| **UNITED  STATES**                                                                                                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **SECURITIES  AND EXCHANGE COMMISSION**                                                                                                                                                                                                                           |
| **Washington,  D.C.  20549**                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                   |
| **FORM 10-Q**                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                   |
| ***(Mark One)***                                                                                                                                                                                                                                                  |   |
|                                                                                                                                                                                                                                                              |   |   |
| ý                                                                                                                                                                                                                                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES** |
|                                                                                                                                                                                                                                                              | **EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                              |   |   |
| **For  the Quarterly Period Ended June 30, 2002**                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                              |   |   |   |
| **OR**                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                              |   |   |   |
| o                                                                                                                                                                                                                                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR  THE SECURITIES** |
|                                                                                                                                                                                                                                                              | **AND EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                              |   |
| **For the transition period from                    to                    .** |
|                                                                                                                                                                                                                                                              |   |
| **Commission  File Number 000-26565**                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                              |   |
| **TRIPATH  TECHNOLOGY INC.**                                                                                                                                                                                                                                      |
| (Exact name of registrant as specified in its charter)                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                              |
| **Delaware**                                                                                                                                                                                                                                                      |   | **77-0407364** |
| (State or other  jurisdiction of Incorporation or Organization)                                                                                                                                                                                                   |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                                                                                                                                                              |   |   |
| **3900  Freedom Circle  Santa Clara, California  95054**                                                                                                                                                                                                     |
| (Address of Principal Executive  Office including (Zip Code)                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                              |   |   |
| **(408) 567- 3000**                                                                                                                                                                                                                                               |
| (Registrant’s telephone number, including area code)                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                              |   |   |
| (Former name, former address and former fiscal year if changed since  last report)                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                   |  |  |  |  |  |  |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ýNo o

 

41,326,760shares of  the Registrant’s common stockwere outstanding as of  August 12, 2002.

 

 

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TRIPATH TECHNOLOGY INC.

 

FORM 10-Q

 

For The Quarter Ended June 30, 2002

 

TABLE OF CONTENTS

 
| PART I. Financial  Information |
|--------------------------------|
|                           |
|                           | Item 1. Financial  Statements |
|                           |   |
|                           |   | Condensed  Consolidated Balance Sheets |
|                           |   |   |
|                           |   | Condensed  Consolidated Statements of Operations |
|                           |   |   |
|                           |   | Condensed  Consolidated Statements of Cash Flows |
|                           |   |   |
|                           |   | Notes  to Condensed 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 |
|                           |   |
| 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 |

 

----

 

PART I.  Financial Information

 

Item 1. Financial Statements

 

TRIPATH TECHNOLOGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

Unaudited

 
|                                                                                                                    |   | **June 30,  2002** |   | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-----------------------------|--------|
| ASSETS                                                                                                                  |   |               |   |                        |   |
| Current assets:                                                                                                         |   |               |   |                        |   |
| Cash and cash equivalents:                                                                                              |   | $                  | 15,624 |                        | $      | 3,997 |   |
| Short-term investments                                                                                                  |   | —             |   | 1,100                       |   |
| Accounts receivable, net                                                                                                |   | 6,844              |   | 2,521                       |   |
| Inventories                                                                                                             |   | 2,917              |   | 10,958                      |   |
| Prepaid expenses and other current assets                                                                               |   | 368                |   | 829                         |   |
|                                                                                                                    |   |               |   |                        |   |
| Total current assets                                                                                                    |   | 25,753             |   | 19,405                      |   |
|                                                                                                                    |   |               |   |                        |   |
| Property and equipment, net                                                                                             |   | 1,887              |   | 2,381                       |   |
| Other assets                                                                                                            |   | 358                |   | 374                         |   |
|                                                                                                                    |   |               |   |                        |   |
| Total assets                                                                                                            |   | $                  | 27,998 |                        | $      | 22,160 |   |
|                                                                                                                    |   |               |   |                        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                               |   |               |   |                        |   |
| Current liabilities:                                                                                                    |   |               |   |                        |   |
| Accounts payable                                                                                                        |   | $                  | 2,913  |                        | $      | 4,352 |   |
| Current portion of capital lease obligations                                                                            |   | 349                |   | 349                         |   |
| Accrued expenses                                                                                                        |   | 1,513              |   | 1,238                       |   |
| Deferred distributor revenue                                                                                            |   | 813                |   | 612                         |   |
|                                                                                                                    |   |               |   |                        |   |
| Total current liabilities                                                                                               |   | 5,588              |   | 6,551                       |   |
|                                                                                                                    |   |               |   |                        |   |
| Capital lease obligations                                                                                               |   | 87                 |   | 262                         |   |
|                                                                                                                    |   |               |   |                        |   |
| Stockholders’ equity:                                                                                              |   |               |   |                        |   |
| Common stock, $0.001 par value, 100,000,000 shares  authorized; 41,308,263 and 27,259,154 shares issued and outstanding |   | 41                 |   | 27                          |   |
| Additional paid-in capital                                                                                              |   | 189,152            |   | 154,675                     |   |
| Deferred stock-based compensation                                                                                       |   | (515               | )      | (1,272                      | )      |
| Accumulated deficit                                                                                                     |   | (166,355           | )      | (138,083                    | )      |
|                                                                                                                    |   |               |   |                        |   |
| Total stockholders’ equity                                                                                         |   | 22,323             |   | 15,347                      |   |
|                                                                                                                    |   |               |   |                        |   |
| Total liabilities and stockholders’ equity                                                                         |   | $                  | 27,998 |                        | $      | 22,160 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

----

 

TRIPATH TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Unaudited

 
|                                                                     |   | **Three months ended   June 30,** |   | **Six  months ended  June 30,** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------------|--------|
|                                                                     |   | **2002**                          |   | **2001**                             |   | **2002** |   | **2001** |   |
| Revenue                                                                  |   | $                                 | 6,052  |                                 | $      | 1,783 |   | $ | 10,607 |   | $ | 7,112 |   |
| Cost of revenue                                                          |   | 5,242                             |   | 2,033                                |   | 13,796 |   | 7,092 |   |
|                                                                     |   |                              |   |                                 |   |   |   |   |   |
| Gross profit (loss)                                                      |   | 810                               |   | (250                                 | )      | (3,189 | ) | 20 |   |
|                                                                     |   |                              |   |                                 |   |   |   |   |   |
| Operating expenses:                                                      |   |                              |   |                                 |   |   |   |   |   |
| Research and development                                                 |   | 3,328                             |   | 6,354                                |   | 6,877 |   | 13,354 |   |
| Selling, general and administrative                                      |   | 1,547                             |   | 2,347                                |   | 3,354 |   | 5,187 |   |
|                                                                     |   |                              |   |                                 |   |   |   |   |   |
|                                                                     |   |                              |   |                                 |   |   |   |   |   |
| Total operating expenses                                                 |   | 4,875                             |   | 8,701                                |   | 10,231 |   | 18,541 |   |
|                                                                     |   |                              |   |                                 |   |   |   |   |   |
| Loss from operations                                                     |   | (4,065                            | )      | (8,951                               | )      | (13,420 | ) | (18,521 | ) |
| Interest and other income, net                                           |   | 52                                |   | 200                                  |   | 100 |   | 628 |   |
|                                                                     |   |                              |   |                                 |   |   |   |   |   |
| Net loss                                                                 |   | (4,013                            | )      | (8,751                               | )      | (13,320 | ) | (17,893 | ) |
| Beneficial conversion feature on issuance of  Preferred Stock            |   | —                            |   | —                               |   | (14,952 | ) | — |   |
|                                                                     |   |                              |   |                                 |   |   |   |   |   |
| Net loss applicable to common stockholders                               |   | $                                 | (4,013 | )                                    | $      | (8,751 | ) | (28,272 | ) | (17,893 | ) |
| Basic and diluted net loss per share applicable to  common stockholders  |   | $                                 | (0.10  | )                                    | $      | (0.32 | ) | $ | (0.78 | ) | $ | (0.67 | ) |
| Number of shares used in computing basic and diluted  net loss per share |   | 41,308                            |   | 27,012                               |   | 36,278 |   | 26,800 |   |

 

Stock-basedcompensation included in :

 
|                                |   | **Three months ended   June 30,** |   | **Six months ended  June 30,** |   |
|-------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|
|                                |   | **2002**                          |   | **2001**                       |   | **2002** |   | **2001** |   |
| Cost of revenue                     |   | $                                 | 10     |                           | $      | 70 |   | $ | 23 |   | $ | 148 |   |
| Research and development            |   | 148                               |   | 288                            |   | 360 |   | 1,342 |   |
| Selling, general and administrative |   | 83                                |   | 34                             |   | 205 |   | 595 |   |
|                                |   |                              |   |                           |   |   |   |   |   |
| Total stock-based compensation      |   | $                                 | 241    |                           | $      | 392 |   | $ | 588 |   | $ | 2,085 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

2

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TRIPATH TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited

 
|                                                                        |   | **Six  months ended  June 30,** |    |
|-----------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                        |   | **2002**                             |    | **2001** |   |
| Cash flows from operating activities:                                       |   |                                 |    |   |   |
| Net loss                                                                    |   | $                                    | (13,320 | ) | $ | (17,893 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities |   |                                 |    |   |   |
| Depreciation and amortization                                               |   | 737                                  |    | 1,116 |   |
| Allowance for doubtful accounts                                             |   | 127                                  |    | — |   |
| Provision for excess inventory                                              |   | 4,977                                |    | — |   |
| Stock-based compensation                                                    |   | 588                                  |    | 2,085 |   |
| Changes in assets and liabilities:                                          |   |                                 |    |   |   |
| Accounts receivable                                                         |   | (4,450                               | )       | (447 | ) |
| Inventories                                                                 |   | 3,064                                |    | (7,761 | ) |
| Prepaid expenses and other assets                                           |   | 477                                  |    | 326 |   |
| Accounts payable                                                            |   | (1,439                               | )       | 623 |   |
| Accrued expenses                                                            |   | 275                                  |    | (88 | ) |
| Deferred distributor revenue                                                |   | 201                                  |    | 2,069 |   |
|                                                                        |   |                                 |    |   |   |
| Net cash used in operating activities                                       |   | (8,763                               | )       | (19,970 | ) |
|                                                                        |   |                                 |    |   |   |
| Cash flows from investing activities:                                       |   |                                 |    |   |   |
| Purchase of short-term investments                                          |   | —                               |    | (9,100 | ) |
| Sale of short-term investments                                              |   | 1,100                                |    | 26,864 |   |
| Purchase of property and equipment                                          |   | (243                                 | )       | (605 | ) |
|                                                                        |   |                                 |    |   |   |
| Net cash provided by investing activities                                   |   | 857                                  |    | 17,159 |   |
|                                                                        |   |                                 |    |   |   |
| Cash flows from financing activities:                                       |   |                                 |    |   |   |
| Proceeds from issuance of common stock, net                                 |   | 19,708                               |    | 1,335 |   |
| Principal payments on capital lease obligations                             |   | (175                                 | )       | (72 | ) |
|                                                                        |   |                                 |    |   |   |
| Net cash provided by financing activities                                   |   | 19,533                               |    | 1,263 |   |
|                                                                        |   |                                 |    |   |   |
| Net increase in cash and cash equivalents                                   |   | 11,627                               |    | (1,548 | ) |
| Cash and cash equivalents, beginning of period                              |   | 3,997                                |    | 12,651 |   |
|                                                                        |   |                                 |    |   |   |
| Cash and cash equivalents, end of period                                    |   | $                                    | 15,624  |   | $ | 11,103 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

3

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**Tripath Technology Inc.**

** **

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

** **

1.             Basis of Presentation

 

The unauditedcondensed consolidated financial statements included herein have been preparedby the Company in accordance with accounting principles generally accepted inthe United States of America and reflect all adjustments, consisting of normalrecurring adjustments, which in the opinion of management are necessary tostate fairly the Company’s financial position, results of operations, and cashflows for the periods presented. Results for the three months and six months ended June 30, 2002 are notnecessarily indicative of the results of the entire year.  The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements as well as the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from those estimates, and such differencesmay be material to the financial statements.

 

The unauditedcondensed consolidated financial statements include the accounts of the Companyand its wholly owned Japanese subsidiary, which was incorporated in January2001. All significant intercompany balances and transactions have beeneliminated in consolidation.

 

2.             Net loss per share

 

Basic net loss pershare is computed by dividing the net loss available to common stockholders forthe period by the weighted average number of common stock outstanding duringthe period.  Diluted net loss per shareis computed based on the weighted average number of common stock and dilutivepotential common stock outstanding.  Thecalculation of diluted net loss per share excludes potential common stock ifthe effect is anti-dilutive.  Potentialcommon stock consist of incremental common stock issuable upon the exercise ofstock options, shares issuable upon conversion of convertible preferred stockand common stock issuable upon the exercise of common stock warrants.

 

Total potentialcommon stock of 9,891,000 and 9,085,000 shares were not included in the dilutednet loss per share calculation for three and six-month periods ended June 30,2002, respectively, because to do so would be anti-dilutive. For the three andsix-month periods ended June 30, 2001, 9,627,000 and 8,423,000 shares ofpotential common stock were excluded from the calculation of diluted net lossper share because they were anti-dilutive.

 

4

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The followingtable sets forth the computation of basic and diluted net loss per share forthe three and six-month periods presented (in thousands, except per shareamounts):

 
|                          |   | **Three  months ended  June 30** |   | **Six months  ended  June 30** |   |
|-------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                          |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Numerator:                    |   |                             |   |                           |   |   |   |   |   |
|                          |   |                             |   |                           |   |   |   |   |   |
| Net loss                      |   | $                                | (4,013 | )                              | $      | (8,751 | ) | $ | (28,272 | ) | $ | (17,893 | ) |
| Denominator:                  |   |                             |   |                           |   |   |   |   |   |
| Weighted average common stock |   | 41,308                           |   | 27,012                         |   | 36,278 |   | 26,800 |   |
|                          |   |                             |   |                           |   |   |   |   |   |
| Net loss per share:           |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted             |   | $                                | (0.10  | )                              | $      | (0.32 | ) | $ | (0.78 | ) | $ | (0.67 | ) |

 

3.             Deferred stock-basedcompensation

 

In connection withcertain employee stock option grants and issuance of restricted stock to anofficer made since January 1998, the Company recognized deferred stock-basedcompensation, which is being amortized over the vesting periods of the relatedoptions and stock, generally four years, using an accelerated basis.  The fair value per share used to calculatedeferred stock-based compensation was derived by reference to the convertiblepreferred stock issuance prices.  Futurecompensation charges are subject to reduction for any employee who terminatesemployment prior to such employee’s option vesting date.

 

The Company hasgranted options to purchase shares of common stock to consultants in exchangefor services.  The Company determinedthe value of the options granted to consultants based on the Black-Scholesoption pricing model.

 

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

 
|                                              |   | **Three  months ended  June 30** |   | **Six months  ended  June 30** |   |
|---------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                              |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Deferred stock-based compensation                 |   | $                                | (135   | )                              | $      | (1,431 | ) | $ | (169 | ) | $ | (1,460 | ) |
| Amortization of deferred stock-based compensation |   | $                                | 241    |                           | $      | 392 |   | $ | 588 |   | $ | 2,085 |   |

 

Unamortizeddeferred stock-based compensation at June 30, 2002 and December 31, 2001 was$515,000 and $1,272,000 respectively.

 

5

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4.             Cash and cash equivalents andshort-term investments

 

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

 

The Companycategorizes short-term investments as available-for-sale. Accordingly, theseinvestments are carried at fair value. The fair value of these securities approximates cost, and there were nomaterial unrealized gains or losses as of June 30, 2002 or December 31,2001.  Short-term investments generallyhave maturities of less than one year from the date of purchase.

 

5.             Inventories

 

Inventories are comprised of the following (in thousands):

 
|                           |   | **June 30,  2002** |   | **December  31,  2001** |   |
|--------------------------------|--------|--------------------|--------|-------------------------|--------|
| Raw materials                  |   | $                  | 473    |                    | $      | 6,531 |   |
| Work-in-process                |   | 114                |   | 273                     |   |
| Finished goods                 |   | 1,696              |   | 3,798                   |   |
| Inventory held by distributors |   | 634                |   | 356                     |   |
| Total                          |   | $                  | 2,917  |                    | $      | 10,958 |   |

 

During the quarterended March 31, 2002 the Company recorded a provision for excess inventory ofapproximately $5 million.  The inventorycharge related to excess inventory for the Company’s TA2022 product based on adecline in forecasted sales for this product.

 

6

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6.             Stockholders’ Equity

 

On January 24,2002, the Company completed a financing in which it raised $21 million in grossproceeds through a private placement of non-voting Series A Preferred Stock andwarrants, at $30 per unit to a group of investors, which was convertible into13,999,000 shares of common stock and warrants to purchase 3,303,760 shares ofcommon stock.   Each share of Series APreferred Stock was convertible into 20 shares of Common Stock (or an effectiveCommon Stock price of $1.50 per share). Investors also received warrants topurchase up to an additional 20 percent of shares of Series A Preferred Stock.The warrants have a term of three years and an exercise price equal to $39.00per share (or an effective Common Stock exercise price of $1.95 per share). Ifthe common stock trades at $5.85 per share or greater for a period of 20 out of30 trading days, the Company can require the holders to exercise the warrants.

 

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

 

As a result of thefavorable conversion price of the shares and related warrants at the date ofissuance, the Company recorded accretion of approximately $15 million (thusincreasing the “net loss applicable to common stockholders” for the six monthperiod ended June 30, 2002) relating to the beneficial conversion featurerepresenting the difference between the accounting conversion price and thefair value of the common stock on the date of the transaction, after valuingthe warrants issued in connection with the financing transaction. The Companyvalued the warrants using the Black-Scholes option pricing model, applying anexpected life of 3 years, a weighted average risk-free rate of 3.61%, anexpected dividend yield of zero percent, a volatility of 130% and a deemed fairvalue of common stock of $2.35, which was the value of the Company’s commonstock on the date of grant.

 

7

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7.             RecentAccounting Pronouncements

 

In April 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS 145 Rescission of FAS Nos. 4, 44, and 64, Amendmentof FAS 13, and Technical Corrections. SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses fromExtinguishment of Debt, and an amendment of that Statement, FASB Statement No.64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, as wellas FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers.This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between therequired accounting for sale-leaseback transactions and the required accountingfor certain 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 theirapplicability under changed conditions. The provisions of SFAS 145 will be adopted during fiscal year 2003. Wedo not anticipate that adoption of this statement will have a material impacton our consolidated balance sheets or consolidated statements of operations.

 

In June 2002, theFASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS146”). SFAS 146 addresses significant issues regarding the recognition,measurement, and reporting of costs that are associated with exit and disposalactivities, including restructuring activities that are currently accounted forunder EITF No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).” The scope of SFAS 146 also includes costs related toterminating a contract that is not a capital lease and termination benefitsthat employees who are involuntarily terminated receive under the terms of aone-time benefit arrangement that is not an ongoing benefit arrangement or anindividual deferred-compensation contract. SFAS 146 will be effective for exitor disposal activities that are initiated after December 31, 2002 and earlyapplication is encouraged. The provisions of EITF No. 94-3 shall continue toapply for an exit activity initiated under an exit plan that met the criteriaof EITF No. 94-3 prior to the adoption of SFAS 146. We do not anticipate thatadoption of this statement will have a material impact on our consolidatedbalance sheets or consolidated statements of operations.

 

8

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Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

This report contains certainforward looking statements (as such term is defined in Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934)and information relating to the Company that are based on the beliefs ofmanagement of the Company as well as assumptions made by and informationcurrently available to management of the Company.  In addition, when used in this report, the words “likely,”“will,” “suggests,” “target,” “may,” “would,” “could,” “anticipate,” “believe,”“estimate,” “expect,” “intend,” “plan,” “predict,” and similar expressions andtheir variants, as they relate to the Company or the management of the Company,may identify forward looking statements. Such statements reflect the judgment of the Company as of the date ofthis quarterly report on Form 10-Q with respect to future events, the outcomeof which are subject to certain known and unknown risks and uncertainties,including but not limited to the factors set forth below and in “ RiskFactors,” which may have a significant impact on the Company’s business,operating results or financial condition.  Such risks and uncertainties include risks and uncertaintiesregarding silicon wafer pricing and the availability of foundry and assemblycapacity and raw materials; the availability and pricing of competing productsand technologies and the resulting effects on sales and pricing of ourproducts; fluctuations in the manufacturing yields of our third partysemiconductor foundries and other problems or delays in the fabrication,assembly, testing or delivery of our products; our ability to specify, developor acquire, complete, introduce, market and transition to volume production newproducts and technologies in a timely manner; the volume of product sales andpricing concessions on certain product sales; and, the timing requirements ofour customers with respect to new product introductions.  Investorsare cautioned that these forward looking statements are inherentlyuncertain.  Should one or more of theserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual results or outcomes may vary materially from those describedherein.  Although we believe that theexpectations reflected in these forward looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements.  Moreover, neither we norany other person assumes responsibility for the accuracy and completeness ofthese forward looking statements.  TheCompany undertakes no obligation to update forward looking statements.

 

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 for theyear ended December 31, 2001.

 

**Overview**

 

We are a fabless semiconductor company that designs and developsintegrated circuit devices for the consumer audio, personal computer andcommunications markets.

 

9

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**CriticalAccounting Policies**

 

*Use ofEstimates:* Management’s discussion and analysis of financial condition and resultsof operations is based upon our consolidated financial statements which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an ongoing basis we evaluate ourestimates, including those related to product returns, warranty obligations,bad debts, inventories, accruals, stock options, warrants, income taxes andrestructuring costs. We base our estimates, on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom the other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. Material differences may occur in ourresults of operations for any period if we made different judgments or utilizeddifferent estimates.

 

*Revenue Recognition*:We recognize revenue from product salesupon shipment to original equipment manufacturers and end users, net ofreserves for estimated returns and allowances, provided that persuasiveevidence of an arrangement exists, the price is fixed, title has transferred,collectibility of resulting receivables is reasonably assured, there are noacceptance requirements and there are no remaining significant obligations.Sales to distributors are made under arrangements allowing limited rights ofreturn, generally under product warranty provisions, stock rotation rights, andprice protection on products unsold by the distributor. In addition, thedistributor may request special pricing and allowances which may be grantedsubject to approval by us. As a result of these returns rights and potentialpricing adjustments, we defer recognition on sales to distributors untilproducts are resold by the distributor to the end user.

 

**Results of Operations**

 

**Three months ended June 30, 2002 and2001**

 

*Revenue*.  Revenue for the three months ended June 30,2002 was $6.1 million, an increase of $4.3 million from revenues of $1.8million for the three months ended June 30, 2001.  The increase in revenue resulted from increased shipments of ourTA2020, TA2022, TA2024, TK2050, and TA3020 digital audio amplifiers.

 

Salesrelating to a consumer electronics manufacturer in China and Apple Computeraccounted for approximately 43% and 28%, respectively, of revenue in the threemonths ended June 30, 2002 and 0% and 34%, respectively, in the correspondingprior year quarter. Sales to our five largest end customers representedapproximately 82% of revenue in the three months ended June 30, 2002 and 90% ofrevenue in the three months ended June 30, 2001.

 

*Gross Profit (Loss).*  Gross profit for the three months ended June30, 2002 was $810,000 (including stock-based compensation expense of $10,000),compared with a gross loss of $250,000 (including stock-based compensationexpense of $70,000) for the three months ended June 30, 2001.

 

Theincrease in gross profit for the three months ended June 30, 2002 compared tothe three months ended June 30, 2001 reflected a combination of changes inproduct mix, increased shipments of products related to new design wins,ongoing cost reduction efforts, quantities produced and the reduction ofinventory reserves related to inventory sold during the quarter.

 

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*Research and Development*.  Research and development expenses for thethree months ended June 30, 2002were $3.3 million (includingstock-based compensation expense of $148,000), a decrease of $3.1 million  from $6.4 million (including stock-basedcompensation expense of $288,000) for the three months ended June 30,2001.  The year-over-year decrease forthe three-month periods resulted from a decrease in personnel costs due toreduced headcount and a decrease in product development expenses.

 

*Selling, General and AdministrativeExpenses*.  Selling,general and administrative expenses for the three months ended June 30, 2002were $1.5 million (including stock-based compensation of $83,000), a decreaseof $800,000 from $2.3 million (including stock-based compensation expense of$34,000) for the three months ended June 30, 2001. The year-over-year decreaseresulted from decreased headcount and related costs for the three months endedJune 30, 2002.

* *

*Interest and Other Income, net*.  Interest income for the three months endedJune 30, 2002 was $52,000, a decrease of $148,000 from interest income of$200,000 in the three months ended June 30, 2001.  The year-over-year decrease in interest income for thethree-month periods reflected a decrease in our cash equivalents and short-terminvestments.

** **

**Six months ended June 30, 2002 and2001**

* *

*Revenue*.  Revenue for the six months ended June 30,2002 was $10.6 million, an increase of $3.5 million from revenues of $7.1million for the six months ended June 30, 2001.  The increase in revenue resulted from increased shipments of ourTA2020, TA2022, TA2024, TK2050, and TA3020 digital audio amplifiers.

 

Salesrelating to a consumer electronics manufacturer in China , Apple Computer andAiwa accounted for approximately 35%, 29% and 10%, respectively, of revenue inthe six months ended June 30, 2002 and 0%, 17% and 0%, respectively, in thecorresponding prior year quarter. Sales to our five largest end customersrepresented approximately 83% of revenue in the six months ended June 30, 2002and 93% of revenue in the six months ended June 30, 2001.

* *

*Gross Profit (Loss)*.  Gross loss for the six months ended June 30,2002 was $3.2 million (including stock-based compensation expense of $23,000),compared with a gross profit of $20,000 (including stock-based compensationexpense of $148,000) for the six months ended June 30, 2001.

 

Thedecrease in gross profit for the six months ended June 30, 2002 compared to thesix months ended June 30, 2001 was primarily due to a write-off of  $5.0 million for excess inventory during thefirst quarter of 2002. The inventory charge related to excess inventory for theCompany’s TA2022 product based on a decline in forecasted sales for thisproduct.

* *

*Research and Development*.  Research and development expenses for thesix months ended June 30, 2002 were $6.9 million (including stock-basedcompensation expense of $360,000), a decrease of $6.5 million from $13.4million (including stock-based compensation expense of $1.3 million) for thesix months ended June 30, 2001.  Theyear-over-year decrease for the six month periods resulted from a decrease inpersonnel costs due to decreased headcount and a decrease in productdevelopment expenses.

* *

*Selling, General and AdministrativeExpenses*.  Selling,general and administrative expenses for the six months ended June 30, 2002 were$3.4 million (including stock-based compensation expense of $205,000), adecrease of $1.8 million from $5.2 million (including stock-based compensationexpense of $595,000) for the six months ended June 30, 2001. Selling generaland administrative expenses decreased year-over-year due to decreased headcountand related costs.

* *

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*Interest and Other Income, net*.  Interest income for the six months endedJune 30, 2002 was $100,000 a decrease of $528,000 from interest income of$628,000 in the six months ended June 30, 2001. The year-over-year decrease ininterest income for the six month periods reflected a decrease in our cashequivalents and short-term investments.

 

*Beneficial Conversion Feature on Issuance of PreferredStock.*Beneficial conversion feature on issuance of Preferredstock for the six months ended June 30, 2002 was $14,952,000 compared to $0 forthe six months ended June 30, 2001. The year-over-year increase was due to thefinancing transaction that was completed in January 2002.

 

**Liquidity and Capital Resources**

 

Since ourinception, we have financed our operations through the private sale of ourequity securities, primarily the sale of preferred stock and through ourinitial public offering on August 1, 2000. Net proceeds to the company as a result of our initial public offeringwere approximately $45.4 million.

 

Net cash used byoperating activities decreased to $8.8 million for the six months ended June30, 2002 from $20.0 million for the six months ended June 30, 2001. Thedecrease was mainly due to a decrease in inventories offset in part by anincrease in accounts receivable and a decrease in accounts payable.

 

Cash provided byinvesting activities decreased to $857,000 for the six months ended June 30,2002 from $17.2 million for the six months ended June 30, 2001. The decreasewas due to decrease in sale of short-term investments and decrease in purchaseof property and equipment.

 

Cash provided byfinancing activities increased to $19.5 million for the six months ended June30, 2002 from $1.3 million for the six months ended June 30, 2001.  The increase was due to the additionalfinancing, details of which are summarized below.

 

On January 24,2002, we completed a financing in which we raised $21 million in gross proceedsthrough a private placement of non-voting Series A Preferred Stock andwarrants, at $30 per unit to a group of investors. At a Special Meeting ofStockholders held on March 7, 2002 the Company’s stockholders approved theissuance and sale of Preferred Stock and warrants which then automaticallyconverted into 13,999,000 shares of common stock and warrants to purchase3,303,760 shares of common stock. If the common stock trades at $5.85 per shareor greater for a period of 20 out of 30 trading days, we can require theholders to exercise the warrants. As a result of the favorable conversion priceof the shares and related warrants at the date of issuance, we recordedaccretion of approximately $15 million relating to the beneficial conversionfeature at the date of the conversion, thereby increasing the “net lossapplicable to common stockholders” for the six month period ended June 30,2002.

 

At June 30, 2002,the Company had approximately $15.6 million in cash and working capital ofapproximately $20.2 million with which to fund current operations.

 

We expect ourfuture liquidity and capital requirements will fluctuate depending on numerousfactors, including the cost and timing of future product development efforts,the timing of introductions of new products and enhancements to existingproducts, market acceptance of our existing and new products and the cost andtiming of sales and marketing activities. We believe that taking into accountour recent financing in January 2002, cost cutting measures and anticipatedfuture burn rate, our existing cash and cash equivalent balances together withcash generated by our operations, if any, will be sufficient to fund operationsfor at least the next twelve

 

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months.However, we may need to raise additional capital in future periods throughpublic or private financings, strategic relationships or other arrangements inorder to grow our business. Additional equity financing may be dilutive to theholders of our common stock, and debt financing, if available, may involverestrictive covenants. However, we cannot be certain that any such financingwill be available on acceptable terms, or at all. If we cannot raise additionalcapital when needed and on acceptable terms, we may not be able to achieve ourbusiness objectives and continue as a going concern.

 

**RecentAccounting Pronouncements**

 

In April 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS 145 Rescission of FAS Nos. 4, 44, and 64, Amendmentof FAS 13, and Technical Corrections. SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses fromExtinguishment of Debt, and an amendment of that Statement, FASB Statement No.64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, as wellas FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers.This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between therequired accounting for sale-leaseback transactions and the required accountingfor certain 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 theirapplicability under changed conditions. The provisions of SFAS 145 will be adopted during fiscal year 2003. Wedo not anticipate that adoption of this statement will have a material impacton our consolidated balance sheets or consolidated statements of operations.

 

In June 2002, theFASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS146”). SFAS 146 addresses significant issues regarding the recognition,measurement, and reporting of costs that are associated with exit and disposalactivities, including restructuring activities that are currently accounted forunder EITF No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).” The scope of SFAS 146 also includes costs related toterminating a contract that is not a capital lease and termination benefits thatemployees who are involuntarily terminated receive under the terms of aone-time benefit arrangement that is not an ongoing benefit arrangement or anindividual deferred-compensation contract. SFAS 146 will be effective for exitor disposal activities that are initiated after December 31, 2002 and earlyapplication is encouraged. The provisions of EITF No. 94-3 shall continue toapply for an exit activity initiated under an exit plan that met the criteriaof EITF No. 94-3 prior to the adoption of SFAS 146. We do not anticipate thatadoption of this statement will have a material impact on our consolidatedbalance sheets or consolidated statements of operations.

 

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**RiskFactors**

** **

**Risks Related to our Business**

 

**Our limited operating history and dependence on newtechnologies make it difficult to evaluate our future products.**

 

We wereincorporated in July 1995 but did not begin shipping products until 1998. Manyof our products have only recently been introduced. Accordingly, we havelimited historical financial information and operating history upon which youmay evaluate us and our products. Our prospects must be considered in the lightof the risks, challenges and difficulties frequently encountered by companiesin their early stage of development, particularly companies in intenselycompetitive and rapidly evolving markets such as the semiconductor industry. Wecannot be sure that we will be successful in addressing these risks andchallenges.

 

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

 

As of June 30,2002, we had an accumulated deficit of $166.4 million. We incurred net lossesof approximately $28.3 million in the six months ended June 30, 2002, $27.0million in 2001, $41.3 million in 2000 and $31.7 million in 1999.  We expect to continue to incur net lossesand these losses may be substantial. Furthermore, we expect to generatesignificant negative cash flow in the future. We will need to generate substantiallyhigher revenue to achieve and sustain profitability and positive cash flow. Ourability to generate future revenue and achieve profitability will depend on anumber of factors, many of which are described throughout this section. If weare unable to achieve or maintain profitability, we will be unable to build asustainable business. In this event, our share price and the value of yourinvestment would likely decline and the Company might be unable to continue asa going concern.

** **

**We will likely need to raise additional capital to continueto grow our business.**

 

Because we have had losses we have funded ouroperating activities to date from the sale of securities, including our mostrecent financing in January 2002. We believe that, taking into account ourrecent financing and cost cutting measures and anticipated future burn rate,our existing cash and cash equivalent balances, together with cash generated byour operations, if any, will be sufficient to fund operations for at least thenext twelve months. However, in order to grow our business significantly, wewill likely need additional capital. We cannot be certain that any suchfinancing 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. As a result of thesecircumstances, our independent accountants’ opinion on our 2001 consolidatedfinancial statements includes an explanatory paragraph indicating that thesematters raise substantial doubt about our ability to continue as a goingconcern.

** **

**We must continue to reduce our costs and improve our marginsin order to reach profitability.**

 

The market for our products is extremely competitive and is characterizedby aggressive pricing.  As a result,margins in our market are often low. Traditionally, we have experienced low oreven negative margins.  In order toreach profitability we must continue to increase our margins by reducing thecost of our products.

 

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

 

Our quarterlyoperating results have fluctuated significantly in the past and are likely tocontinue to do so in the future. The many factors that could cause ourquarterly results to fluctuate include, in part:

 

•                  level of sales;

 

•                  mix of high and low margin products;

 

•                  availability and pricing of wafers;

 

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

 

•                  rate of development of targetmarkets.

 

A large portion ofour operating expenses, including salaries, rent and capital lease expenses,are fixed.  If we experience a shortfallin revenues relative to our expenses, we may be unable to reduce our expensesquickly enough to off set the reduction in revenues during that accountingperiod, which would adversely affect our operating results.

 

Fluctuations inour operating results may also result in fluctuations in our common stockprice. If the market price of our stock is adversely affected, we may experiencedifficulty in raising capital or making acquisitions.  In addition, we may become the object of securities class actionlitigation.

 

As a result, we donot believe that period-to-period comparisons of our revenues and operatingresults are necessarily meaningful. You should not rely on the results of anyone quarter as an indication of future performance.

** **

**Our stock price may be subject to significant volatility**

 

The stock pricesfor many technology companies have recently experienced large fluctuations,which may or may not be directly related to the operating performance of thespecific companies. Broad market fluctuations as well as general economicconditions may cause our stock price to decline.

** **

**Our customers may cancel or defer product orders, which couldresult in excess inventory.**

 

Our sales are generally made pursuant to individualpurchase orders that may be canceled or deferred by customers on short noticewithout significant penalty.  Thus,orders in backlog may not result in future revenue.   In the past we have had cancellations and deferrals bycustomers.  Any cancellation or deferralof product orders could result in us holding excess inventory, which couldseriously harm our profit margins and restrict our ability to fund our operations.During the quarter ended March 31, 2002 we recorded a provision for excessinventory of approximately $5 million. We recognize 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.

 

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**Industry-wide overcapacity has caused and may continue tocause our results to fluctuate and such shifts could result in significantinventory write-downs and adversely affect our relationships with oursuppliers.**

 

We must buildinventory well in advance of product shipments. The semiconductor industry ishighly cyclical and in light of the current downturn, which has resulted inexcess capacity and overproduction, there is a risk that we will forecastinaccurately and produce excess inventories of our products.  As a result of such inventory imbalances,large future inventory write-downs may occur due to lower of cost or marketaccounting, excess inventory or inventory obsolescence. In addition, anyadjustment in our ordering patterns resulting from increased inventory mayadversely affect our suppliers’ willingness to meet our demand, if our demandincreases in the future.

** **

**Our product shipment patterns make it difficult to predictour quarterly revenues.**

 

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

** **

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

 

A relatively smallnumber of customers have accounted for most of our revenues to date.  Any reduction or delay in sales of ourproducts to one or more of these key customers could seriously reduce our salesvolume and revenue and adversely affect our operating results.  In particular, sales to three largecustomers, including a consumer electronics manufacturer, Apple Computer andAiwa accounted for approximately 35%, 29% and 10%, respectively, of revenue inthe six months ended June 30, 2002 and 0%, 25%, and 12% respectively, of totalrevenue in 2001.  Moreover, sales to ourfive largest end customers represented approximately 83% of our total revenuein the six months ended June 30, 2002 and 82% of our total revenue in 2001.  We expect that we will continue to rely onthe success of our largest customers and on our success in selling our existingand future products to those customers in significant quantities.  However, we cannot be sure that we willretain our largest customers or that we will be able to obtain additional keycustomers or replace key customers we may lose or who may reduce theirpurchases.

** **

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

 

We currently relyon sales of our TA2020, TA2022, TA2024, TA1101B, TA3020 and TK2050 digitalaudio amplifiers to generate a significant portion of our revenue. Sales ofthese products amounted to 96% of our revenue in the six months ended June 30,2002, 94% of our revenue in 2001 and 93% of our revenue in 2000. We havedeveloped additional products and plan to introduce more products in the futurebut there can be no assurance that these products will be commerciallysuccessful. Consequently, if our existing products are not successful, oursales could decline substantially.

 

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

 

Because of ourlengthy sales cycles, we may experience a delay between increasing expenses forresearch and development, sales and marketing, and general and administrativeefforts, as well as increasing investments in inventory, and the generation ofrevenue, if any, from such expenditures. In addition, the delays inherent in such a lengthy sales cycle raiseadditional risks of customer decisions to cancel or change product plans, whichcould result in our loss of anticipated sales. Our new products are generally incorporated into our customers’ productsor systems at the design stage.  Toendeavor to have our products selected for design into new products of currentand potential customers, commonly referred to as design wins, often requiressignificant expenditures by us without any assurance of success.  Once we have achieved a design win, oursales cycle will start with the test and evaluation of our products by thepotential customer and design of the customer’s equipment to incorporate ourproducts.  Generally, different partshave to be redesigned in order to incorporate our devices successfully into ourcustomers’ products.  The sales cyclefor the test and evaluation of our products can range from a minimum of threeto six months, and it can take a minimum of an additional six to nine monthsbefore a customer commences volume production of equipment that incorporatesour products.  Achieving a design winprovides no assurance that such customer will ultimately ship productsincorporating our products or that such products will be commerciallysuccessful.  Our revenue or prospectiverevenue would be reduced if a significant customer curtails, reduces or delaysorders during our sales cycle, or chooses not to release products incorporatingour products.

** **

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

 

During 2001,slowing worldwide demand for semiconductors has resulted in significantinventory buildups for semiconductor companies.  Presently, we have no visibility regarding how long thesemiconductor industry downturn will last or how severe the downturn will be.If the downturn continues or worsens, we may experience greater levels ofcancellations and/or pushouts of orders for our products in the future, whichcould adversely affect our business and operating results over a prolongedperiod of time.

 

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**We may experience difficulties in the introduction of new orenhanced products that could result in significant, unexpected expenses ordelay their launch, which would harm our business.**

 

Our failure or ourcustomers’ failure to develop and introduce new products successfully and in atimely manner would seriously harm our ability to generate revenues.  Consequently, our success depends on ourability to develop new products for existing and new markets, introduce suchproducts in a timely and cost-effective manner and to achieve design wins.  The development of these new devices ishighly complex, and from time to time we have experienced delays in completingthe 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;

•                  accuratenew product definition;

•                  timelycompletion and introduction of new product designs;

•                  availabilityof foundry capacity;

•                  achievingacceptable manufacturing yields; and

•                  marketacceptance of our products and our customers’ products.

 

We seek but cannotguarantee success with regard to these factors.

 

**If we are unable to retain key personnel, we might not beable to operate our business successfully.**

 

We may not besuccessful in retaining executive officers and other key management andtechnical personnel.  The competitionfor such employees is intense, particularly in Silicon Valley and particularlyfor experienced mixed-signal circuit designers, systems applications engineersand experienced executive 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 Tripathi, ourfounder, president and chief executive officer, could seriously harm us. We donot have any employment contracts with our employees.

 

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**Our headquarters, as well as the facilities of our principalmanufacturers and customers are located in geographic regions with increasedrisks of power supply failure, natural disasters, labor strikes and politicalunrest.**

 

Our headquartersis located in Santa Clara, California, an area on or near a known earthquakefault within the state. In addition, businesses within the State of Californiahave recently experienced a shortage of available electrical power which hasresulted in electrical blackouts. In the event these blackouts continue orincrease in severity, they could disrupt the operations of our facilitieswithin the state.

 

Our principalmanufacturers and customers are located in the Pacific Rim region. The risk ofearthquakes in this region, particularly in Taiwan, is significant due to theproximity of major earthquake fault lines. Earthquakes, fire, flooding andother natural disasters in the Pacific Rim region likely would result in thedisruption of our foundry partners’ assembly and testing capacity and theability of our customers to purchase our products. Labor strikes or politicalunrest in these regions would likely also disrupt operations of our foundriesand customers. In particular, there is a recent history of political unrestbetween China and Taiwan. Any disruption resulting from such events could causesignificant delays in shipments of our products until we are able to shift ourmanufacturing, assembly and testing from the affected contractor to anotherthird party vendor. We cannot be sure that such alternative capacity could beobtained on favorable terms, if at all. Moreover, any such disruptions couldalso cause significant decreases in our sales to these customers until ourcustomers resume normal purchasing volumes.

** **

**Stockholders will incur additional dilution upon the exerciseof warrants, and management will have sole discretion to use the proceedsreceived from exercise of these warrants**.

 

To the extent thatthe warrants are exercised, there will be additional dilution to yourshares.  If all of the warrants areexercised, we will be required to issue an additional 3,328,760 shares ofcommon stock, or approximately 8.1% of the common stock outstanding as of June30, 2002. 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.

 

**The market may be adversely affected due to the large numberof shares eligible for sale under the registration statement filed inconnection with the recent financing.**

 

The shares ofcommon stock eligible for sale under the registration statement filed inconnection with the recent Series A financing represent a large percentage ofour outstanding common stock.  Themarket for the common shares may be adversely affected as a result of sales ofa large number of shares in the market or the perception that large sales mayoccur.

 

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**We may not maintain NASDAQ National Market listingrequirements**

 

Tomaintain the listing of our common stock on The Nasdaq National Market we arerequired to meet certain listing requirements, including a minimum bid price of$1.00 per share. If our stock is traded below the $1.00 minimum bid price for30 consecutive business days, we will receive a deficiency notice and will havea grace period of 90 calendar days to cure the deficiency by meeting the $1.00per share trading price for 10 consecutive days. There can be no assurance thatwe will maintain compliance with the minimum bid price. If we fail to meet theminimum bid price for 10 consecutive days during the grace period our commonstock may be delisted from The NASDAQ National Market. Even if we are able tocomply with the minimum bid requirement, there is no assurance that in thefuture we will continue to satisfy NASDAQ listing requirements, with the resultthat our common stock may be delisted from The NASDAQ National Market. Shouldour common stock be delisted from The NASDAQ National Market, it would likelybe traded on The NASDAQ Small Cap Market, and if delisted from The NASDAQ SmallCap Market, would likely be traded on the so-called ‘‘pink sheets’’ or the‘‘Electronic Bulletin Board’’ of the National Association of SecuritiesDealers, Inc. Consequently, it would likely be more difficult to trade in orobtain accurate quotations as to the market price of our common stock.Delisting of our common stock could materially adversely affect the marketprice, the market liquidity of our common stock and our ability to raisenecessary capital.

 

**Risks Related to Manufacturing**

 

**We depend on two outside foundries for our semiconductordevice manufacturing requirements.**

 

We do not own oroperate a fabrication facility, and substantially all of our semiconductordevice requirements are currently supplied by two outside foundries, UnitedMicroelectronics Corporation, or UMC, in Taiwan and STMicroelectronics Group inEurope.  Although we primarily utilizethese two outside foundries, most of our components are not manufactured atboth foundries at any given time.  As aresult, each foundry is a sole source for certain products.  There are significant risks associated withour reliance on outside foundries, including:

 

•                  the lack of guaranteed wafer supply;

 

•                  limited control over deliveryschedules, quality assurance and control, manufacturing yields and productioncosts; and

 

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

 

In addition, themanufacture of integrated circuits is a highly complex and technologicallydemanding process.  Although we workclosely with our foundries to minimize the likelihood of reduced manufacturingyields, our foundries have from time to time experienced lower than anticipatedmanufacturing yields, particularly in connection with the introduction of newproducts and the installation and start-up of new process technologies.

 

We provide ourfoundries with continuous forecasts of our production requirements; however,the ability of each foundry to provide us with semiconductor devices is limitedby the foundry’s available capacity.  Inmany cases, we place our orders on a purchase order basis, and foundries mayallocate capacity to the production of other companies’ products while reducingthe deliveries to us on short notice. In particular, foundry customers that are larger and better financedthan us or that have long-term agreements with our foundries may cause suchfoundries to reallocate capacity in a manner adverse to us.

 

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If we use a newfoundry, several months would be typically required to complete the qualificationprocess before we can begin shipping products from the new foundry. In theevent either of our current foundries suffers any damage or destruction totheir respective facilities, or in the event of any other disruption of foundrycapacity, we may not be able to qualify alternative manufacturing sources forexisting or new products in a timely manner. Even our current outside foundries would need to have certainmanufacturing processes qualified in the event of disruption at anotherfoundry, which we may not be able to accomplish in a timely enough manner toprevent an interruption in supply of the affected products.

 

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

** **

**We depend on third-party subcontractors for most of oursemiconductor assembly and testing requirements and any unexpected interruptionin their services could cause us to miss scheduled shipments to customers andto lose revenues.**

 

Semiconductorassembly and testing are complex processes, which involve significanttechnological expertise and specialized equipment.  As a result of our reliance on third-party subcontractors forassembly and testing of our products, we cannot directly control productdelivery schedules, which has in the past, and could in the future, result inproduct shortages or quality assurance problems that could increase the costsof manufacture, assembly or testing of our products.  Almost all of our products are assembled and tested by one offive subcontractors: AMBIT Microsystems Corporation in Taiwan, ST Assembly TestServices Ltd. in Singapore, Amkor Technology, Inc. in the Philippines, ASE inKorea, Malaysia and the Philippines and ISE Labs Assembly in the UnitedStates.  We do not have long-termagreements with any of these suppliers and retain their services on a per orderbasis.  The availability of assembly andtesting services from these subcontractors could be adversely affected in theevent a subcontractor suffers any damage or destruction to their respectivefacilities, or in the event of any other disruption of assembly and testingcapacity.  Due to the amount of timenormally required to qualify assemblers and testers, if we are required to findalternative manufacturing assemblers or testers of our components, shipmentscould be delayed.  Any problemsassociated with the delivery, quality or cost of our products could seriouslyharm our business.

** **

**Failure to transition our products to more effective and/orincreasingly smaller semiconductor chip sizes and packaging could cause us tolose our competitive advantage and reduce our gross margins.**

 

We evaluate thebenefits, on a product-by-product basis, of migrating to smaller semiconductorprocess technologies in order to reduce costs and have commenced migration ofsome products to smaller semiconductor processes.  We believe that the transition of our products to increasingly smallersemiconductor processes will be important for us to reduce manufacturing costsand to remain competitive. Moreover, we are dependent on our relationships withour foundries to migrate to smaller semiconductor processes successfully.  We cannot be sure that our future processmigrations will be achieved without difficulties, delays or increasedexpenses.  Our gross margins would beseriously harmed if any such transition is substantially delayed or inefficientlyimplemented.

** **

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

 

We currentlyobtain almost all of our manufacturing, assembly and test services from supplierslocated outside the United States and may expand our manufacturing activitiesabroad.  Approximately 88% of our totalrevenue in the six months ended June 30, 2002 was derived from sales toindependent customers based outside the United States.  In 2001, 2000 and 1999, 94%, 93% and 95%,respectively, of our total revenue was derived from sales to independentcustomers based outside of the United States. In addition, we often ship products to our domestic customers’international manufacturing divisions and subcontractors.

 

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

 

•                  political, social and economicinstability;

 

•                  trade restrictions and tariffs;

 

•                  the imposition of governmentalcontrols;

 

•                  exposure to different legalstandards, particularly with respect to intellectual property;

 

•                  import and export licenserequirements;

 

•                  unexpected changes in regulatoryrequirements;

 

•                  difficulties in collectingreceivables; and

 

•                  potentially adverse tax consequences.

 

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

 

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**Risks Related to our Product Lines**

 

**Our ability to achieve revenue growth will be harmed if weare unable to persuade electronic systems manufacturers to adopt our newamplifier technology.**

 

We facedifficulties in persuading manufacturers to adopt our products using our newamplifier technology. Traditional amplifiers use design approaches developed inthe 1930s.  These approaches are stillused in most amplifiers and engineers are familiar with these designapproaches.  In order to adopt ourproducts, manufacturers and engineers must understand and accept our newtechnology.  To take advantage of ourproducts, manufacturers must redesign their systems, particularly componentssuch as the power supply and heat sinks. Manufacturers must work with their suppliers to obtain modifiedcomponents and they often must complete lengthy evaluation and testing.  In addition, our amplifiers are often moreexpensive as components than traditional amplifiers. For these reasons,prospective customers may be reluctant to adopt our technology.

** **

**We currently depend on high-end consumer audio markets thatare typically characterized by aggressive pricing, frequent new productintroductions and intense competition.**

 

A substantialportion of our current revenue is generated from sales of products that addressthe high-end consumer audio markets, including home theater, computer audio,and the automotive audio markets.  Thesemarkets are characterized by frequent new product introductions, decliningprices and intense competition. Pricing in these markets is aggressive, and weexpect pricing pressure to continue.  Inthe computer audio segment, our success depends on consumer awareness andacceptance of existing and new products by our customers and consumers inparticular, the elimination of externally-powered speakers.  In the automotive audio segment, we facepressure from our customers to deliver increasingly higher-powered solutionsunder significant engineering limitations due to the size constraints in cardashboards.  In addition, our ability toobtain prices higher than the prices of traditional amplifiers will depend onour ability to educate manufacturers and their customers about the benefits ofour products.  Failure of our customersand consumers to accept our existing or new products will seriously harm ouroperating results.

** **

**If we are not successful in developing and marketing new andenhanced products for the DSL high speed communications markets that keep pacewith technology and our customers’ needs, our operating results will suffer.**

 

The market for ourDSL products is new and emerging, and is characterized by rapid technologicaladvances, intense competition and a relatively small number of potentialcustomers. This will likely result in price erosion on existing products andpressure for cost-reduced future versions. We are currently sampling and fieldtesting our first product for the DSL market and we have not received any largevolume orders. Implementation of our products require manufacturers to acceptour technology and redesign their products. If potential customers do not accept our technology or experienceproblems implementing our devices in their products, our products could berendered obsolete and our business would be harmed.  If we are unsuccessful in introducing future products with enhancedperformance, our ability to achieve revenue growth will be seriously harmed.

** **

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**We may experience difficulties in the introduction of anamplifier product for use in the cellular phone market that could result insignificant expenses or delay in its launch.**

 

We are currentlydeveloping an amplifier product for use in the cellular phone market.  We currently have no design wins orcustomers for this product under development. We may not introduce our amplifier product for the cellular phone marketon time, and this product may never achieve market acceptance.  Furthermore, competition in this market islikely to result in price reductions, shorter product life cycles, reducedgross margins and longer sales cycles compared with what we have experienced todate.

** **

**Intense competition in the semiconductor industry and in theconsumer audio and communications markets could prevent us from achieving orsustaining profitability.**

 

The consumeraudio, personal computer, communications and semiconductor industries arehighly competitive.  We compete with anumber of major domestic and international suppliers of semiconductors in theaudio and communications markets.  Wealso may face competition from suppliers of products based on new or emergingtechnologies.  Many of our competitorsoperate their own fabrication facilities and have longer operating historiesand presence in key markets, greater name recognition, access to largercustomer bases and significantly greater financial, sales and marketing,manufacturing, distribution, technical and other resources than us.  As a result, such competitors may be able toadapt more quickly to new or emerging technologies and changes in customerrequirements or devote greater resources to the promotion and sale of theirproducts than us.  Current and potentialcompetitors have established or may establish financial or strategicrelationships among themselves or with existing or potential customers,resellers or other third parties. Accordingly, it is possible that new competitors or alliances amongcompetitors could emerge and rapidly acquire significant market share.  In addition, existing or new competitors mayin the future develop technologies that more effectively address thetransmission of digital information through existing analog infrastructures ata lower cost or develop new technologies that may render our technologyobsolete.  There can be no assurancethat we will be able to compete successfully in the future against our existingor potential competitors, or that our business will not be harmed by increasedcompetition.

** **

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

 

Products such asthose that we offer may contain errors and defects when first introduced or asnew versions are released.  We have inthe past experienced such errors and defects, in particular in the developmentstage of a new product.  Delivery ofproducts with production defects or reliability, quality or compatibilityproblems could significantly delay or hinder market acceptance of suchproducts, which could damage our reputation and seriously harm our ability toretain our existing customers and to attract new customers.  Moreover, such errors and defects couldcause problems, interruptions, delays or a cessation of sales to ourcustomers.  Alleviating such problemsmay require substantial redesign, manufacturing and testing which would resultin significant expenditures of capital and resources.  Despite testing conducted by us, our suppliers and our customers,we cannot be sure that errors and defects will not be found in new productsafter commencement of commercial production. Such errors and defects could result in additional development costs,loss of, or delays in, market acceptance, diversion of technical and otherresources from our other development efforts, product repair or replacementcosts, claims by our customers or others against us, or the loss of credibilitywith our current and prospective customers. Any such event could result in the delay or loss of market acceptance ofour products and would likely harm our business.

 

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**Downturns in the highly cyclical semiconductor industry andrapid technological change could result in substantial period-to-periodfluctuations in wafer supply, pricing and average selling prices which make itdifficult to predict our future performance.**

 

We providesemiconductor devices to the audio, personal computer and communicationsmarkets.  The semiconductor industry ishighly cyclical and subject to rapid technological change and has been subjectto significant economic downturns at various times, characterized by diminishedproduct demand, accelerated erosion of average selling prices and productionovercapacity.  The semiconductorindustry also periodically experiences increased demand and production capacityconstraints.  As a result, we have experiencedand may experience in the future substantial period-to-period fluctuations inour results of operations due to general semiconductor industry conditions,overall economic conditions or other factors, many of which are outside ourcontrol.  Due to these risks, you shouldnot rely on period-to-period comparisons to predict our future performance.

** **

**Risks Related to Our Intellectual Property**

 

**Our intellectual property and proprietary rights may beinsufficient to protect our competitive position**.

 

Our businessdepends, in part, on our ability to protect our intellectual property.  We rely primarily on patent, copyright,trademark and trade secret laws to protect our proprietary technologies.  We cannot be sure that such measures willprovide meaningful protection for our proprietary technologies and processes.As of June 30, 2002, we have nineteen issued United States patents, andtwenty-one additional United States patent applications which are pending. Inaddition, we have ten international patents issued and an additional seventyinternational patents pending. We cannot be sure that any patent will issue asa result of these applications or future applications or, if issued, that anyclaims 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 there under would provide us meaningfulprotection.  The failure of any patentsto provide protection to our technology would make it easier for ourcompetitors to offer similar products. In connection with our participation in the development of variousindustry standards, we may be required to agree to license certain of our patentsto other parties, including our competitors, that develop products based uponthe adopted standards.

 

We also generallyenter into confidentiality agreements with our employees and strategicpartners, and generally control access to and distribution of our documentationand other proprietary information. Despite these precautions, it may be possible for a third party to copyor otherwise obtain and use our products, services or technology withoutauthorization, develop similar technology independently or design around ourpatents.  In addition, effectivecopyright, trademark and trade secret protection may be unavailable or limitedin certain foreign countries.  Some ofour customers have entered into agreements with us pursuant to which suchcustomers have the right to use our proprietary technology in the event wedefault in our contractual obligations, including product supply obligations,and fail to cure the default within a specified period of time.

 

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**We may be subject to intellectual property rights disputesthat could divert management’s attention and could be costly.**

 

The semiconductorindustry is characterized by vigorous protection and pursuit of intellectualproperty rights.  From time to time, wemay receive in the future, notices of claims of infringement, misappropriationor misuse of other parties’ proprietary rights.  We cannot be sure that we will prevail in these actions, or thatother actions alleging infringement by us of third-party patents,misappropriation or misuse by us of third-party trade secrets or the invalidityof one or more patents held by us will not be asserted or prosecuted againstus, or that any assertions of infringement, misappropriation or misuse orprosecutions seeking to establish the invalidity of our patents will notseriously harm our business.  Forexample, in a patent or trade secret action, an injunction could be issuedagainst us requiring that we withdraw particular products from the market ornecessitating that specific products offered for sale or under development beredesigned.  We have also entered intocertain indemnification obligations in favor of our customers and strategicpartners that could be triggered upon an allegation or finding of our infringement,misappropriation or misuse of other parties’ proprietary rights.  Irrespective of the validity or 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 surethat the steps taken by us to prevent our, or our customers’, misappropriationor infringement of intellectual property will be successful.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing the income we receive from our investments withoutsignificantly increasing risk of loss. Some of the securities that we may acquire in the future may be subjectto market risk for changes in interest rates. To mitigate this risk, we plan to maintain a portfolio of cashequivalents and short-term investments in a variety of securities, which mayinclude commercial paper, money market funds, government and non-governmentdebt securities. We manage the sensitivity of our results of operations tothese risks by maintaining a conservative portfolio, which is comprised solelyof highly-rated, short-term investments. We do not hold or issue derivative, derivative commodity instruments orother financial instruments for trading purposes. Currently we are exposed tominimal market risks. Due to the short-term and liquid nature of our portfolio,fluctuations in interest rates within historical norms would not materiallyaffect its value nor our financial condition.

 

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**Part II.****          OtherInformation**

 

Item 1.             Legal proceedings

 

None

 

Item 2.             Changesin Securities and Use of Proceeds

 

None

 

Item 3.             Defaults in Securities

 

None

 

Item 4.             Submissionof Matters to a Vote of Security Holders

 

None

 

Item 5.             Other Information

 

TwoBoard vacancies were filled during the quarter ended June 30, 2002. Mr. Y.S. Fuwas appointed to the Board by Unanimous Written Consent on April 24, 2002 andMr. A.K. Acharya was appointed at a Board meeting held on June 26, 2002.

 

Item 6.             Exhibitsand Reports on Form 8-K

 

(a)                                  None

 

(b)                                 Reportson Form 8-K

 

None

** **

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** **

**Signature**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by undersigned, thereunto dulyauthorized.

 
|   | Tripath  Technology Inc.      |
|--------|-------------------------------|
|   |                          |
|   | Date:  August 14, 2002        |
|   | by:                           |  /s/ John J. DiPietro |   |
|   |                          |
|   | John  J. DiPietro,            |
|   | Vice  President and           |
|   | Chief  Financial Officer      |
|   | (duly  authorized officer and |
|   | principal  financial officer) |

 

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