calendar month end date.  For presentation purposes, the Company hasindicated that its first quarter ended on March 31, whereas in fact, theCompany’s first quarter of fiscal 2003 ended on March 30, 2003. The Company’sfirst quarter of fiscal  2002 ended onMarch 31, 2002. The results of operations for the three months ended March 31,2003 are not necessarily indicative of the results to be expected for anysubsequent quarter or for the entire year.

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements as well as the reported amounts of revenue and expenses during thereporting period.  Actual results coulddiffer from those estimates, and such differences may be material to thefinancial statements.

 

The unaudited condensed interim consolidated financial statementsinclude the accounts of the Company and its wholly owned Japanese subsidiary,which was incorporated in January 2001. All significant intercompany balancesand transactions have been eliminated in consolidation. The U.S. dollar is thefunctional currency for the Company’s Japanese wholly-owned subsidiary. Assetsand liabilities that are not denominated in the functional currency areremeasured 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 materialfor any period presented.

 

The Company's unaudited condensed interim consolidated financialstatements have been prepared on the basis of a going concern, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business.  TheCompany's former independent accountants included an explanatory paragraph intheir audit report on the Company's consolidated financial statements for thefiscal year ended December 31, 2002 which indicates that the Company hassuffered recurring losses from operations and has an accumulated deficit thatraises substantial doubt about the Company's ability to continue as a goingconcern.

 

To conserve cash, the Company has implemented cost cutting measures,and in August 2001, implemented a restructuring program. In addition, onJanuary 24, 2002, the Company completed a financing in which it raised $21million in gross proceeds through a private equity placement and in July 2002,the Company entered into a credit agreement with a financial institution thatprovides for a one-year revolving credit facility of up to $10 million, subjectto certain restrictions in the borrowing base based on eligibility ofreceivables.

 

If liquidity problems should arise, the Company will, as a last resort,take measures to reduce operating expenses such as reducing headcount orcanceling research and development projects. However, the Company may need toraise additional funds to finance its activities next year and beyond throughpublic or private equity or debt financings, the formation of strategicpartnerships or alliances with other companies or through bank borrowings withexisting or new banks. The Company may not be able to obtain additional fundson terms that would be favorable to its stockholders and the Company, or atall.

 

The Company believes, based on its ability to implement theaforementioned measures, if needed, that it will have liquidity sufficient tomeet its operating, working capital and financing needs for the next ninemonths and perhaps beyond. The Company has not made any adjustment to itsconsolidated financial statements as a result of the outcome of the uncertaintydescribed above.

 

2.             Revenue recognition

 

The Company recognizes revenue from product sales upon shipment tooriginal equipment manufacturers and end users, net of sales returns andallowances. The Company’s sales to distributors are made under arrangementsallowing limited rights of return, generally under product warranty provisions,stock rotation rights and price protection on products unsold by thedistributor. In addition, the distributor may request special pricing andallowances which may be granted subject to approval by the Company. As a resultof these returns rights and potential pricing adjustments, except in verylimited circumstances, the Company defers recognition on sales to distributorsuntil products are resold by the distributor to the end user. Revenue may berecognized when sold to a distributor when the distributor has no rights ofreturn.

 

3.                                       Netloss per share

 

Basic net loss per share is computed by dividing the net loss availableto common stockholders for the period by the weighted average number of commonstock outstanding during the period. Diluted net loss per share is computed based on the weighted averagenumber of common stock and dilutive potential common stock outstanding.  The calculation of diluted net loss pershare excludes potential common stock if the effect is anti-dilutive.  Potential common stock consist ofincremental common stock issuable upon the exercise of stock options, sharesissuable upon conversion of convertible preferred stock and common stockissuable upon the exercise of common stock warrants.

 

Total potential common stock of 10,338,000 and 7,051,000 shares werenot included in the diluted net loss per share calculation for the periodsended March 31, 2003 and 2002, respectively, because to do so would beanti-dilutive.

 

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

 
|                                                                    |   | **Three Months Ended  March 31,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                    |   | **2003**                          |   | **2002** |   |
| Numerator:                                                              |   |                              |   |   |   |
| Net loss                                                                |   | $                                 | (2,477 | ) | $ | (9,307 | ) |
| Accretion on  preferred stock                                           |   | —                            |   | (14,952 | ) |
| Net loss  applicable to common stockholders                             |   | $                                 | (2,477 | ) | $ | 24,259 |   |
| Denominator:                                                            |   |                              |   |   |   |
|                                                                    |   |                              |   |   |   |
| Weighted average common stock                                           |   | 41,352                            |   | 31,193 |   |
| Basic and  diluted net loss per share applicable to common stockholders |   | $                                 | (0.06  | ) | $ | (0.78 | ) |

 

4

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4.                                       Deferredstock-based compensation

 

In connection with certain employee stock option grants and issuance ofrestricted stock to an officer made since January 1998, the Company recognizeddeferred stock-based compensation, which is being amortized over the vestingperiods of the related options and stock, generally four years, using anaccelerated basis.  The fair value pershare used to calculate deferred stock-based compensation was derived byreference to the convertible preferred stock issuance prices.  Future compensation charges are subject toreduction for any employee who terminates employment prior to such employee’soption vesting date.

 

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

 

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

 
|                                               |   | **Three Months Ended****March 31,** |   |
|----------------------------------------------------|--------|-------------------------------------|--------|
|                                               |   | **2003**                            |   | **2002** |   |
| Deferred  stock-based compensation                 |   | $                                   | (88    | ) | $ | (34 | ) |
| Amortization  of deferred stock-based compensation |   | $                                   | (36    | ) | $ | 347 |   |

 

Unamortizeddeferred stock-based compensation at March 31, 2003 and December 31, 2002 was$39,000 and $91,000 respectively.

 

5.                                    Accounting for stock-based compensation

 

The Company accounts for itsstock-based compensation plans under the recognition and measurement principlesof APB Opinion No. 25, “Accounting for Stock Issued to Employees,*”* and related Interpretations.  No stock-based employee compensation cost isreflected in net income for the periods ended March 31, 2003 and 2002, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

 

The following table illustratesthe effect on net loss and loss per share if the Company had applied the fairvalue recognition provisions of FASB Statement No. 123, “Accounting forStock-Based Compensation” to stock-based employee compensation.

 
|                                                                                                                                                                                                 |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                                                                                 |   | **2003**                          |   | **2002** |   |
| Net loss                                                                                                                                                                                             |   | $                                 | (2,477 | ) | $ | (9,307 | ) |
| Accretion on  preferred stock                                                                                                                                                                        |   | —                            |   | (14,952 | ) |
| Net loss  applicable to common stockholders, as reported                                                                                                                                             |   | (2,477                            | )      | (24,259 | ) |
| Total  stock-based employee compensation expense (benefit) included in the net loss,  determined under the recognition and measurement principles of APB Opinion  No. 25, net of related tax effects |   | (36                               | )      | 347 |   |
| Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects                                                                |   | (94                               | )      | (1,681 | ) |
| Pro forma  net loss applicable to common stockholders                                                                                                                                                |   | $                                 | (2,607 | ) | $ | (26,385 | ) |
|                                                                                                                                                                                                 |   |                              |   |   |   |
| Loss per  share:                                                                                                                                                                                     |   |                              |   |   |   |
| Basic - as  reported                                                                                                                                                                                 |   | $                                 | (0.06  | ) | $ | (0.78 | ) |
| Basic - pro  forma                                                                                                                                                                                   |   | $                                 | (0.06  | ) | $ | (0.82 | ) |

 

5

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6.                                       Cash,cash equivalents and restricted cash

 

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

 

The Company categorizes short-term investments as available-for-sale.Accordingly these investments are carried at fair value. The Company had noshort-term investments as of March 31, 2003 or December 31, 2002.

 

The Company has a credit facility with a financial institution that hascertain restrictions in the borrowing base. The amount by which the aggregateface amount of all outstanding stand-by letters of credit exceeds the borrowingbase, as determined by eligible receivables, represents the amount of restrictedcash necessary to secure the letters of credit. At March 31, 2003, the Companyhad no restricted cash.

 

7 .            Concentrationof credit risk and significant customers

 

Financial instruments that potentially subject the Company toconcentrations of credit risk consist primarily of cash, cash equivalents andshort-term investments. Substantially all of the Company’s cash and cashequivalents are invested in highly-liquid money market funds and commercialsecurities with major financial institutions. Short-term investmentsconsist of U.S. government and commercial bonds and notes. The Company sellsits products principally to original equipment manufacturers. The Companyperforms ongoing credit evaluations of its customers and maintains an allowancefor potential credit losses, as considered necessary by management. Creditlosses to date have been consistent with management’s estimates. During thequarters ended March 31, 2003 and 2002, the Company had minimal bad debtswrite-offs.

 

The following table summarizessales to end customers comprising 10% or more of the Company’s total revenuefor the periods indicated:

 

|       |   | **% of  Revenue for the Quarter  Ended March 31,** |   |
|------------|--------|----------------------------------------------------|--------|
|       |   | **2003**                                           |   | **2002** |   |
|       |   |                                               |   |   |   |
| Customer A |   | 25                                                 | %      | 31 | % |
| Customer B |   | 21                                                 | %      | — |   |
| Customer C |   | 11                                                 | %      | — |   |
| Customer D |   | —                                             |   | 21 | % |
| Customer E |   | —                                             |   | 24 | % |

 

The Company’s accounts receivable were concentrated with threecustomers at March 31, 2003 representing 24%, 18% and 18% of aggregate grossreceivables, four customers at March 31, 2002 representing 35%, 22%, 12% and10% of aggregate gross receivables.

 

8.                                       Inventories

 

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

 

 

6

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Inventories are comprised of the following(in thousands):

 
|                            |   | **March 31,  2003** |   | **December 31,  2002** |   |
|---------------------------------|--------|---------------------|--------|------------------------|--------|
| Raw materials                   |   | $                   | 1,237  |                   | $      | 1,868 |   |
| Work-in-process                 |   | 495                 |   | 551                    |   |
| Finished  goods                 |   | 2,113               |   | 2,409                  |   |
| Inventory  held by distributors |   | 395                 |   | 424                    |   |
| Total                           |   | $                   | 4,240  |                   | $      | 5,252 |   |

 

9.             Segment and geographic information

 

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

 

Thefollowing is a geographic breakdown of the Company’s sales by shippingdestination for the following periods:

 

|           |   | **Three  Months Ended** |   |
|----------------|--------|-------------------------|--------|
|           |   | **March 31,**           |   |
|           |   | **2003**                |   | **2002** |   |
| United  States |   | $                       | 171    |   | $ | 72 |   |
| Japan          |   | 1,239                   |   | 1,290 |   |
| Singapore      |   | 307                     |   | 336 |   |
| Taiwan         |   | 442                     |   | 1,052 |   |
| China          |   | 274                     |   | 1,174 |   |
| Rest of  world |   | 519                     |   | 631 |   |
|           |   | $                       | 2,952  |   | $ | 4,555 |   |

 

Approximately 69% and 62% of the Company's total revenue for the threemonths ended March 31, 2003 and March 31, 2002, respectively, was derived fromsales to end customers based outside the United States.

 

10.           Line of credit

 

On July 12, 2002, the Company entered into a credit agreement witha financial institution that provides for a one-year revolving credit facilityin an amount of up to $10 million, subject to certain restrictions in theborrowing base based on eligibility of receivables. Any advances under thecredit agreement will be secured by the Company’s personal property and willbear interest at the prime rate plus 0.875% per annum. The Company has agreedto provide a security interest in its intellectual property solely, in theevent that a judicial authority holds that this is necessary, to enable thefinancial institution to perfect the financial institution’s security interestin the rights to payment and proceeds from sale of the Company’s personalproperty. The Company has also agreed not to pledge its intellectual propertyto a third party.  The credit agreementcontains certain financial and reporting covenants.  The covenant relating to meeting the deadline for submission ofreporting items was violated during the quarter ended March 31, 2003.  A waiver is in the process of being obtainedfrom the financial institution for the covenant that was violated.

 

Thecredit agreement was used to issue stand-by letters of credit totaling$0.7 million to collateralize the Company’s obligations to a third partyfor the purchase of inventory and to provide a security deposit for the leaseof new office space. At March 31, 2003, there was up to $9.3 millionavailable under the credit facility, subject to certain restrictions in theborrowing base. The Company is currently unable to borrow any additionalamounts at March 31, 2003. The amount by which the aggregate face amount of alloutstanding stand-by letters of credit exceeds the borrowing base, asdetermined by eligible receivables, represents the amount of restricted cashnecessary to secure the letters of credit. At March 31, 2003, the Company hadoutstanding stand-by letters of credit of $0.7 million.

 

 

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11.           Commitments andcontingencies

 

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

 

Ourtotal potential commitments on our operating leases and inventory purchases asof  March 31, 2003, were as follows (inthousands):

** **
| **As of March 31, 2003**                            |   | **Operating  Leases** |   | **Capital  Lease** |   | **Inventory  Purchase Commitments** |   |
|-----------------------------------------------------|--------|-----------------------|--------|--------------------|--------|-------------------------------------|--------|
| 2003                                                |   | $                     | 392    |               | $      | 230                                 |   | $ | 1,002 |   |
| 2004                                                |   | 933                   |   | 406                |   | —                              |   |
| 2005                                                |   | 1,083                 |   | 408                |   | —                              |   |
| 2006                                                |   | 1,046                 |   | —             |   | —                              |   |
| 2007                                                |   | 269                   |   | —             |   | —                              |   |
| Total minimum lease payments                        |   | $                     | 3,723  |               | 1,044  |                                | $      | 1,002 |   |
| Less: amount representing interest                  |   |                  |   | (129               | )      |                                |   |
| Present value of minimum lease payments             |   |                  |   | 915                |   |                                |   |
| Less: current portion of capital lease  obligations |   |                  |   | (250               | )      |                                |   |
| Long-term capital lease obligations                 |   |                  |   | $                  | 665    |                                |   |   |

 

Contingencies:  From time totime, in the normal course of business, various claims could be made againstthe Company.  At March 31, 2003, therewere no pending claims the outcome of which is expected to result in a materialadverse effect on the financial position or results of operations of theCompany.

 

12.           Guarantees

 

In November 2002, the FASB issued FIN No. 45 “Guarantor’s Accountingand Disclosure Requirements for Guarantees, including Indirect Guarantees ofIndebtedness of Others — an interpretation of FASB Statements No. 5, 57 and 107and rescission of FIN 34.” The following is a summary of the Company’sagreements that the Company has determined are within the scope of FIN 45.

 

The Company provides a limited warranty for up to one year for anydefective products. During the quarter ended March 31, 2003 and for the yearended December 31, 2002, warranty expense was insignificant. The Company has areserve for warranty costs of $30,000, which has not changed in the pastquarter.

 

Pursuant to its bylaws, the Company has agreed to indemnify itsofficers and directors for certain events or occurrences arising as a result ofthe officer or director serving in such capacity. The term of theindemnification 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 claimsthat would invoke these indemnification agreements. Accordingly, the Companyhas no liabilities recorded for these agreements as of March 31, 2003.

 

The Company enters into indemnification provisions under (i) itsagreements with other companies in its ordinary course of business, typicallywith business partners, contractors and customers, its sublandlord and (ii) itsagreements with investors. Under these provisions the Company has agreed togenerally indemnify and hold harmless the indemnified party for losses sufferedor incurred by the indemnified party as a result of the Company’s activitiesor, in some cases, as a result of the indemnified party’s activities under theagreement. These indemnification provisions often include indemnificationsrelating to representations made by the Company with regard to intellectualproperty rights. These indemnification provisions generally survive terminationof the underlying agreement. In addition, in some cases, the Company has agreedto reimburse employees for certain expenses and to provide salary continuationduring short-term disability. The maximum potential amount of future paymentsthe Company could be required to make under these indemnification provisions isunlimited. To date, the Company has not incurred any costs as there have beenno lawsuits or claims related to these indemnification agreements. Accordingly,the Company has no liabilities recorded for these agreements as of March 31,2003.

 

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13.                                 Recent Accounting Pronouncements

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission ofFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.” SFAS 145 rescinds FASB Statement No. 4, “ReportingGains and Losses from Extinguishment of Debt,” and an amendment of thatStatement, FASB Statement No. 64, “Extinguishments of Debt Made to SatisfySinking-Fund Requirements,” as well as FASB Statement No. 44, “Accounting forIntangible Assets of Motor Carriers.” This Statement amends FASB Statement No.13, “Accounting for Leases,” to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions.  ThisStatement also amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings or describe their applicabilityunder changed conditions.  The Companyadopted the provisions of SFAS 145 on January 1, 2003. The adoption of thisstatement did not have a material impact on the Company’s consolidatedfinancial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit orDisposal Activities” (“SFAS 146”). SFAS 146 addresses significant issuesregarding the recognition, measurement and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exit anActivity (including Certain Costs Incurred in a Restructuring).” The scope ofSFAS 146 also includes costs related to terminating a contract that is not acapital lease and termination benefits that employees who are involuntarilyterminated receive under the terms of a one-time benefit arrangement that isnot an ongoing benefit arrangement or an individual deferred-compensationcontract. SFAS 146 will be effective for exit or disposal activities that areinitiated after December 31, 2002, and early application isencouraged. The provisions of EITF No. 94-3 shall continue to apply for an exitactivity initiated under an exit plan that met the criteria of EITF No. 94-3prior to the adoption of SFAS 146.  TheCompany adopted SFAS 146 on January 1, 2003. The adoption of this statement didnot have a material impact on the Company’s consolidated financial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires thata liability be recorded in the guarantor’s balance sheet upon issuance of aguarantee. In addition, FIN 45 requires disclosures about the guarantees thatan entity has issued, including a reconciliation of changes in the entity’sproduct warranty liabilities.  The initial recognition and initialmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002, irrespectiveof the guarantor’s fiscal year-end.  The disclosure requirements of FIN 45are effective for financial statements of interim or annual periods endingafter December 15, 2002. The Company adopted FIN 45 on January 1, 2003 and hasprovided the required disclosures about guarantees.  The Company did not have significant warranty expense for theperiod ended March 31, 2003. The adoption of this standard did not have amaterial impact on the Company’s consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation, Transition and Disclosure — an amendment of FASBStatement No.123.”(“SFAS 148”).  SFAS148 provides alternative methods of transition for a voluntary change to thefair value based method of accounting for stock-based employee compensation.SFAS 148 also requires that disclosures of the pro forma effect of using thefair value method of accounting for stock-based employee compensation bedisplayed more prominently and in a tabular format. Additionally, SFAS 148requires disclosure of the pro forma effect in interim financial statements.The transition and annual disclosure requirements of SFAS 148 are effective forfiscal years ended after December 15, 2002.  The interim disclosure requirementsare effective for interim periods ending after December 15, 2002.  TheCompany adopted SFAS 148 on January 1, 2003, and has provided disclosures tocomply with the requirements of SFAS 148.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated bythe primary beneficiary of the entity if the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. FIN 46 iseffective immediately for all new variable interest entities created oracquired after January 31, 2003. For variable interest entities created oracquired prior to February 1, 2003, the provisions of FIN 46 must be appliedfor the first interim or annual period beginning after June 15, 2003.  TheCompany adopted FIN 46 on January 1, 2003. The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements.

 

 

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**Item2.  Management’s Discussion****and Analysis of Financial Condition and Results ofOperations.**

 

This report contains forward lookingstatements (as such term is defined in Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934) and informationrelating to us that are based on the beliefs of our management as well asassumptions made by and information currently available to our management.  In addition, when used in this report, thewords “likely,” “will,” “suggests,” “target,” “may,” “would,” “could,” “anticipate,”“believe,” “estimate,” “expect,” “intend,” “plan,” “predict,” and similarexpressions and their variants, as they relate to us or our management, mayidentify forward looking statements. Such statements reflect our judgment as of the date of this quarterlyreport on Form 10-Q with respect to future events, the outcome of which aresubject to certain known and unknown risks and uncertainties, including but notlimited to the factors set forth elsewhere in this report and in “RiskFactors,” which may have a significant impact on our business, operatingresults or financial condition. Investors are cautioned that these forward looking statements areinherently uncertain.  Should one ormore of these risks or uncertainties materialize, or should underlyingassumptions prove incorrect, actual results or outcomes may vary materiallyfrom those described herein.  Althoughwe believe that the expectations reflected in these forward looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements.  Moreover,neither we nor any other person assumes responsibility for the accuracy andcompleteness of these forward looking statements.  All forward looking statements included in this report are basedon information available to us as of the date of this report.  We undertake no obligation to update orrevise 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 withthe condensed consolidated financial statements and the notes thereto includedin Item 1 in this quarterly report and our annual report on Form 10-K, asamended on April 30, 2003, for the year ended December 31, 2002.

 

**CriticalAccounting Policies**

* *

*Use of Estimates:* Management’s discussion and analysis offinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an ongoing basis,we evaluate our estimates, including those related to product returns, warrantyobligations, bad debts, inventories, accruals, stock options, warrants, incometaxes (including the valuation allowance for deferred taxes) and restructuringcosts. We base our estimates on historical experience and on

 

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variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. Material differences may occur in our results of operations for anyperiod if we made different judgments or utilized different estimates.

* *

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

* *

*Inventories:*   Inventoriesare stated at the lower of cost or market. This policy requires us to makeestimates regarding the market value of our inventory, including an assessmentof excess or obsolete inventory. We determine excess and obsolete inventorybased on an estimate of the future demand and estimated selling prices for ourproducts within a specified time horizon, generally 12 months. The estimates weuse for expected demand are also used for near-term capacity planning andinventory purchasing and are consistent with our revenue forecasts. Actualdemand and market conditions may be different from those projected by ourmanagement. If our unit demand forecast is less than our current inventorylevels and purchase commitments during the specified time horizon, or if theestimated selling price is less than our inventory value, we will be requiredto take additional excess inventory charges or write-downs to net realizablevalue, which will decrease our gross margin and net operating results in thefuture. During the quarter ended March 31, 2002, we recorded a provision forexcess inventory of approximately $5 million related to excess inventory forour TA2022 product as a result of a decrease in forecasted sales for thisproduct.

** **

**Results of Operations**

** **

**Three months endedMarch 31, 2003 and 2002**

* *

*Revenue*.  Revenue for the three months ended March 31,2003 was $3.0 million, a decrease of $1.6 from revenues of $4.6 million for thethree months ended March 31, 2002.  Thedecrease in revenue resulted primarily from a decrease in sales of our TA1101,TA2020, TA2022 and TA3020 digital audio amplifiers.

 

Sales to Apple Computer Inc. and Kyoshin Technosonic Co., Ltd., (KTS)accounted for approximately 25% and 21%, respectively, of revenue in the threemonths ended March 31, 2003 and 31% and 0%, respectively, in the corresponding prioryear quarter. Sales to our five largest customers represented approximately 70%of revenue in the three months ended March 31, 2003 and 87% of revenue in thethree months ended March 31, 2002.

* *

*Gross Profit (Loss).*  Gross profit for the three months endedMarch 31, 2003 was $0.7 million (including stock-based compensation expense of$2,000), compared with a gross loss of $4.0 million (including stock-basedcompensation expense of $13,000) for the three months ended March 31, 2002.  The gross profit for the three months endedMarch 31, 2003 reflects ongoing product cost reduction efforts.

 

The gross loss for the three months ended March 31, 2002 was primarilydue to a write off of  $5.0 million forexcess inventory. The inventory charge related to excess inventory for theCompany’s TA 2022 product based on a decline in forecasted sales for thisproduct.

* *

*Research andDevelopment*. Research and development expenses for the three months ended March 31,2003 were $2.0 million (including stock-based compensation expense of $17,000),a decrease of $1.5 million from $3.5 million (including stock-basedcompensation expense of $212,000) for the three months ended March 31,2002.  The year over year decrease forthe three month periods resulted from a decrease in personnel costs, a decreasein product development expenses and lower expenses related to rent andinsurance.

* *

*Selling, General andAdministrative Expenses*.  Selling, general and administrative expenses for the three monthsended March 31, 2003 were $1.2 million (including stock-based compensationbenefit of $55,000) a decrease of $600,000 from $1.8 million (including

 

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stock-based compensation expense of $122,000) for the three monthsended March 31, 2002. Selling general and administrative expenses decreasedyear over year due to decreased headcount and related costs and lower expensesrelated to rent, insurance and bad debts.

* *

*Accretion on Preferred Stock.*Accretionon preferred stock for the three months ended March 31, 2003 was $0 compared toapproximately $15.0 million for the corresponding prior year quarter. Theyear-over-year decrease was due to the financing transaction that was completedin January 2002, in which we raised $21 million in gross proceeds through aprivate placement of non-voting Series A Preferred Stock and warrants. Theaccretion related to the beneficial conversion feature represents thedifference between the accounting conversion price and the fair value of thecommon stock on the date of the transaction, after valuing the warrants issuedin connection with the financing transaction.

 

**Liquidity and CapitalResources**

 

Since our inception, we have financed our operations through theprivate sale of our equity securities, primarily the sale of preferred stock,through our initial public offering on August 1, 2000 and through a privateplacement in January 2002.  Net proceedsto us as a result of our initial public offering and our private placement wereapproximately $45.4 million and $19.9 million, respectively.

 

Net cash used in operating activities decreased from $3.2 million forthe three months ended March 31, 2002 to $1.3 million for the three monthsended March 31, 2003. The $1.9 million decrease was primarily due to a $1.8million reduction in net loss, which was net of a provision for excessinventory of $5.0 million during the three months ended March 31, 2002, pluslower levels of accounts receivable, inventories, accounts payable and otherworking capital items.  Under the currentlease agreement we did not pay any cash during the first quarter of 2003.However, beginning August 1, 2003 we will be required to pay approximately$42,000 per month.

 

Net cash provided by investing activities decreased to $0.5  million for the three months ended March 31,2003 as compared to $1.0 million for the three months ended March 31, 2002. Thedecrease was due to a decrease in sale of short-term investments offset by adecrease in restricted cash.

 

Cash used in financing activities for the three months ended March 31,2003 was $41,000 as compared to cash provided by financing activities of $19.7million for the three months ended March 31, 2002. We completed a financing inJanuary 2002 and raised $21 million in gross proceeds through a privateplacement.

 

At March 31, 2003, we had approximately $9.2 million in cash and nettotal working capital of approximately $11.7 million with which to fund currentoperations.

 

We entered into a credit agreement with a financial institution thatprovides for a one year revolving credit facility in an amount of up to $10million subject to certain restrictions in the borrowing base based oneligibility of receivables. The credit agreement was used to secure stand-byletters of credit which currently total $0.7 million. We are currently unableto borrow any additional amounts at March 31, 2003 and do not expect to be ableto borrow any substantial amounts in the future under this credit agreement.

 

Ourtotal potential commitments on our operating leases and inventory purchases asof  March 31, 2003, were as follows (inthousands):

** **
| **As of  March 31, 2003**                           |   | **Operating  Leases** |   | **Capital  Lease** |   | **Inventory  Purchase Commitments** |   |
|-----------------------------------------------------|--------|-----------------------|--------|--------------------|--------|-------------------------------------|--------|
| 2003                                                |   | $                     | 392    |               | $      | 230                                 |   | $ | 1,002 |   |
| 2004                                                |   | 933                   |   | 406                |   | —                              |   |
| 2005                                                |   | 1,083                 |   | 408                |   | —                              |   |
| 2006                                                |   | 1,046                 |   | —             |   | —                              |   |
| 2007                                                |   | 269                   |   | —             |   | —                              |   |
| Total minimum lease payments                        |   | $                     | 3,723  |               | 1,044  |                                | $      | 1,002 |   |
| Less: amount representing  interest                 |   |                  |   | (129               | )      |                                |   |
| Present value of minimum  lease payments            |   |                  |   | 915                |   |                                |   |
| Less:  current portion of capital lease obligations |   |                  |   | (250               | )      |                                |   |
| Long-term capital lease  obligations                |   |                  |   | $                  | 665    |                                |   |   |

 

 

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

 

On January 24, 2002, we completed a financing in which we raised $21million in gross proceeds through a private equity placement.  Moreover,in July 2002, we entered into a credit agreement with a financial institutionthat provides for a one-year revolving credit facility of up to $10 million,subject to certain restrictions in the borrowing base, based on eligibility ofreceivables.

 

If future revenues and gross margins do not meet our forecasts, we maytake measures to reduce our operating expenses, such as reducing headcount orcanceling research and development projects. However, we may need to raiseadditional funds to finance our activities next year and beyond through publicor private equity or debt financings, the formation of strategic partnershipsor alliances with other companies or through bank borrowings with existing ornew banks. We may not be able to obtain additional funds on terms that would befavorable to us and our stockholders, or at all.

 

We believe, based on our ability to implement the aforementionedmeasures, if needed, that we will have liquidity sufficient to meet ouroperating, working capital and financing needs for the next nine months andperhaps beyond.  We have not made any adjustment to our consolidatedfinancial statements as a result of the outcome of the uncertainty describedabove. Our former independent accountants included an explanatory paragraph intheir audit report on our consolidated financial statements for the fiscal yearended December 31, 2002 which indicates that we have suffered recurring lossesfrom operations and have an accumulated deficit that raises substantial doubtabout our ability to continue as a going concern.

 

**RecentAccounting Pronouncements**

** **

In April 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission ofFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.”

 

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SFAS 145 rescinds FASB Statement No. 4, “Reporting Gains and Lossesfrom Extinguishment of Debt,” and an amendment of that Statement, FASBStatement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-FundRequirements,” as well as FASB Statement No. 44, “Accounting for IntangibleAssets of Motor Carriers.” This Statement amends FASB Statement No. 13,“Accounting for Leases,” to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions.  ThisStatement also amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings or describe their applicabilityunder changed conditions.  We adoptedthe provisions of SFAS 145 on January 1, 2003. The adoption of this statementdid not have a material impact on our consolidated financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit orDisposal Activities” (“SFAS 146”). SFAS 146 addresses significant issuesregarding the recognition, measurement and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” The scopeof SFAS 146 also includes costs related to terminating a contract that is not acapital lease and termination benefits that employees who are involuntarilyterminated receive under the terms of a one-time benefit arrangement that isnot an ongoing benefit arrangement or an individual deferred-compensationcontract. SFAS 146 will be effective for exit or disposal activities that areinitiated after December 31, 2002, and early application is encouraged. Theprovisions of EITF No. 94-3 shall continue to apply for an exit activityinitiated under an exit plan that met the criteria of EITF No. 94-3 prior tothe adoption of SFAS 146.  We adoptedSFAS 146 on January 1, 2003. The adoption of this statement did not have amaterial impact on our consolidated financial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others (“FIN 45”).” FIN 45 requires thata liability be recorded in the guarantor’s balance sheet upon issuance of aguarantee. In addition, FIN 45 requires disclosures about the guarantees thatan entity has issued, including a reconciliation of changes in the entity’sproduct warranty liabilities.  The initial recognition and initialmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002, irrespective of theguarantor’s fiscal year-end.  The disclosure requirements of FIN 45 areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002. We adopted FIN 45 on January 1, 2003 and have provided therequired disclosures about guarantees. We did not have significant warranty expense for the period ended March31, 2003. The adoption of this standard did not have a material impact on ourconsolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation, Transition and Disclosure — an amendment of FASBStatement No.123.”(“SFAS 148”). SFAS 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. SFAS 148 also requires that disclosuresof the pro forma effect of using the fair value method of accounting forstock-based employee compensation be displayed more prominently and in atabular format. Additionally, SFAS 148 requires disclosure of the pro formaeffect in interim financial statements. The transition and annual disclosurerequirements of SFAS 148 are effective for fiscal years ended after December15, 2002.  The interim disclosure requirements are effective for interimperiods ending after December 15, 2002. We adopted SFAS 148 on January 1, 2003and have provided disclosures to comply with the requirements of SFAS 148.

 

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

** **

**RiskFactors**

 

Set forth below and elsewhere in this quarterly report and in the otherdocuments we file with the Securities and Exchange Commission are risks anduncertainties that could cause actual results to differ materially from theresults contemplated by the forward looking statements contained in thisquarterly report.  Prospective andexisting investors are strongly urged to carefully consider the variouscautionary statements and risks set forth in this quarterly report and ourother public filings.  Some of thesefactors are as follows:

 

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**Risks Related to Our Business**

** **

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

 

As of March 31, 2003, we had an accumulated deficit of $174.8 million.We incurred net losses of approximately $2.5 million in the three months endedMarch 31, 2003, $19.3 million (before accretion on preferred stock of $14.9million) in 2002 and $27.0 million in 2001. We may continue to incur net losses and these losses may be substantial.Furthermore, we may continue to generate significant negative cash flow in thefuture. We will need to generate substantially higher revenue to achieve andsustain profitability and positive cash flow. Our ability to generate future revenueand achieve profitability will depend on a number of factors, many of which aredescribed throughout this section. If we are unable to achieve or maintainprofitability, we will be unable to build a sustainable business. In thisevent, our share price and the value of your investment would likely declineand the Company might be unable to continue as a going concern.

** **

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

 

Because we have had losses, we have funded our operating activities todate from the sale of securities, including our most recent financing inJanuary 2002. Additionally, in July 2002, we put in place a $10 millionrevolving line of credit for a term of one year, whose availability isdependent on meeting certain loan covenants. However, to grow our businesssignificantly, we will need additional capital. We cannot be certain that anysuch financing will be available on acceptable terms, or at all. Moreover,additional equity financing, if available, would likely be dilutive to theholders of our common stock, and debt financing, if available, would likelyinvolve restrictive covenants. If we cannot raise sufficient additionalcapital, it would adversely affect our ability to achieve our businessobjectives and to continue as a going concern.

 

**Our former independent accountants haveincluded a going concern explanatory paragraph in their report on ourconsolidated financial statements.**

 

Our former independent accountants have included an explanatoryparagraph in their audit report on our consolidated financial statements forthe fiscal year ended December 31, 2002, which indicates that we have sufferedrecurring losses from operations and have an accumulated deficit that raises substantialdoubt about our ability to continue as a going concern.  The inclusion ofa going concern explanatory paragraph in our independent auditor’s audit reporton our consolidated financial statements for the fiscal year ended December 31,2002 could have a detrimental effect on our stock price, and our ability toraise new capital.

** **

**We may not be able topay our debt and other obligations, which would cause us to be in default underthe terms of our credit facility, which would result in harm to our businessand financial condition.**

 

On July 12, 2002, we entered into a credit agreement with a financialinstitution that provides for a one-year revolving credit facility in an amountof up to $10 million.  Any advancesunder the credit agreement will be secured by our personal property and willbear interest at the prime rate plus 0.875% per annum. We have agreed toprovide a security interest in our intellectual property solely, in the eventthat a judicial authority holds that this is necessary, to enable the financialinstitution to perfect the financial institution’s security interest in therights to payment and proceeds from sale of our personal property. We have alsoagreed not to pledge our intellectual property to a third party. The creditagreement contains certain financial and reporting covenants.  A covenant relating to meeting the deadlinefor submission of reporting items was violated during the quarter ended March31, 2003.  A waiver is in the process ofbeing obtained from the financial institution for the covenant that wasviolated. We intend to fulfill our debt service obligations from cash generatedby our operations, if any, and from our existing cash and investments.  There can be no assurance that we will beable to meet our debt service obligations of the credit facility.

 

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If our cash flow is inadequate to meet our obligations under the creditfacility or otherwise, we could face substantial liquidity problems.  If we are unable to generate sufficient cashflow or otherwise obtain funds necessary to make required payments on thecredit facility, we would be in default under the terms thereof, which wouldpermit the financial institution that provided the credit facility toaccelerate the maturity of our obligations. Any such default would harm our business, prospects, financial conditionand operating results.  In addition, wecannot assure you that we would be able to repay amounts due in respect of thecredit facility if payment were to be accelerated following the occurrence ofany event of default under the terms of the credit facility.

 

In addition, in the event of our bankruptcy, liquidation orreorganization or upon acceleration of the payments due under the creditfacility due to an event of default, our assets would be available fordistribution to our current stockholders only after our indebtedness has beenpaid in full.  As a result, there maynot be sufficient assets remaining to make any distributions to ourstockholders.

** **

**We must continue to reduce our costs andimprove our margins in order to reach profitability.**

 

The market for our products is extremely competitive and ischaracterized by aggressive pricing.  Asa result, margins in our market are often low. Traditionally, we haveexperienced low or even negative margins. To assist us in reaching profitability, we must continue to increase ourmargins by reducing the cost of our products. We have taken steps in the past and plan to take additional steps in2003 and beyond to reduce our cost of manufacturing and to improve our overallprofit margin, but there is no guarantee that we will be successful in ourefforts to reduce our manufacturing costs and improve our gross margins in thefuture.

 

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

 

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

 

•                  levelof sales;

 

•                  mixof high and low margin products;

 

•                  availabilityand pricing of wafers;

 

•                  timingof introducing new products, including lower cost versions of existingproducts, fluctuations in manufacturing yields and other problems or delays inthe fabrication, assembly, testing or delivery of products; and

 

**•**                  rate of development of targetmarkets.

 

A large portion of our operating expenses, including salaries, rent andcapital lease expenses, are fixed.  Ifwe experience a shortfall in revenues relative to our expenses, we may beunable to reduce our expenses quickly enough to off-set the reduction inrevenues during that accounting period, which would adversely affect ouroperating results. Fluctuations in our operating results may also result influctuations in our common stock price. If the market price of our stock isadversely affected, we may experience difficulty in raising capital or makingacquisitions.  In addition, we maybecome the object of securities class action litigation. As a result, we do notbelieve that period-to-period comparisons of our revenues and operating resultsare necessarily meaningful. You should not rely on the results of any onequarter as an indication of future performance.

 

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

** **

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

 

•                  announcementsof developments related to our business;

 

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•                  fluctuationsin our financial results;

 

•                  generalconditions in the stock market or around the world, terrorism or developmentsin the semiconductor and capital equipment industry and the general economy;

 

•                  salesor purchases of our common stock in the marketplace;

 

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

 

•                  developmentsin patents or other intellectual property rights;

 

•                  developmentsin our relationships with customers and suppliers;

 

•                  ashortfall or changes in revenue, gross margins or earnings or other financialresults from analysts’ expectations or an outbreak of hostilities or naturaldisasters; or

 

•                  acquisitionor merger activity and the success in implementing such acquisitions.

 

**Our customers may cancel or defer productorders, which could result in excess inventory.**

 

Our sales are generally made pursuant to individual purchase ordersthat may be canceled or deferred by customers on short notice withoutsignificant penalty.  Thus, orders inbacklog may not result in future revenue. In the past, we have had cancellations and deferrals by customers.  Any cancellation or deferral of productorders could result in us holding excess inventory, which could seriously harmour profit margins and restrict our ability to fund our operations. During thequarter ended March 31, 2002, we recorded a provision for excess inventory ofapproximately $5.0 million.  Werecognize revenue upon shipment of products to the end customer.  Although we have not experienced customerrefusals to accept shipped products or material difficulties in collectingaccounts receivable, such refusals or collection difficulties are possible andcould result in significant charges against income, which could seriously harmour revenues and our cash flow.

** **

**Industry-wide overcapacity has caused and maycontinue to cause our results to fluctuate, and such shifts could result insignificant inventory write-downs and adversely affect our relationships withour suppliers.**

 

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

** **

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

 

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

** **

**We rely on a small number of customers formost of our revenue and a decrease in revenue from these customers couldseriously harm our business.**

 

A relatively small number of customers have accounted for most of ourrevenues to date.  Any reduction ordelay in sales of our products to one or more of these key customers couldseriously reduce our sales volume and revenue and adversely affect ouroperating results.  In particular, salesto three large customers, including Apple Computer Inc., Kyoshin TechnosonicCo., Ltd., (KTS) and Samsung Electronics Co., Ltd., accounted for approximately25%, 21% and 11%, respectively, of revenue for the three months ended March 31,2003 and 31%, 0% and 4% respectively, in the corresponding prior yearquarter.  Moreover, sales to our fivelargest end customers represented approximately 70% revenue in the three monthsended March 31, 2003 and 87% of revenue in the three

 

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months ended March 31, 2002.  Weexpect that we will continue to rely on the success of our largest customersand on our success in selling our existing and future products to thosecustomers in significant quantities. However, we cannot be sure that we will retain our largest customers orthat we will be able to obtain additional key customers or replace keycustomers we may lose or who may reduce their purchases.

** **

**We currently rely onsales of six products for a significant portion of our revenue, and the failureof these products to be successful in the future could substantially reduce oursales.**

 

We currently rely on sales of our TA0105, TA1101B, TA2020, TA2024,TK2050 and TLD4012 digital audio amplifiers to generate a significant portionof our revenue. Sales of these products amounted to 93% of our revenue for thethree months ended March 31, 2003, 75% of our revenue in 2002 and 69%of our revenue in 2001. We have developed additional products and plan tointroduce more products in the future, but there can be no assurance that theseproducts will be commercially successful. Consequently, if our existingproducts are not successful, our sales could decline substantially.

** **

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

 

Because of our lengthy sales cycles, we may continue to experience adelay between incurring expenses for research and development, sales andmarketing and general and administrative efforts, as well as incurringinvestments in inventory, and the generation of revenue, if any, from suchexpenditures.  In addition, the delaysinherent in such a lengthy sales cycle raise additional risks of customerdecisions to cancel or change product plans, which could result in our loss ofanticipated sales.  Our new products aregenerally incorporated into our customers’ products or systems at the designstage.  To try and have our productsselected for design into new products of current and potential customers,commonly referred to as design wins, often requires significant expenditures byus without any assurance of success. Once we have achieved a design win, our sales cycle will start with thetest and evaluation of our products by the potential customer and design of thecustomer’s equipment to incorporate our products.  Generally, different parts have to be redesigned to incorporateour devices successfully into our customers’ products.  The sales cycle for the test and evaluationof our products can range from a minimum of three to six months, and it cantake a minimum of an additional six to nine months before a customer commencesvolume production of equipment that incorporates our products.  Achieving a design win provides no assurancethat such customer will ultimately ship products incorporating our products orthat such products will be commercially successful.  Our revenue or prospective revenue would be reduced if asignificant customer curtails, reduces or delays orders during our sales cycle,or chooses not to release products incorporating our products.

** **

**The current general economic downturn in thesemiconductor industry has lead and may continue to lead to decreased revenue.**

 

During 2001, 2002 and the first quarter of 2003, slowing worldwidedemand for semiconductors has resulted in significant inventory buildups forsemiconductor companies.  Presently, wecannot predict with any degree of certainty how long the semiconductor industrydownturn will last or how severe the downturn will be. If the downturn continuesor worsens, we may experience greater levels of cancellations and/or push-outsof orders for our products in the future, which could adversely affect ourbusiness and operating results, including the possibility of additionalinventory write-downs, over a prolonged period of time. In addition, we reducedour workforce during fiscal 2002 by approximately 20%, or about 15 people.  If we continue to reduce our workforce, itmay adversely impact our ability to respond rapidly to any renewed growth opportunitiesin the future.

 

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

 

Our failure or our customers’ failure to develop and introduce newproducts successfully and in a timely manner would seriously harm our abilityto generate revenues.  Consequently, oursuccess depends on our ability to develop new products for existing and newmarkets, introduce such products in a timely and cost-effective manner and toachieve design wins.  The development ofthese new devices is highly complex, and from time to time we have experienceddelays in completing the development and introduction of new products. Thesuccessful introduction of a new product may currently take up to 18months.  Successful product developmentand introduction depends on a number of factors, including:

 

•                  accurateprediction of market requirements and evolving standards;

 

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•                  accuratenew product definition;

 

•                  timelycompletion and introduction of new product designs;

 

•                  availabilityof foundry capacity;

 

•                  achievingacceptable manufacturing yields;

 

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

 

•                  marketcompetition.

 

We cannot guarantee success with regard to these factors.

** **

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

 

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

** **

**The facilities of several of our keymanufacturers and the majority of our customers, are located in geographicregions with increased risks of natural disasters, labor strikes and politicalunrest.**

 

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

** **

**It is unclear how the Severe AcuteRespiratory Syndrome (SARS) outbreak will impact our business.**

 

The recent SARS outbreak may have an adverse impact on our worldwidebusiness, particularly in the Pacific Rim region, where the outbreak has beenmost widespread. Several key manufacturers and a majority of our customers arelocated in the Pacific Rim region. In the three months ended March 31, 2003,sales to end customers based in the Pacific Rim region accounted forapproximately 63% of our total revenues. If the SARS outbreak leads toquarantines affecting our operations in the Pacific Rim region, it would likelycause serious harm to our operations in Asia. In addition, in response to theSARS outbreak, many companies have restricted travel for their employees in theaffected regions, which may affect our ability to conduct sales, marketing andother operations in these areas. If the outbreak were to continue or worsen,these adverse effects could grow, as well as possibly impact the economies ofthe affected countries overall, and, accordingly, adversely impact our manufacturingand sales in the Pacific Rim region. The risk of delayed or cancelled orders isparticularly relevant with respect to enterprise customer orders, which aremore likely to be cancelled, delayed or reduced and also have a greaterfinancial impact on our operating results.

 

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

 

To the extent that the warrants issued in connection with the January2002 Series A financing are exercised, there will be additional dilution toyour shares.  If all of the warrants areexercised, we will be required to issue an additional 3,328,760 shares ofcommon stock, or approximately 8% of the common stock outstanding as of March31, 2003. If all of the warrants are exercised in full, we would receiveapproximately $6.4 million in proceeds. Our management will have sole discretion over use of these proceeds andmay spend the proceeds in ways with which our stockholders may not agree.

 

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**We may not maintainThe Nasdaq Small Cap Market listing requirements, and as a result, our commonstock may be subject to delisting.**

 

On August 13, 2002, we received a deficiency notice from the NasdaqStock Market, or Nasdaq, for failing to maintain the Nasdaq National Market’sminimum bid price requirement for continued listing, which includes meeting a$1.00 minimum bid price for 30 consecutive trading days. As we were unable tomaintain this requirement, we submitted an application to Nasdaq for transferto their SmallCap Market.  Theapplication was approved and accordingly we are now listed on The NasdaqSmallCap Market.  Stock trading on TheNasdaq SmallCap Market is typically less liquid and usually involves largervariations between the bid and ask price than stock trading on the NasdaqNational Market.  Therefore, the transfer of our stock from the NasdaqNational Market to The Nasdaq SmallCap Market could have an adverse effect onthe liquidity of our common stock and your ability to sell our commonstock.  To remain listed on The NasdaqSmallCap Market, we must meet the minimum listing requirement that the bidprice of our common stock closes at $1.00 per share or higher for a minimum of10 consecutive trading dates.  As we hadnot met this minimum listing requirement by the initial deadline of February10, 2003, we applied for and, on February 11, 2003, were provided with, anadditional 180 days, or until August 8, 2003, to gain compliance with TheNasdaq SmallCap Market minimum listing requirement.  If we are unable to meet the minimum listing requirement prior toAugust 8, 2003, we may be delisted from The Nasdaq SmallCap Market, or, in thealternative, we may be granted an additional grace period to regain compliance.Furthermore, we may be eligible to transfer back to the Nasdaq National Marketif by August 8, 2003 the bid price of our common stock maintains the $1.00 pershare requirement for 30 consecutive trading days and we have maintainedcompliance with all other continued listing requirements of the Nasdaq NationalMarket.

 

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

 

Additionally, if our common stock is delisted from The Nasdaq SmallCapMarket, sales of our common stock would likely be conducted only in theover-the-counter market or potentially in regional exchanges. This may have anegative impact on the liquidity and the price of our common stock, andinvestors may find it more difficult to purchase or dispose of, or to obtainaccurate quotations as to the market value of, our common stock.  In addition, if our common stock is notlisted on the Nasdaq National Market or The Nasdaq SmallCap Market and thetrading price of our common stock was to remain below $1.00 per share, tradingin our common stock would also be subject to the requirements of certain rulespromulgated under the Exchange Act, which require additional disclosures bybroker-dealers in connection with any trades involving a stock defined as a“penny stock” (generally, a non-Nasdaq equity security that has a market priceof less than $5.00 per share, subject to certain exceptions).  In such event, the additional burdensimposed upon broker-dealers to effect transactions in our common stock couldfurther limit the market liquidity of our common stock and the ability ofinvestors to trade our common stock.

 

We also believe that the current per share price level of our commonstock has reduced the effective marketability of our shares of common stockbecause of the reluctance of many leading brokerage firms to recommendlow-priced stock to their clients. Certain investors view low-priced stock asspeculative and unattractive. In addition, a variety of brokerage housepolicies and practices tend to discourage individual brokers within those firmsfrom dealing in low-priced stock. Such policies and practices pertain to thepayment of broker’s commissions and to time-consuming procedures that make thehandling of low-priced stocks unattractive to brokers from an economicstandpoint.

 

In addition, because brokerage commissions on low-priced stockgenerally represent a higher percentage of the stock price than commissions onhigher-priced stock, the current share price of our common stock can result inindividual stockholders paying transaction costs (commissions, markups ormarkdowns) that represent a higher percentage of their total share value thanwould be the case if the share price were substantially higher. This factoralso may limit the willingness of institutions to purchase our common stock atits current low share price.

** **

**Terrorist attacks andthreats, and government responses thereto, may negatively impact all aspects ofour operations, revenues, costs and stock price.**

 

The threat of terrorist attacks involving the United States, theinstability in the Middle East, a decline in consumer confidence and continuedeconomic weakness and geo-political instability have had a substantial adverseimpact on the economy.  If consumerconfidence does not recover, our revenues may be adversely impacted for fiscal2003 and beyond. Moreover, any further terrorist attacks involving the U.S., orany additional U.S. military actions overseas may disrupt our operations orthose of our customers and

 

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suppliers.  These events havehad and may continue to have an adverse impact on the U.S. and world economy ingeneral and consumer confidence and spending in particular, which could harmour sales. Any of these events could increase volatility in the U.S. and worldfinancial markets which could harm our stock price and may limit the capitalresources available to us and our customers or suppliers. This could have asignificant impact on our operating results, revenues and costs and may resultin increased volatility in the market price of our common stock.

** **

**We are subject toanti-takeover provisions that could delay or prevent an unfriendly acquisitionof our company.**

 

Provisions of our restated certificate of incorporation, equityincentive plans, bylaws and Delaware law may discourage transactions involvingan 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 abilityof our board of directors to issue preferred stock without further stockholderapproval could have the effect of delaying, deferring or preventing a thirdparty from acquiring us and may adversely affect the voting and other rights ofholders of our common stock.

 

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**Risks Related to Manufacturing**

 

**We depend on three outside foundries for oursemiconductor device manufacturing requirements.**

 

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

 

•                  thelack of guaranteed wafer supply;

 

•                  limitedcontrol over delivery schedules, quality assurance and control, manufacturingyields and production costs; and

 

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

 

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

 

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

 

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

 

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

** **

**We depend on third-party subcontractors formost of our semiconductor assembly and testing requirements and any unexpectedinterruption in their services could cause us to miss scheduled shipments tocustomers and to lose revenues.**

 

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

 

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

 

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

 

**Our international operations subject us torisks inherent in doing business on an international level that could harm ouroperating results.**

 

We currently obtain almost all of our manufacturing, assembly and testservices from suppliers located outside the United States and may expand ourmanufacturing activities abroad. Approximately 69% of our total revenue for the three months ended March31, 2003 was derived from sales to end customers based outside the UnitedStates.  In 2002 and 2001, 61% and 72%,respectively, of our total revenue was derived from sales to end customersbased outside of the United States.  Inaddition, we often ship products to our domestic customers’ internationalmanufacturing divisions and subcontractors.

 

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

 

•                  political,social and economic instability;

 

•                  traderestrictions and tariffs;

 

•                  theimposition of governmental controls;

 

•                  exposureto different legal standards, particularly with respect to intellectualproperty;

 

•                  importand export license requirements;

 

•                  unexpectedchanges in regulatory requirements;

 

•                  difficultiesin collecting receivables; and

 

•                  potentiallyadverse tax consequences.

 

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

 

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**Risks Related to Our Product Lines**

** **

**Our ability to achieve revenue growth will beharmed if we are unable to persuade electronic systems manufacturers to adoptour new amplifier technology.**

 

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

** **

**We currently depend on consumer audio marketsthat are typically characterized by aggressive pricing, frequent new productintroductions and intense competition.**

 

A substantial portion of our current revenue is generated from sales ofproducts that address the consumer audio markets, including home theater,computer audio and the automotive audio markets.  These markets are characterized by frequent new productintroductions, declining prices and intense competition. Pricing in thesemarkets is aggressive, and we expect pricing pressure to continue.  In the computer audio segment, our successdepends on consumer awareness and acceptance of existing and new products byour customers and consumers, in particular, the elimination of externally-poweredspeakers.  In the automotive audiosegment, we face pressure from our customers to deliver increasinglyhigher-powered solutions under significant engineering limitations due to thesize constraints in car dashboards.  Inaddition, our ability to obtain prices higher than the prices of traditionalamplifiers will depend on our ability to educate manufacturers and theircustomers about the benefits of our products. Failure of our customers and consumers to accept our existing or newproducts will seriously harm our operating results.

** **

**If we are not successful in developing andmarketing new and enhanced products for the DSL high speed communicationsmarkets that keep pace with technology and our customers’ needs, our operatingresults will suffer.**

 

The market for our DSL products is new and emerging, and ischaracterized by rapid technological advances, intense competition and arelatively small number of potential customers. This will likely result inprice erosion on existing products and pressure for cost-reduced futureversions. We recently started to ship our TA4012 DSL line driver in volume andare in the sampling phase of our new dual channel line driver. Implementationof our products require manufacturers to accept our technology and redesign theirproducts.  If potential customers do notaccept our technology or experience problems implementing our devices in theirproducts, our products could be rendered obsolete and our business would beharmed.  If we are unsuccessful inintroducing future products with enhanced performance, our ability to achieverevenue growth will be seriously harmed.

** **

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

 

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

** **

**Intense competition in the semiconductorindustry and in the consumer audio and communications markets could prevent usfrom achieving or sustaining profitability.**

 

The semiconductor industry and the consumer audio and communicationsmarkets are highly competitive.  Wecompete with a number of major domestic and international suppliers ofsemiconductors in the audio and communications markets.  We also may face competition from suppliersof products based on new or emerging technologies.  Many of our competitors operate their own fabrication facilitiesand have longer operating histories and presence in key markets, greater namerecognition, access to larger customer bases and significantly greaterfinancial, sales and marketing, manufacturing, distribution, technical andother resources than us.  As a result,such competitors may be able to adapt more quickly to new or emergingtechnologies and changes in customer requirements or devote greater resourcesto the promotion and sale of their products than us.  Current and potential competitors have

 

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established or may establish financial or strategic relationships amongthemselves or with existing or potential customers, resellers or other thirdparties.  Accordingly, it is possiblethat new competitors or alliances among competitors could emerge and rapidlyacquire significant market share.  Inaddition, existing or new competitors may in the future develop technologiesthat more effectively address the transmission of digital information throughexisting analog infrastructures at a lower cost or develop new technologiesthat may render our technology obsolete. There can be no assurance that we will be able to compete successfullyin the future against our existing or potential competitors, or that ourbusiness will not be harmed by increased competition.

** **

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

 

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

** **

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

 

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

 

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**Risks Related to Our Intellectual Property**

 

**Our intellectual property and proprietaryrights may be insufficient to protect our competitive position**.

 

Our business depends, in part, on our ability to protect ourintellectual property.  We relyprimarily on patent, copyright, trademark and trade secret laws to protect ourproprietary technologies.  We cannot besure that such measures will provide meaningful protection for our proprietarytechnologies and processes. As of March 31, 2003, we have 22 issued UnitedStates patents, and 20 additional United States patent applications which arepending. In addition, we have 14 international patents issued and an additional61 international patents pending. We cannot be sure that any patent will issueas a result of these applications or future applications or, if issued, thatany claims allowed will be sufficient to protect our technology.  In addition, we cannot be sure that anyexisting or future patents will not be challenged, invalidated or circumvented,or that any right granted thereunder would provide us meaningful protection.  The failure of any patents to provideprotection to our technology would make it easier for our competitors to offersimilar products.  In connection withour participation in the development of various industry standards, we may berequired to agree to license certain of our patents to other parties, includingour competitors, that develop products based upon the adopted standards.

 

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

** **

**We may be subject to intellectual propertyrights disputes that could divert management’s attention and could be costly.**

 

The semiconductor industry is characterized by vigorous protection andpursuit of intellectual property rights. From time to time, we may receive in the future notices of claims ofinfringement, misappropriation or misuse of other parties’ proprietaryrights.  We cannot be sure that we willprevail in these actions, or that other actions alleging infringement by us ofthird-party patents, misappropriation or misuse by us of third-party tradesecrets or the invalidity of one or more patents held by us will not beasserted or prosecuted against us, or that any assertions of infringement,misappropriation or misuse or prosecutions seeking to establish the invalidityof our patents will not seriously harm our business.  For example, in a patent or trade secret action, an injunctioncould be issued against us requiring that we withdraw particular products fromthe market or necessitating that specific products offered for sale or underdevelopment be redesigned.  We have alsoentered into certain indemnification obligations in favor of our customers andstrategic partners that could be triggered upon an allegation or finding of ourinfringement, misappropriation or misuse of other parties’ proprietary rights.  Irrespective of the validity or successfulassertion of such claims, we would likely incur significant costs and diversionof our management and personnel resources with respect to the defense of suchclaims, which could also seriously harm our business.  If any claims or actions are asserted against us, we may seek toobtain a license under a third party’s intellectual property rights.  We cannot be sure that under suchcircumstances a license would be available on commercially reasonable terms, ifat all.  Moreover, we often incorporatethe intellectual property of our strategic customers into our designs, and wehave certain obligations with respect to the non-use and non-disclosure of suchintellectual property.

 

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

 

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**Item3. Quantitative and Qualitativ****e Disclosures about Market Risk**

 

The primary objective of our investment activities is to preserveprincipal while at the same time maximizing the income we receive from ourinvestments without significantly increasing risk of loss.  Some of the securities that we may acquirein the future may be subject to market risk for changes in interest rates.  To mitigate this risk, we plan to maintain aportfolio of cash equivalents and short-term investments in a variety ofsecurities, which may include commercial paper, money market funds, governmentand non-government debt securities. We manage the sensitivity of our results ofoperations to these risks by maintaining a conservative portfolio, which iscomprised solely of highly-rated, short-term investments.  We do not hold or issue derivative,derivative commodity instruments or other financial instruments for tradingpurposes. Currently we are exposed to minimal market risks. Due to theshort-term and liquid nature of our portfolio, fluctuations in interest rateswithin historical norms would not materially affect its value nor our financialcondition.

** **

**Item4. Controls and Procedures**

 

(a)    Evaluation ofdisclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing dateof this Quarterly Report on Form 10-Q, the Company’s principal executiveofficer and principal financial officer have concluded that the Company’sdisclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c)under the Securities Exchange Act of 1934 (the “Exchange Act”), are effectiveto ensure that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

(b)    Changes in internalcontrols.******OnApril 21, 2003, the Company revised its internal controls and procedures toinclude a requirement that, where a signed document must be filed with orfurnished to the Commission, the Company will receive a manually signedsignature page or other document authenticating, acknowledging or otherwiseadopting the signature that appears in the filing.  Such document will beexecuted and received by the Company before or at the time the filing is madeand will be retained by the Company for a period of five years after the dateof filing.  Except as described above, there have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,nor were there any significant deficiencies or material weaknesses in theCompany’s internal controls.  Accordingly, no additional correctiveactions were required or undertaken.

 

(c)    Limitations on theeffectiveness of controls. Our management, including the chiefexecutive officer and chief financial officer, does not expect that ourdisclosure controls and procedures or our internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. 

** **

**Part II.**          **Other Information**

 

Item 1.             Legal proceedings

 

None.

 

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Item 6.    Exhibits and Reportson Form 8-K

 

(a)                                  Exhibits

 

See Exhibit Index below

 

(b)                                 Reportson Form 8-K

 

None

 

**Availability of this Report**

 

The Company intends to make this quarterly report on Form 10-Q publiclyavailable on its web site (www.tripath.com) without charge immediatelyfollowing its filing with the Securities and Exchange Commission.  The Company assumes no obligation to updateor revise any forward-looking statements in this quarterly report on Form 10-Q,whether as a result of new information, future events or otherwise, unless itis required to do so by law.

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**SIGNATURES**

 

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

 
|   | Tripath Technology Inc.                    |
|--------|--------------------------------------------|
|   |                                       |
|   | Date: May 16, 2003                         |
|   |                                       |
|   | By:                                        | /s/  David P. Eichler |   |
|   |                                       |   |
|   | David P. Eichler                           |
|   | Vice President Finance and                 |
|   | Chief Financial Officer                    |
|   | Principal Financial and Accounting Officer |

 

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**CERTIFICATIONS**

 

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

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Tripath Technology Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

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

 

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

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: May 16, 2003                         |   |
|--------------------------------------------|--------|
|                                       |   |
|                                       |   |
| /s/  Dr. Adya  S.  Tripathi |   |
| Dr. Adya  S. Tripathi                 |   |
| Chief Executive Officer                    |   |

 

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**CERTIFICATIONS**

 

I, David P. Eichler, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Tripath Technology Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

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

 

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

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: May 16, 2003              |   |
|---------------------------------|--------|
|                            |   |
|                            |   |
| /s/  David P. Eichler |   |
| David P. Eichler                |   |
| Chief Financial Officer         |   |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** |   | **Description**                                                                                                                  |
|----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)               |   | Restated  Certificate of Incorporation of Tripath Technology Inc.                                                                |
| 3.2(1)               |   | Bylaws of Tripath  Technology Inc.                                                                                               |
| 99.1*                |   | Certification by Chief Executive Officer and Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*                      This certificationaccompanies this quarterly report on Form 10-Q and shall not be deemed “filed”by Tripath Technology Inc. for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended.

 

(1)               Incorporated by reference tothe Registrant’s Registration Statement on Form S-1, registration number 333-35028,as amended.

 

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