|UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark
        One)
|-----------------------------------------------------------------------------------------------------

|x | QUARTERLY REPORT
          PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934For the Quarterly
          Period Ended September 30, 2003
        OR 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o | TRANSITION REPORT
          PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
          1934
        For the transition
          period from            to  .

|Commission File Number
000-31081


      TRIPATH TECHNOLOGY
        INC.
        (Exact name of registrant
        as specified in its charter)
|-----------------------------------------------------------------------------------------------------------------------------------------------

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

|2560 Orchard Parkway San Jose, California
95131(Address of Principal Executive Office including (Zip Code)
|----------------------------------------------------------------------------------------------------------

|(408)
      750-3000 (Registrants telephone number, including area code)
|-------------------------------------------------------------------------

|Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x
No o


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


44,765,555 shares of the
Registrants common stock were outstanding as of November 4, 2003.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|TABLE OF CONTENTS


PART I. Financial Information
|-------------------------------------------------

| | Item 1. Financial Statements (unaudited)
| | ----------------------------------------

| | Condensed Consolidated
      Balance Sheets at September 30, 2003 and December 31, 2002
| | ---------------------------------------------------------------------------------------

| | Condensed
Consolidated Statements of Operations for the three and nine months ended September 30,
2003 and 2002
| | ---------------------------------------------------------------------------------------------------------------

| | Condensed
Consolidated Statements of Cash Flows for the three and nine months ended September 30,
2003 and 2002
| | ---------------------------------------------------------------------------------------------------------------

| | Notes to Condensed
      Interim Consolidated Financial Statements
| | ------------------------------------------------------------------

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

| | Item 3. Quantitative
        and Qualitative Disclosures about Market Risk
| | --------------------------------------------------------------------------

| | Item 4. Controls
        and Procedures
| | ---------------------------------------

|PART II. Other Information
|--------------------------

| | Item 2. Changes
        in Securities and Use of Proceeds
| | ---------------------------------------------------------

| | Item 5. Other Information
| | -------------------------

| | Item 6. Exhibits and Reports
        on Form 8-K
| | ------------------------------------------------

| | Signature
| | ---------

| | Exhibit Index
| | -------------

|
|

|PART I.   Financial
Information


Item 1. Financial Statements



TRIPATH TECHNOLOGY INC. CONDENSED CONSOLIDATED
BALANCE SHEETS (in thousands) Unaudited
|--------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                               | September
      30, 
      2003 |  | December
      31,
      2002 |         
|---------------------------------------------------------------------------------------------- | ------------------------------- |  | ----------------------------- | --------
|Current
      assets:                                                                          |                                 |  |                               |         
|Cash
      and cash equivalents                                                                |                                 |  | $                             | 9,088   
|Restricted
      cash                                                                          |                                 |  |                               |        
|Accounts
      receivable, net                                                                 |                                 |  |                               | 1,934   
|Inventories                                                                                    |                                 |  |                               | 4,036   
|Prepaid
      expenses and other current assets                                                |                                 |  |                               | 161     
|                                                                                               |                                 |  |                               |         
|                                                                                               |                                
|Total
      current assets                                                                     |                                 |  |                               | 15,219  
|                                                                                               |                                
|Property
      and equipment, net                                                              |                                 |  |                               | 1,673   
|Other
      assets                                                                             |                                 |  |                               | 77      
|                                                                                               |                                 |  |                               |         
|Total
      assets                                                                             |                                 |  | $                             | 16,969  
|                                                                                               |                                 |  |                               |         
|LIABILITIES
      AND STOCKHOLDERS EQUITY                                                     |                                 | 
|Current
      liabilities:                                                                     |                                 | 
|Accounts
      payable                                                                         |                                 |  | $                             | 2,510   
|Current
      portion of capital lease obligations                                             |                                 |  |                               | 300     
|Accrued
      expenses                                                                         |                                 |  |                               | 674     
|Deferred
      distributor revenue                                                             |                                 |  |                               | 738     
|                                                                                               |                                 |  |                               |         
|Total
      current liabilities                                                                |                                 |  |                               | 4,222   
|                                                                                               |                                 |  |                               |         
|                                                                                               |                                 | 
|Long
      term liabilities                                                                    |                                 |  |                               | 1,157   
|                                                                                               |                                 |  |                               |         
|Commitments
      and contingencies (see Note 12)                                              |                                 | 
|                                                                                               |                                
|Stockholders
      equity:                                                                    |                                 | 
|Common
      stock, $0.001 par value, 100,000,000 shares authorized; 44,665,410 and 41,326,760 |                                 | 
|shares
      issued and outstanding                                                            |                                 |  |                               | 44      
|Additional
      paid-in capital                                                               |                                 |  |                               | 189,987 
|Deferred
      stock-based compensation                                                        |                                 |  |                               | (263    
|Accumulated
      deficit                                                                      |                                 |  |                               | (178,178
|                                                                                               |                                 |  |                               |         
|Total
      stockholders equity                                                               |                                 |  |                               | 11,590  
|                                                                                               |                                 |  |                               |         
|                                                                                               |                                 | 
|                                                                                               |                                
|Total
      liabilities and stockholders equity                                               |                                 |  | $                             | 16,969  
|                                                                                               |                                 |  |                               |         

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


1
|-------------------------------------------------------------------------------------------------------------

|TRIPATH TECHNOLOGY INC. CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS(in thousands, except
per share data) Unaudited
|----------------------------------------------------------------------------------------------------------------------

|                                                      | Three
      months endedSeptember 30, |  | Nine
months endedSeptember 30, |       
|----------------------------------------------------- | ------------------------------------- |  | ------------------------------ | ------
|                                                      | 2003                                  |  | 2002                           |       
|Revenue                                               |                                       |  | $                              | 3,674 
|Cost
      of revenue                                 |                                       |  |                                | 2,514 
|                                                      |                                       |  |                                |       
|Gross
      profit (loss)                             |                                       |  |                                | 1,160 
|                                                      |                                       |  |                                |       
|Operating
      expenses:                             |                                       | 
|Research
      and development                        |                                       |  |                                | 1,602 
|Selling,
      general and administrative             |                                       |  |                                | 1,103 
|                                                      |                                       |  |                                |       
|Total
      operating expenses                        |                                       |  |                                | 2,705 
|                                                      |                                       |  |                                |       
|                                                      |                                       |  |                                |       
|Loss
      from operations                            |                                       |  |                                | (1,545
|Interest
      and other income, net                  |                                       |  |                                | 9     
|                                                      |                                       |  |                                |       
|Net
      loss                                        |                                       |  | $                              | (1,536
|                                                      |                                       |  |                                |       
|Beneficial
      conversion feature on issuance of    |                                       | 
|Preferred
      Stock                                 |                                       |  | $                              |      
|                                                      |                                       |  |                                |       
|Net
      loss applicable to common stockholders      |                                       |  | $                              | (1,536
|                                                      |                                       |  |                                |       
|Basic
      and diluted net loss per share applicable |                                       | 
|to
      common stockholders                          |                                       |  | $                              | (0.04 
|                                                      |                                       |  |                                |       
|Number
      of shares used in computing basic and    |                                       | 
|diluted net
      loss per share                      |                                       |  |                                | 42,115
|                                                      |                                       |  |                                |       

| | Stock-based
compensation included in:
| | -------------------------------------

|                                          | Three
      months ended
      September 30, |  | Nine
      months ended
      September 30, |   
|----------------------------------------- | -------------------------------------------- |  | ------------------------------------------- | --
|                                          |                                              |  | 2003                                        |   
|Cost of revenue                           |                                              |  | $                                           | 1 
|Research
      and development            |                                              |  |                                             | (7
|Selling,
      general and administrative |                                              |  |                                             | 43
|                                          |                                              |  |                                             |   
|Total stock-based
      compensation      |                                              |  | $                                           | 37
|                                          |                                              |  |                                             |   

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

2
|------------------------------------------------------------------------------------------------------------

|TRIPATH TECHNOLOGY INC. CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS(in thousands) Unaudited
|-----------------------------------------------------------------------------------------------

|                                                                      | Nine
      months endedSeptember 30,
|--------------------------------------------------------------------- | ------------------------------------
|                                                                      |                                     
|Cash flows
      from operating activities:                           |                                     
|Net
      loss                                                        |                                     
|Adjustments
      to reconcile net loss to net cash used in operating |                                     
|activities:                                                           |                                     
|Depreciation
      and amortization                                   |                                     
|Allowance
      for doubtful accounts                                 |                                     
|Provision
      for excess inventory                                  |                                     
|Stock-based
      compensation                                        |                                     
|Deferred
      rent                                                   |                                     
|Changes
      in assets and liabilities:                              |                                     
|Accounts
      receivable                                             |                                     
|Inventories                                                           |                                     
|Prepaid
      expenses and other assets                               |                                     
|Accounts
      payable                                                |                                     
|Accrued
      expenses                                                |                                     
|Deferred
      distributor revenue                                    |                                     
|                                                                      |                                     
|Net
      cash used in operating activities                           |                                     
|                                                                      |                                     
|Cash flows
      from investing activities:                           |                                     
|Sale
      of short-term investments                                  |                                     
|Purchase
      of property and equipment                              |                                     
|Restricted
      Cash                                                 |                                     
|                                                                      |                                     
|Net
      cash provided by investing activities                       |                                     
|                                                                      |                                     
|Cash flows
      from financing activities:                           |                                     
|Proceeds
      from issuance of preferred stock and warrants          |                                     
|Proceeds
      from issuance of common stock under ESPP and upon      |                                     
|exercise
      of options                                             |                                     
|Proceeds
      from issuance of common stock upon exercise of         |                                     
|warrants                                                              |                                     
|Principal
      payments on capital lease obligations                 |                                     
|                                                                      |                                     
|Net
      cash provided by financing activities                       |                                     
|                                                                      |                                     
|Net (decrease)
      increase in cash and cash equivalents            |                                     
|Cash and
      cash equivalents, beginning of period                  |                                     
|                                                                      |                                     
|Cash and
      cash equivalents, end of period                        |                                     
|                                                                      |                                     

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

3
|------------------------------------------------------------------------------------------------------------

|Tripath Technology Inc. Notes
to Condensed Interim Consolidated Financial Statements(Unaudited)
|-----------------------------------------------------------------------------------------------

|1. | Basis
of Presentation
|-- | ---------------------

|The unaudited condensed interim
consolidated financial statements included herein have been prepared by Tripath Technology
Inc. (the Company) in accordance with accounting principles generally accepted
in the United States of America and reflect all adjustments, consisting of normal
recurring adjustments, which in the opinion of management are necessary to state fairly
the Companys financial position, results of operations and cash flows for the
periods presented. These interim financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K, as amended, for the year ended December 31, 2002. The results
of operations for the three and nine months ended September 30, 2003 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the entire
year.


The preparation of financial
statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates, and such differences
may be material to the financial statements.


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


The Companys unaudited
condensed interim consolidated financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Companys former independent
accountants included an explanatory paragraph in their audit report on the Companys
consolidated financial statements for the fiscal year ended December 31, 2002, which
indicates that the Company has suffered recurring losses from operations and has an
accumulated deficit that raises substantial doubt about the Companys ability to
continue as a going concern.


To conserve cash, the Company has
implemented cost cutting measures, and in August 2001, implemented a restructuring
program. In addition, on January 24, 2002, the Company completed a financing in which it
raised $21 million in gross proceeds through a private equity placement and in July 2002,
the Company entered into a credit agreement with a financial institution that provided for
a one-year revolving credit facility of up to $10 million, subject to certain restrictions
in the borrowing base based on eligibility of receivables. The credit agreement expired on
June 30, 2003 and has not been renewed. During the quarter ended September 30, 2003, the
Company received proceeds totaling approximately $1.7 million as a result of the exercise
of warrants issued in connection with the financing that was completed on January 24,
2002.


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


The Company believes, based on its
ability to implement the aforementioned measures, if needed, that it will have liquidity
sufficient to meet its operating, working capital and financing needs for the next twelve
months and perhaps beyond. The Company has not made any adjustment to its consolidated
financial statements as a result of the outcome of the uncertainty described above.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Revenue
recognition
|-- | -------------------

|The Company recognizes revenue from
product sales upon shipment to original equipment manufacturers and end users, net of
sales returns and allowances. The Companys sales to distributors are made under
arrangements allowing limited rights of return, generally under product warranty
provisions, stock rotation rights and price protection on products unsold by the
distributor. In addition, the distributor may request special pricing and allowances which
may be granted subject to approval by the Company. As a result of these returns rights and
potential pricing adjustments, except in very limited circumstances, the Company defers
recognition on sales to distributors until products are resold by the distributor to the
end user. Revenue may be recognized when sold to a distributor when the distributor has no
right of return.
4
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Net loss per share
|-- | ------------------

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


Total potential common stock of
10,702,000 and 8,974,000 shares were not included in the diluted net loss per share
calculation for the three and nine-month periods ended September 30, 2003, respectively,
because to do so would be anti-dilutive. For the three and nine month periods ended
September 30, 2002, 8,529,000 and 6,761,000 shares of potential common stock were excluded
from the calculation of diluted net loss per share because they were anti-dilutive.


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

|                                    | Three
      months ended September 30 |  | Nine
      months endedSeptember 30 |       
|----------------------------------- | ------------------------------------- |  | ----------------------------------- | ------
|
|Numerator:                          |                                       |  |                                     |       
|Net
      loss                      |                                       |  | $                                   | (1,536
|                                    |                                       |  |                                     |       
|Denominator:                        |                                       | 
|Weighted
      average common stock |                                       |  |                                     | 42,115
|                                    |                                       |  |                                     |       
|Net loss
      per share:           |                                       | 
|Basic
      and diluted             |                                       |  | $                                   | (0.04 
|                                    |                                       |  |                                     |       

|4. | Deferred stock-based compensation
|-- | ---------------------------------

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


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


Unamortized deferred stock-based
compensation at September 30, 2003 and December 31, 2002 was $263,000 and $91,000
respectively.
5
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Accounting for stock-based compensation
|-- | ---------------------------------------

|The
Company accounts for its stock-based compensation plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation cost is
reflected in net income for the periods ended September 30, 2003 and 2002, as all options
granted under those plans had an exercise price no less than the market value of the
underlying common stock on the date of grant.


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

|                                                                               | Three
      months ended September 30, |  | Nine
      months endedSeptember 30, |       
|------------------------------------------------------------------------------ | -------------------------------------- |  | ------------------------------------ | ------
|                                                                               |                                        |  | 2003                                 |       
|Net
      loss applicable to common stockholders, as reported                  |                                        |  | $                                    | (1,536
|Total
      stock-based employee compensation (expense)/benefit included in   
|the
      net loss, determined under the recognition and measurement           |                                        | 
|principles
      of APB Opinion No. 25, net of related tax effects             |                                        |  |                                      | 37    
|                                                                               |                                        |  |                                      |       
|Total
      stock-based employee compensation (expense)/benefit determined     |                                        | 
|under
      fair value based method for all awards, net of related tax effects |                                        |  |                                      | (473  
|                                                                               |                                        |  |                                      |       
|                                                                               |                                        |  |                                      |       
|Pro
      forma net loss applicable to common stockholders                     |                                        |  | $                                    | (1,972
|                                                                               |                                        |  |                                      |       
|As
      reported                                                              |                                        |  | $                                    | (0.04 
|                                                                               |                                        |  |                                      |       
|Pro
      forma                                                                |                                        |  | $                                    | (0.05 
|                                                                               |                                        |  |                                      |       

|6. | Cash, cash equivalents and restricted cash
|-- | ------------------------------------------

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


The Company had a credit facility
with a financial institution that had certain restrictions in the borrowing base. The
amount by which the aggregate face amount of all outstanding stand-by letters of credit
exceeded the borrowing base, as determined by eligible receivables, represented the amount
of restricted cash necessary to secure the letters of credit. At September 30, 2003, the
Company had no restricted cash. The credit agreement expired on June 30, 2003 and has not
been renewed.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | Concentration of credit risk and significant customers
|-- | ------------------------------------------------------

|Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of
cash, cash equivalents and short-term investments. Substantially all of the Companys
cash and cash equivalents are invested in highly-liquid money market funds and commercial
securities with major financial institutions. Short-term investments consist of U.S.
government and commercial bonds and notes. The Company sells its products principally to
original equipment manufacturers and distributors. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit losses, as
considered necessary by management.

6
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                 | % of Revenue
      for the Three 
      Months Ended September 30 |      | % of Revenue
      for the Nine 
      Months Ended September 30
|---------------- | ----------------------------------------------------------------- | ---- | ----------------------------------------------------------------
|                 |                                                                  
|                 |                                                                   | 2003 |                                                                 
|                 |                                                                  
|Customer
      A |                                                                   |      |                                                                 
|Customer
      B |                                                                   |      |                                                                 
|Customer
      C |                                                                   |      |                                                                 
|Customer
      D |                                                                   |      |                                                                 

|The Companys accounts
receivable were concentrated with four customers at September 30, 2003 representing 39%,
15%, 13% and 9% of aggregate gross receivables, four customers at September 30, 2002
representing 20%, 14%, 12% and 10% of aggregate gross receivables.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | Inventories
|-- | -----------

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

| | Inventories
are comprised of the following (in thousands):
| | ----------------------------------------------------------

|                                     |  |  | September
      30,2003 |       | December
      31,2002 |  
|------------------------------------ |  |  | ----------------------- | ----- | ---------------------- | -
|                                     |  |  |                         |      
|Raw
      materials                  |  |  | $                       | 696   |                        | $
|Work-in-process                      |  |  |                         | 384   |                        |  
|Finished
      goods                 |  |  |                         | 2,610 |                        |  
|Inventory
      held by distributors |  |  |                         | 346   |                        |  
|                                     |  |  |                         |      
|Total                                |  |  | $                       | 4,036 |                        | $
|                                     |  |  |                         |      

|7
|-

|9. | Segment and geographic information
|-- | ----------------------------------

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


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

|              | Three
      Months Ended
      September 30 |  | Nine
      Months Ended
      September 30 |      
|------------- | ------------------------------------------- |  | ------------------------------------------ | -----
|              |                                             |  |                                            |      
|              | 2003                                        |  | 2002                                       |      
|              |                                             |  |                                            |      
|Europe        |                                             |  | $                                          | 342  
|Korea         |                                             |  |                                            | 869  
|United States |                                             |  |                                            | 215  
|Japan         |                                             |  |                                            | 1,705
|Singapore     |                                             |  |                                            | 5    
|Taiwan        |                                             |  |                                            | 300  
|China         |                                             |  |                                            | 234  
|Rest of World |                                             |  |                                            | 4    
|              |                                             |  |                                            |      
|              |                                             |  |                                            |      
|              |                                             |  | $                                          | 3,674
|              |                                             |  |                                            |      

|Approximately 77% and 57% of the
Companys total revenue for the three months ended September 30, 2003 and September
30, 2002, respectively, were derived from sales directly to end customers based outside
the United States. Similarly, for the nine months ended September 30, 2003 and September
30, 2002, respectively, sales directly to end customers based outside the United States
were approximately 75% and 61%.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | Line
of credit
|--- | --------------

|On July 12, 2002, the Company
entered into a credit agreement with a financial institution that provided for a one-year
revolving credit facility in an amount of up to $10 million, subject to certain
restrictions in the borrowing base based on eligibility of receivables. The credit
agreement expired on June 30, 2003 and has not been renewed.


The credit agreement was used to
issue stand-by letters of credit totaling $0.7 million to collateralize the
Companys obligations to a third party for the purchase of inventory and to provide a
security deposit for the lease of new office space. Upon the expiration of the credit
agreement on June 30, 2003, the Company entered into a Pledge and Security Agreement to
provide a security interest in a money market account in the amount of $0.7 million for
the standby letters of credit, which totaled $0.7 million at September 30, 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. | Warrants
|--- | --------

|In connection with the financing that
was completed on January 24, 2002, the company issued warrants to purchase 3,303,760
shares of the Companys common stock. This included unregistered warrants that were
issued to the placement agent for the financing transaction to purchase 503,960 shares of
the Companys common stock. The 2,799,800 registered warrants have a term of three
years and an effective Common Stock exercise price of $1.95 per share, whereas 419,968 of
the 503,960 warrants issued to the placement agent have an effective Common Stock exercise
price of $1.50 per share. The remainder of the warrants issued to the placement agent have
an effective Common Stock exercise price of $1.95 per share. If the common stock trades at
$5.85 per share or greater for a period of 20 out of 30 trading days, the Company can
require the holders to exercise the remaining outstanding warrants.


During the quarter ended September
30, 2003, warrants were exercised which resulted in the issuance of 1,190,566 shares of
the Companys common stock with proceeds to the Company totaling approximately $1.7
million. The warrants issued to the placement agent were exercised on a net issuance basis
resulting in 300,438 shares of the Companys common stock being issued to the
placement agent.

8
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | Commitments
and contingencies
|--- | -----------------------------

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


Our total potential commitments on
our operating leases and inventory purchases as of September 30, 2003, were as follows (in
thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|As
      of September 30, 2003                           |  | Operating
      Leases |       | Capital
      Lease |   | Inventory
      Purchase
      Commitments
|-------------------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ------------------------------------------
|                                                         |  |                        |       |                     |  
|2003                                                     |  | $                      | 179   |                     | $ | 90                                        
|2004                                                     |  |                        | 933   |                     |   | 406                                       
|2005                                                     |  |                        | 1,083 |                     |   | 408                                       
|2006                                                     |  |                        | 1,046 |                     |   |                                          
|2007                                                     |  |                        | 270   |                     |   |                                          
|                                                         |  |                        |       |                     |  
|Total
      minimum lease payments                       |  | $                      | 3,511 |                     | $ | 904                                       
|                                                         |  |                        |       |                     |  
|Less:
      amount representing interest                 |  |                        |       |                     |   | (93                                       
|                                                         |  |                        |       |                     |  
|Present
      value of minimum lease payments            |  |                        |       |                     |   | 811                                       
|Less:
      current portion of capital lease obligations |  |                        |       |                     |   | (300                                      
|                                                         |  |                        |       |                     |  
|Long-term
      capital lease obligations                |  |                        |       |                     | $ | 512                                       
|                                                         |  |                        |       |                     |  

|Contingencies: From time to time, in
the normal course of business, various claims could be made against the Company. At
September 30, 2003, there were no pending claims the outcome of which is expected to
result in a material adverse effect on the financial position or results of operations of
the Company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. | Guarantees
|--- | ----------

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


The Company provides a limited
warranty for up to one year for any defective products. During the quarter ended September
30, 2003 and for the year ended December 31, 2002, warranty expense was insignificant. The
Company has a reserve for warranty costs of $30,000, which has not changed in the past
quarter.


On June 30, 2003, the Company entered
into a Pledge and Security Agreement to provide collateral for outstanding standby letters
of credit which totaled $0.7 million at September 30, 2003.


Pursuant to its bylaws, the Company
has agreed to indemnify its officers and directors for certain events or occurrences
arising as a result of the officer or director serving in such capacity. The term of the
indemnification period is for the officers or directors lifetime. To date, the
Company has not incurred any costs as there have been no lawsuits or claims that would
invoke these indemnification agreements. Accordingly, the Company has no liabilities
recorded for these agreements as of September 30, 2003. The Company is self-insured for
these and similar claims.


The Company enters into
indemnification provisions under (i) its agreements with other companies in its ordinary
course of business, typically with business partners, contractors and customers, its
sublandlord and (ii) its agreements with investors. Under these provisions the Company has
agreed to generally indemnify and hold harmless the indemnified party for losses suffered
or incurred by the indemnified party as a result of the Companys activities or, in
some cases, as a result of the indemnified partys activities under the agreement.
These indemnification provisions often include indemnifications relating to
representations made by the Company with regard to intellectual property rights. These
indemnification provisions generally survive termination of the underlying agreement. The
maximum potential amount of future payments the Company could be required to make under
these indemnification provisions is unlimited. To date, the Company has not incurred any
costs as there have been no lawsuits or claims related to these indemnification
agreements. Accordingly, the Company has no liabilities recorded for these agreements as
of September 30, 2003.

9
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. | Recent
Accounting Pronouncements
|--- | --------------------------------

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


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


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


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


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


The following discussion and analysis
should be read in connection with the condensed consolidated financial statements and the
notes thereto included in Item 1 in this quarterly report and our annual report on Form
10-K, as amended on April 30, 2003, for the year ended December 31, 2002.


Critical Accounting
Policies


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

10
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Revenue Recognition: We
recognize revenue from product sales upon shipment to original equipment manufacturers and
end users, net of reserves for estimated returns and allowances, provided that persuasive
evidence of an arrangement exists, the price is fixed, title has transferred,
collectibility of resulting receivables is reasonably assured, there are no acceptance
requirements and there are no remaining significant obligations. Sales to distributors are
made under arrangements allowing limited rights of return, generally under product
warranty provisions, stock rotation rights and price protection on products unsold by the
distributor. In addition, the distributor may request special pricing and allowances which
may be granted subject to approval by us. As a result of these returns rights and
potential pricing adjustments, except in very limited circumstances we defer recognition
on sales to distributors until products are resold by the distributor to the end user.
Revenue may be recognized when sold to a distributor when the distributor has no rights of
return.


Inventories: Inventories
are stated at the lower of cost or market. This policy requires us to make estimates
regarding the market value of our inventory, including an assessment of excess or obsolete
inventory. We determine excess and obsolete inventory based on an estimate of the future
demand and estimated selling prices for our products within a specified time horizon,
generally 12 months. The estimates we use for expected demand are also used for near-term
capacity planning and inventory purchasing and are consistent with our revenue forecasts.
Actual demand and market conditions may be different from those projected by our
management. If our unit demand forecast is less than our current inventory levels and
purchase commitments during the specified time horizon, or if the estimated selling price
is less than our inventory value, we will be required to take additional excess inventory
charges or write-downs to net realizable value, which will decrease our gross margin and
net operating results in the future. During the quarter ended March 31, 2002, we recorded
a provision for excess inventory of approximately $5 million related to excess inventory
for our TA2022 product as a result of a decrease in forecasted sales for this product.


Three months ended
September 30, 2003 and 2002


     Revenue.
          Revenue for the three months ended September 30, 2003 was $3.7 million, an
          increase of $1 million or 37% over revenues of $2.7 million for the three months
          ended September 30, 2002. The increase in revenue resulted primarily from an
          increase in sales of our TA2020, TA2024 and TLD4012 products, reflecting an
          increase in demand from customers such as KTS, Samsung and Alcatel. The increase
          was partially offset by a decrease in sales of our TA3020 and TK2050 products,
          reflecting decreased demand in the low-end DVD receiver market in China.


Sales to Alcatel, Apple Computer,
Kyoshin Technosonic Co., Ltd., (KTS) and Samsung accounted for approximately 11%, 16%, 26%
and 19%, respectively, of revenue in the three months ended September 30, 2003 and 1%,
32%, 7%, and 7%, respectively, in the corresponding prior year quarter. Sales to our five
largest customers represented approximately 76% of revenue in the three months ended
September 30, 2003 and 64% of revenue in the three months ended September 30, 2002.


Gross Profit
(Loss). Gross profit for the three months ended September 30, 2003 was $1.2
million (including stock-based compensation expense of $1,000), compared with a gross
profit of $265,000 (including stock-based compensation expense of $2,000) for the three
months ended September 30, 2002. The increase in the gross profit for the three months
ended September 30, 2003 reflects ongoing product cost reduction efforts, increased unit
volume as well as sale of higher margin products.


Research and
Development. Research and development expenses for the three months ended September
30, 2003 were $1.6 million (including stock-based compensation credit of $7,000), a
decrease of $0.9 million or 36% from $2.5 million (including stock-based compensation
credit of $193,000) for the three months ended September 30, 2002. The year over year
decrease for the three month periods resulted from a decrease in personnel costs, a
decrease in product development expenses and lower expenses related to rent and insurance.


Selling, General
and Administrative Expenses. Selling, general and administrative
expenses for the three months ended September 30, 2003 were $1.1 million (including
stock-based compensation expense of $43,000) an increase of $200,000 from $892,000
(including stock-based compensation credit of $698,000) for the three months ended
September 30, 2002. Excluding stock-based compensation, selling general and administrative
expenses decreased year over year due to decreased headcount and related costs and lower
expenses related to rent, insurance and bad debts.


11
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-----------------------------------------------------------------------------------

|Nine months ended
September 30, 2003 and 2002


     Revenue.
          Revenue for the nine months ended September 30, 2003 was $9.8 million, a
          decrease of $3.5 million or 26% from revenues of $13.3 million for the nine
          months ended September 30, 2002. The decrease in revenue resulted primarily from
          a decrease in sales of our TA1101 and TA 2024 products to Apple Computer, and
          decreased sales of TA2020, TA2022 and TA3020 digital audio amplifiers primarily
          in China due to decreased demand in the low-end DVD receiver market.


Sales to Alcatel, Apple Computer,
Kyoshin Technosonic Co., Ltd., (KTS), and Samsung accounted for approximately 9%, 18%, 23%
and 14%, respectively, of revenue in the nine months ended September 30, 2003 and 1%, 30%
3%, and 4%, respectively, in the corresponding nine month period. Sales to our five
largest customers represented approximately 66% of revenue in the nine months ended
September 30, 2003 and 71% of revenue in the nine months ended September 30, 2002.


Gross Profit
(Loss). Gross profit for the nine months ended September 30, 2003 was $2.8
million (including stock-based compensation expense of $4,000), compared with a gross loss
of $2.9 million (including stock-based compensation expense of $25,000) for the nine
months ended September 30, 2002. The increase in the gross profit for the nine months
ended September 30, 2003 reflects ongoing product cost reduction efforts and sale of
higher margin products. The gross loss for the nine months ended September 30, 2002 was
primarily due to a $5 million provision for excess and obsolete inventory (TA 2022),
recorded during the first quarter of 2002.


Research and
Development. Research and development expenses for the nine months ended September
30, 2003 were $5.2 million (including stock-based compensation expense of $27,000), a
decrease of $4.2 million or 45% from $9.4 million (including stock-based compensation
expense of $167,000) for the nine months ended September 30, 2002. The year over year
decrease for the nine month periods resulted from a decrease in personnel costs, a
decrease in product development expenses and lower expenses related to rent and insurance.


Selling, General
and Administrative Expenses. Selling, general and administrative
expenses for the nine months ended September 30, 2003 were $3.5 million (including
stock-based compensation expense of $14,000) a decrease of $0.7 million from $4.2 million
(including stock-based compensation credit of $493,000) for the nine months ended
September 30, 2002. Selling general and administrative expenses decreased year over year
due to decreased headcount and related costs and lower expenses related to a reduction in
rent, insurance and bad debts.


Liquidity and Capital
Resources


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


Net cash used in operating activities
decreased from $10.2 million for the nine months ended September 30, 2002 to $3.2 million
for the nine months ended September 30, 2003. The $7.0 million decrease was primarily due
to a $10.7 million reduction in net loss, together with decreases in inventories and
accrued expenses, partially offset by an increase in accounts receivable. The decrease in
the net loss was due to both decreased operating expenses and as a result of no
significant additional inventory reserves being taken during 2003 whereas a $5 million
provision for excess inventory was taken during the nine months ended September 30, 2002.
Under the current building lease agreement we did not pay any cash during the first seven
months of 2003. However, beginning August 1, 2003 we are now required to pay approximately
$42,000 per month.


Net cash provided by investing
activities decreased from $522,000 for the nine months ended September 30, 2002 to
$375,000 for the nine months ended September 30, 2003. The decrease was due to a decrease
in sale of short-term investments and a decrease in purchase of equipment, partially
offset by the release of restricted cash.


Cash provided by financing activities
for the nine months ended September 30, 2003 was $1.8 million as compared to $19.4 million
for the nine months ended September 30, 2002. We completed a financing in January 2002 and
raised $21 million in gross proceeds through a private placement. 1.2 million common stock
warrants issued in connection with the January 2002 financing were exercised during the
quarter ended September 30, 2003, which resulted in proceeds of approximately $1.7
million. At September 30, 2003 approximately 1.9 million common stock warrants are
exercisable and outstanding. These stock warrants have an exercise price of $1.95 per
share and expire in January 2005. If these warrants are exercised we will receive
approximately $3.7 million in cash proceeds. Furthermore, if our common stock trades at
$5.85 per share or greater for a period of 20 out of 30 consecutive trading days, the
Company can require the holders to exercise the remaining outstanding warrants.


At September 30, 2003, we had
approximately $9.1 million in cash and net working capital of approximately $11.0 million
with which to fund current operations.

12
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We entered into a credit agreement
with a financial institution that provided for a one year revolving credit facility in an
amount of up to $10 million subject to certain restrictions in the borrowing base based on
eligibility of receivables. The credit agreement expired on June 30, 2003 and has not been
renewed.


The credit agreement was used to
issue stand-by letters of credit totaling $0.7 million to collateralize the
Companys obligations to a third party for the purchase of inventory and to provide a
security deposit for the lease of new office space. Upon the expiration of the credit
agreement on June 30, 2003, the Company entered into a Pledge and Security Agreement to
provide a security interest in a money market account in the amount of $0.7 million for
the standby letters of credit, which totaled $0.7 million at September 30, 2003.


Our total potential commitments on
our operating leases and inventory purchases as of September 30, 2003, were as follows (in
thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|As
      of September 30, 2003                           |  | Operating
      Leases |       | Capital
      Lease |   | Inventory
      Purchase
      Commitments |  
|-------------------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ------------------------------------------ | -
|                                                         |  |                        |       |                     |   |                                           
|2003                                                     |  | $                      | 179   |                     | $ | 90                                         |  
|2004                                                     |  |                        | 933   |                     |   | 406                                        |  
|2005                                                     |  |                        | 1,083 |                     |   | 408                                        |  
|2006                                                     |  |                        | 1,046 |                     |   |                                           |  
|2007                                                     |  |                        | 270   |                     |   |                                           |  
|                                                         |  |                        |       |                     |   |                                           
|Total
      minimum lease payments                       |  | $                      | 3,511 |                     | $ | 904                                        |  
|                                                         |  |                        |       |                     |   |                                           
|Less:
      amount representing interest                 |  |                        |       |                     |   | (93                                        | )
|                                                         |  |                        |       |                     |   |                                           
|Present
      value of minimum lease payments            |  |                        |       |                     |   | 811                                        |  
|Less:
      current portion of capital lease obligations |  |                        |       |                     |   | (300                                       | )
|                                                         |  |                        |       |                     |   |                                           
|                                                         |  |                        |       |                     | $ | 512                                        |  
|                                                         |  |                        |       |                     |   |                                           

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


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


We believe, based on our ability to
implement the aforementioned measures, if needed, that we will have liquidity sufficient
to meet our operating, working capital and financing needs for the next twelve months and
perhaps beyond.  We have not made any adjustment to our consolidated financial
statements as a result of the outcome of the uncertainty described above. Our former
independent accountants included an explanatory paragraph in their audit report on our
consolidated financial statements for the fiscal year ended December 31, 2002 which
indicates that we have suffered recurring losses from operations and have an accumulated
deficit that raises substantial doubt about our ability to continue as a going concern.


Recent Accounting
Pronouncements


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

13
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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


Risk Factors


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


Risks Related to Our
Business


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


As of September 30, 2003, we had an
accumulated deficit of $178.2 million. We incurred net losses of approximately $5.8
million in the nine months ended September 30, 2003, $16.5 million (before accretion on
preferred stock of $14.9 million) in 2002 and $27.0 million in 2001. We may continue to
incur net losses and these losses may be substantial. Furthermore, we may continue to
generate significant negative cash flow in the future. We will need to generate
substantially higher revenue to achieve and sustain profitability and positive cash flow.
Our ability to generate future revenue and achieve profitability will depend on a number
of factors, many of which are described throughout this section. If we are unable to
achieve or maintain profitability, we will be unable to build a sustainable business. In
this event, our share price and the value of your investment would likely decline and we
might be unable to continue as a going concern.


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


Because we have had losses, we have
funded our operating activities to date from the sale of securities, including our most
recent financing in January 2002. However, to grow our business significantly, we will
need additional capital. We cannot be certain that any such financing will be available on
acceptable terms, or at all. Moreover, additional equity financing, if available, would
likely be dilutive to the holders of our common stock, and debt financing, if available,
would likely involve restrictive covenants. If we cannot raise sufficient additional
capital, it would adversely affect our ability to achieve our business objectives and to
continue as a going concern.


Our   former
 independent   accountants   have   included   a   going  concern   explanatory paragraph
  in   their   report   on  our   consolidated   financial   statements.


Our former independent accountants
have included an explanatory paragraph in their audit report on our consolidated financial
statements for the fiscal year ended December 31, 2002, which indicates that we have
suffered recurring losses from operations and have an accumulated deficit that raises
substantial doubt about our ability to continue as a going concern.  The inclusion of
a going concern explanatory paragraph in our independent auditors audit report on
our consolidated financial statements for the fiscal year ended December 31, 2002 could
have a detrimental effect on our stock price, and our ability to raise new capital.

14
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|Our quarterly
operating results are likely to fluctuate
significantly and may fail to meet the
expectations of securities analysts and
investors, which may cause our share price
to decline.


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

| |  | level
of sales;
| | - | ---------------

| |  | 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 delays in the fabrication,
assembly, testing or delivery of products; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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


Our stock price
may be subject to significant volatility.


The stock prices for many technology companies
have recently experienced large fluctuations, which may or may not be directly related to
the operating performance of the specific companies. Broad market fluctuations as well as
general economic conditions may cause our stock price to decline. We believe that
fluctuations of our stock price may continue to be caused by a variety of factors,
including:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

|15
|--

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


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


Industry-wide
overcapacity has caused and may continue
to cause our results to fluctuate, and
such shifts could result in significant
inventory write-downs and adversely affect our
relationships with our suppliers.


We must build inventory well in
advance of product shipments. The semiconductor industry is highly cyclical and in light
of the current downturn, which has resulted in excess capacity and overproduction, there
is a risk that we could continue to forecast inaccurately and produce excess inventories
of our products. As a result of such inventory imbalances, large future inventory
write-downs may occur due to excess inventory or inventory obsolescence. In addition, any
adjustment in our ordering patterns resulting from increased inventory may adversely
affect our suppliers willingness to meet our demand, if our demand increases in the
future.


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


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


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


A relatively small number of
customers have accounted for most of our revenues to date. Any reduction or delay in sales
of our products to one or more of these key customers could seriously reduce our sales
volume and revenue and adversely affect our operating results. In particular, sales to
three large customers, including Apple Computer Inc., Kyoshin Technosonic Co., Ltd., (KTS)
and Samsung Electronics Co., Ltd., accounted for approximately 18%, 23% and 14%,
respectively, of revenue for the nine months ended September 30, 2003 and 30%, 3% and 4%
respectively, in the corresponding nine months ended September 30, 2002. Moreover, sales
to our five largest end customers represented approximately 66% revenue in the nine months
ended September 30, 2003 and 71% of revenue in the nine months ended September 30, 2002.
We expect that we will continue to rely on the success of our largest customers and on our
success in selling our existing and future products to those customers in significant
quantities. However, we cannot be sure that we will retain our largest customers or that
we will be able to obtain additional key customers or replace key customers we may lose or
who may reduce their purchases.


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


We currently rely on sales of our
TA1101B, TA2020, TA2024, and TLD4012 digital audio amplifiers to generate a significant
portion of our revenue. Sales of these products amounted to 86% of our revenue for the
nine months ended September 30, 2003, 62% of our revenue in 2002 and 67% of our
revenue in 2001. We have developed additional products and plan to introduce more products
in the future, but there can be no assurance that these products will be commercially
successful. Consequently, if our existing products are not successful, our sales could
decline substantially.

16
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


Because of our lengthy sales cycles,
we may continue to experience a delay between incurring expenses for research and
development, sales and marketing and general and administrative efforts, as well as
incurring investments in inventory, and the generation of revenue, if any, from such
expenditures. In addition, the delays inherent in such a lengthy sales cycle raise
additional risks of customer decisions to cancel or change product plans, which could
result in our loss of anticipated sales. Our new products are generally incorporated into
our customers products or systems at the design stage. To try and have our products
selected for design into new products of current and potential customers, commonly
referred to as design wins, often requires significant expenditures by us without any
assurance of success. Once we have achieved a design win, our sales cycle will start with
the test and evaluation of our products by the potential customer and design of the
customers equipment to incorporate our products. Generally, different parts have to
be redesigned to incorporate our devices successfully into our customers products.
The sales cycle for the test and evaluation of our products can range from a minimum of
three to six months, and it can take a minimum of an additional six to nine months before
a customer commences volume production of equipment that incorporates our products.
Achieving a design win provides no assurance that such customer will ultimately ship
products incorporating our products or that such products will be commercially successful.
Our revenue or prospective revenue would be reduced if a significant customer curtails,
reduces or delays orders during our sales cycle, or chooses not to release products
incorporating our products.


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


During 2001 and 2002, slowing
worldwide demand for semiconductors has resulted in significant inventory buildups for
semiconductor companies. Presently, we cannot predict with any degree of certainty how
long the semiconductor industry downturn will last or how severe the downturn will be. If
the downturn continues or worsens, we may experience greater levels of cancellations
and/or push-outs of orders for our products in the future, which could adversely affect
our business and operating results, including the possibility of additional inventory
write-downs, over a prolonged period of time.


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


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

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

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

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

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

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

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

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

|We cannot guarantee success with
regard to these factors.

17
|-------------------------------------------------------------

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


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


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


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


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


During the quarter ended September
30, 2003 a portion of the warrants issued in connection with the January 2002 Series A
financing were exercised resulting in proceeds of approximately $1.7 million for the
issuance of approximately 1 million shares of common stock. The warrants have a three year
term and are exercisable at $1.95 per share. In addition, if the common stock trades at
$5.85 per share or greater for a period of 20 out of 30 trading days, we can require the
holders to exercise the remaining outstanding warrants. If all of the remaining
outstanding warrants are exercised, we will be required to issue approximately an
additional 1.9 million shares of common stock, or approximately 4% of the common stock
outstanding as of September 30, 2003. If all of the remaining outstanding warrants are
exercised in full, we would receive approximately $3.7 million in proceeds. Our management
will have sole discretion over use of these proceeds and may spend the proceeds in ways
with which our stockholders may not agree.


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


The threat of terrorist attacks
involving the United States, the instability in the Middle East, a decline in consumer
confidence and continued economic weakness and geo-political instability have had a
substantial adverse impact on the economy. If consumer confidence does not recover, our
revenues may be adversely impacted for fiscal 2003 and beyond. Moreover, any further
terrorist attacks involving the U.S., or any additional U.S. military actions overseas may
disrupt our operations or those of our customers and suppliers. These events have had and
may continue to have an adverse impact on the U.S. and world economy in general and
consumer confidence and spending in particular, which could harm our sales. Any of these
events could increase volatility in the U.S. and world financial markets which could harm
our stock price and may limit the capital resources available to us and our customers or
suppliers. This could have a significant impact on our operating results, revenues and
costs and may result in increased volatility in the market price of our common stock.


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


Provisions of our restated
certificate of incorporation, equity incentive plans, bylaws and Delaware law may
discourage transactions involving an unfriendly change in corporate control. In addition
to the foregoing, the stockholdings of our officers, directors and persons or entities
that may be deemed affiliates and the ability of our board of directors to issue preferred
stock without further stockholder approval could have the effect of delaying, deferring or
preventing a third party from acquiring us and may adversely affect the voting and other
rights of holders of our common stock.

18
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Risks Related to
Manufacturing


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


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

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

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

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

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


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


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


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


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


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


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


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


19
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our gross margins would be seriously
harmed if any such transition is substantially delayed or inefficiently implemented.


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


We currently obtain almost all of our
manufacturing, assembly and test services from suppliers located outside the United States
and may expand our manufacturing activities abroad. Approximately 77% of our total revenue
for the three months ended September 30, 2003 was derived from sales to end customers
based outside the United States. In 2002 and 2001, 63% and 59%, respectively, of our total
revenue was derived from sales to end customers based outside of the United States. In
addition, we often ship products to our domestic customers international
manufacturing divisions and subcontractors.


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

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

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

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

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

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

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

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

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


Risks Related to Our
Product Lines


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


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


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


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


20
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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


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


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


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


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


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


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


21
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Downturns in the
highly cyclical semiconductor industry and rapid
technological change could result in substantial
period-to-period fluctuations in wafer supply, pricing
and average selling prices, which make it
difficult to predict our future performance.


We provide semiconductor devices to
the audio, personal computer and communications markets. The semiconductor industry is
highly cyclical and subject to rapid technological change and has been subject to
significant economic downturns at various times, characterized by diminished product
demand, accelerated erosion of average selling prices and production overcapacity. The
semiconductor industry also periodically experiences increased demand and production
capacity constraints. As a result, we have experienced and may experience in the future
substantial period-to-period fluctuations in our results of operations due to general
semiconductor industry conditions, overall economic conditions or other factors, many of
which are outside our control. Due to these risks, you should not rely on period-to-period
comparisons to predict our future performance.


Risks Related to Our
Intellectual Property


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


Our business depends, in part, on our
ability to protect our intellectual property. We rely primarily on patent, copyright,
trademark and trade secret laws to protect our proprietary technologies. We cannot be sure
that such measures will provide meaningful protection for our proprietary technologies and
processes. As of September 30, 2003, we have 31 issued United States patents, and 11
additional United States patent applications which are pending. In addition, we have 16
international patents issued and an additional 31 international patents pending. We cannot
be sure that any patent will issue as a result of these applications or future
applications or, if issued, that any claims allowed will be sufficient to protect our
technology. In addition, we cannot be sure that any existing or future patents will not be
challenged, invalidated or circumvented, or that any right granted thereunder would
provide us meaningful protection. The failure of any patents to provide protection to our
technology would make it easier for our competitors to offer similar products. In
connection with our participation in the development of various industry standards, we may
be required to agree to license certain of our patents to other parties, including our
competitors, that develop products based upon the adopted standards.


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


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


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


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


22
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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 3. Quantitative and
Qualitative Disclosures about Market Risk


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


Item 4. Controls and
Procedures


     Introduction.
          Rules promulgated under the Securities Exchange Act of 1934, as amended, (the
          Act) define disclosure controls and procedures to mean
          controls and procedures that are designed to ensure that information required to
          be disclosed by public companies in the reports filed or submitted under the Act
          is recorded, processed, summarized and reported, within the time periods
          specified in the SECs rules and forms (Disclosure Controls).
          New rules promulgated under the Act define internal control over financial
          reporting to mean a process designed by, or under the supervision of, a
          public companys principal executive and principal financial officers, or
          persons performing similar functions, and effected by such companys board
          of directors, management and other personnel, to provide reasonable assurance
          regarding the reliability of financial reporting and the preparation of
          financial statements for external purposes in accordance with generally accepted
          accounting principles (GAAP), including those policies and
          procedures that (i) pertain to the maintenance of records that in reasonable
          detail accurately and fairly reflect the transactions and dispositions of the
          assets of the company, (ii) provide reasonable assurance that transactions are
          recorded as necessary to permit preparation of financial statements in
          accordance with GAAP, and that receipts and expenditures of the company are
          being made only in accordance with authorizations of management and directors of
          the company and (iii) provide reasonable assurance regarding prevention or
          timely detection of unauthorized acquisition, use or disposition of the
          companys assets that could have a material effect on the financial
          statements (Internal Controls).


We have designed our Disclosure
Controls and Internal Controls to provide reasonable assurances that their objectives will
be met. A control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that its objectives will be met. All control
systems are subject to inherent limitations, such as resource constraints, the possibility
of human error and the possibility of intentional circumvention of these controls.
Furthermore, the design of any control system is based in part upon assumptions about the
likelihood of future events, which assumptions may ultimately prove to be incorrect. As a
result, we cannot assure you that our control system will detect every error or instance
of fraudulent conduct.


Evaluation
of disclosure controls
and procedures. Based on their evaluation as of
September 30, 2003, our chief executive officer and chief financial officer, with the
participation of management, have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) were
effective to ensure that the information required to be disclosed by us in this quarterly
report on Form 10-Q was recorded, processed, summarized and reported within the time
periods specified in the SECs rules and Form 10-Q.


Changes
in internal controls. There
were no changes in our internal controls over financial reporting during the quarter ended
September 30, 2003, that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
23
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|Part II. OTHER
INFORMATION


Item 2. Changes in
Securities and Use of Proceeds


In connection with a Series A
financing that was completed on January 24, 2002, the Company issued to the placement
agent for the financing a warrant to acquire 419,968 units, with each unit consisting of
one share of the Companys common stock and a warrant to acquire 0.20 of a share of
common stock. On September 15, 2003, the placement agent exercised the warrant to acquire
419,968 units and immediately thereafter, the placement agent exercised the resulting
warrant to acquire 83,994 shares of the Companys common stock. Each of the warrants
were issued on a net exercise, or cashless, basis, and the placement agent was issued an
aggregate of 300,438 shares of the Companys common stock as a result of the
transaction. The Company received no additional consideration for the issuance of such
shares. The initial exchange by the Company of the warrant to acquire 419,968 units and
the subsequent exchange by the Company of the warrant to acquire 83,994 shares of the
Companys common stock were exempted from registration under Section 3(a)(9) of the
Securities Act as exchanges by an issuer exclusively with existing security holders where
no commission or remuneration is paid. There were no underwriters involved in this
transaction or additional purchasers of unregistered common stock during the quarter ended
September 30, 2003.


Item 5. Other Information


Availability of this
Report


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



Item 6. Exhibits and
Reports on Form 8-K
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | See
Exhibit Index below.
| | ------------------------

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

| | The
following reports on Form 8-K were furnished during the third quarter of fiscal 2003:
| | -----------------------------------------------------------------------------------------

| | (i) | On
August 1, 2003, we furnished an amendment to our current report on Form 8-K
               under Item 12, originally filed on July 29, 2003, describing and
furnishing the                script used in a conference call discussing our financial
results for the                quarter ended June 30, 2003.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | On
July 29, 2003, we furnished a current report on Form 8-K under Item 12,
               describing and furnishing the press release announcing our earnings for
the                quarter ended June 30, 2003, which press release included our
condensed                consolidated balance sheets and statements of operations for the
period.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|24
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|SIGNATURE


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

| |  | Tripath Technology Inc.
      Date November 10, 2003
| |  | ----------------------------------------------------

| |  | By:  /s/  David P. Eichler
             
      David P. Eichler
Vice President Finance and                 
Chief Financial Officer                    
Principal Financial and Accounting Officer
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
|--

|EXHIBIT INDEX
|-------------

| | Exhibit
      No. |   |  | Description |                                                                                                                                | 
| | ----------------- | - |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------ | 
| |                   |   |  |            
| | 10.5              |  |  |             | 2000
      Employee Stock Purchase Plan, as amended.                                                                           | 
| |                   |   |  |             |                                                                                                                                | 
| | 31.1              |   |  |             | Certification
      required by Rule 13a-14(a) or Rule 15d-14(a).                                                              | 
| |                   |   |  |             |                                                                                                                                | 
| | 31.2              |   |  |             | Certification
      required by Rule 13a-14(a) or Rule 15d-14(a).                                                              | 
| |                   |   |  |             |                                                                                                                                | 
| | 32.1              | * |  |             | Certification
      of the Chief Executive Officer and the Chief Financial Officer of the Company,
      as required by Rule   | 
| |                   |   |  |             | 13a-14(b)
      or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
      States Code (18 U.S.C. 1350). | 

| | Represents
a management contract or compensatory plan or arrangement.
|- | ---------------------------------------------------------------------

|* | This
certification accompanies the Form 10-Q to which it relates, is not deemed filed with the
SEC and is not to be incorporated by reference into any filing of the Company under the
Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended
(whether made before or after the date of the Form 10-Q), irrespective of any general
incorporation language contained in such filing.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
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