##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-31103
 LEXAR MEDIA, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    33-0723123(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)47300 Bayside ParkwayFremont, California
    
    94538(Address of principal executive offices)
    
    (Zip Code)
 (510) 413-1200
(Registrants telephone number, including area code)
 
 þ o
 o þ o
 o þ




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##### 



LEXAR MEDIA, INC.
 FORM 10-Q
FOR THE QUARTER ENDED March 31, 2006
  
 TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31,
2006 and April 1, 2005 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31,
2006 and April 1, 2005 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4.
    
    Controls and Procedures
    
    
    40PART II OTHER INFORMATION
    
    
    42Item 1.
    
    Legal Proceedings
    
    
    42Item 1A.
    
    Risk Factors
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    65Item 3.
    
    Defaults Upon Senior Securities
    
    
    65Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    65Item 5.
    
    Other Information
    
    
    65Item 6.
    
    Exhibits
    
    
    65SIGNATURE
    
    
    66EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
   2




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##### Table of Contents



PART I-FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 LEXAR MEDIA, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share data)
 (unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    113,028
    
    
    $
    169,318Restricted cash
    
    
    5,000
    
    
    
    5,000Short-term investments
    
    
    1,300
    
    
    
    2,000Accounts receivable, net of allowances for
sales returns, discounts and doubtful accounts
of $14,726 and $17,554, respectively
    
    
    51,379
    
    
    
    103,396Inventories
    
    
    70,788
    
    
    
    117,055Prepaid expenses and other current assets
    
    
    10,312
    
    
    
    9,197Total current assets
    
    
    251,807
    
    
    
    405,966Property and equipment, net
    
    
    10,815
    
    
    
    10,823Intangible assets, net
    
    
    7,126
    
    
    
    246Other assets
    
    
    2,505
    
    
    
    2,682Total assets
    
    $
    272,253
    
    
    $
    419,717LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    38,435
    
    
    
    109,604Accrued liabilities
    
    
    77,128
    
    
    
    73,328Deferred license revenue and product margin
    
    
    14,680
    
    
    
    25,236Short term bank borrowings
    
    
    
    
    
    
    54,723Total current liabilities
    
    
    130,243
    
    
    
    262,891Deferred license revenue, net of current portion
    
    
    19,000
    
    
    
    4,000Senior convertible notes payable
    
    
    70,000
    
    
    
    70,000Total liabilities
    
    
    219,243
    
    
    
    336,891Stockholders equity:Preferred stock, $0.0001 par value: 10,000,000
shares authorized; no shares issued and
outstanding
    
    
    
    
    
    
    Common stock, $0.0001 par value:200,000,000 shares authorized; 82,441,604 and
81,001,608 shares issued and outstanding
    
    
    8
    
    
    
    8Additional paid-in capital
    
    
    293,111
    
    
    
    286,094Accumulated deficit
    
    
    (240,470
    )
    
    
    (203,653
    )Accumulated other comprehensive gain
    
    
    361
    
    
    
    377Total stockholders equity
    
    
    53,010
    
    
    
    82,826Total liabilities and stockholders equity
    
    $
    272,253
    
    
    $
    419,717
  3




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LEXAR MEDIA, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 (unaudited)
 Three Months EndedMarch 31,
    
    
    April 1,2006
    
    
    2005Net revenues:Product revenues
    
    $
    120,633
    
    
    $
    231,633License and royalty revenues
    
    
    4,041
    
    
    
    809Total net revenues
    
    
    124,674
    
    
    
    232,442Cost of product revenues
    
    
    125,296
    
    
    
    203,060Gross margin
    
    
    (622
    )
    
    
    29,382Operating expenses:Research and development
    
    
    3,744
    
    
    
    3,393Sales and marketing
    
    
    15,032
    
    
    
    19,934General and administrative
    
    
    13,678
    
    
    
    15,163Total operating expenses
    
    
    32,454
    
    
    
    38,490Loss from operations
    
    
    (33,076
    )
    
    
    (9,108
    )Other income (expense):Interest and other expense
    
    
    (1,448
    )
    
    
    (484
    )Interest and other income
    
    
    997
    
    
    
    126Foreign exchange loss, net
    
    
    (282
    )
    
    
    (102
    )Total other income (expense)
    
    
    (733
    )
    
    
    (460
    )Loss before income taxes
    
    
    (33,809
    )
    
    
    (9,568
    )Income taxes
    
    
    3,008
    
    
    
    18Net loss
    
    $
    (36,817
    )
    
    $
    (9,586
    )Net loss per common share:Basic
    
    $
    (0.45
    )
    
    $
    (0.12
    )Diluted
    
    $
    (0.45
    )
    
    $
    (0.12
    )Shares used in computing net loss per common share:Basic
    
    
    81,530
    
    
    
    79,519Diluted
    
    
    81,530
    
    
    
    79,519
  Three Months EndedMarch 31,
    
    
    April 1,2006
    
    
    2005Cost of product revenues
    
    $
    208
    
    
    $
    Research and development
    
    
    370
    
    
    
    Selling and marketing
    
    
    613
    
    
    
    General and administrative
    
    
    728
    
    
    
    Total
    
    $
    1,919
    
    
    $
    
  4




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LEXAR MEDIA, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Three Months EndedMarch 31,
    
    
    April 1,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (36,817
    )
    
    $
    (9,586
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,022
    
    
    
    944Stock-based compensation
    
    
    1,919
    
    
    
    Allowances for sales returns, discounts and doubtful accounts
    
    
    1,812
    
    
    
    943Provision to record inventory at net realizable value
    
    
    9,406
    
    
    
    2,436Amortization of deferred financing costs
    
    
    237
    
    
    
    Change in operating assets and liabilities:Accounts receivable, net
    
    
    50,346
    
    
    
    98,226Inventories
    
    
    36,949
    
    
    
    27,781Prepaid expenses and other assets
    
    
    (1,162
    )
    
    
    (405
    )Accounts payable and accrued liabilities
    
    
    (67,069
    )
    
    
    (74,102
    )Deferred license revenue and product margin
    
    
    4,444
    
    
    
    (10,290
    )Net cash provided by operating activities
    
    
    1,087
    
    
    
    35,947Cash flows from investing activities:Purchase of property and equipment
    
    
    (886
    )
    
    
    (801
    )Payment relating to intangible assets
    
    
    (7,000
    )
    
    
    Purchase of short-term investments
    
    
    (1,300
    )
    
    
    Proceeds from short-term investments
    
    
    2,000
    
    
    
    7,738Net cash (used in) provided by investing activities
    
    
    (7,186
    )
    
    
    6,937Cash flows from financing activities:Issuance of stock under employee stock purchase plan
    
    
    1,216
    
    
    
    888Exercise of stock options
    
    
    3,881
    
    
    
    202Proceeds from convertible promissory notes net of issuance costs
    
    
    
    
    
    
    56,837Proceeds from asset-based notes payable to bank, net of issuance
costs
    
    
    
    
    
    
    32,855Repayment of short term bank borrowings
    
    
    (54,723
    )
    
    
    (40,000
    )Net cash (used in) provided by financing activities
    
    
    (49,626
    )
    
    
    50,782Effect of exchange rates on cash and cash equivalents
    
    
    (565
    )
    
    
    62Net increase (decrease) in cash and cash equivalents
    
    
    (56,290
    )
    
    
    93,728Cash and cash equivalents at beginning of period
    
    
    169,318
    
    
    
    27,705Cash and cash equivalents at end of period
    
    $
    113,028
    
    
    $
    121,433
  5




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##### Table of Contents



LEXMAR MEDIA, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1-Basis of Presentation
    Note 2-Description of Business
 Overview
     www.lexar.com
 6




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Note 3-Summary of Selected Accounting Policies
 Revenue Recognition
 Product Revenues
      License and Royalty Revenues
  7




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Deferred Taxes
  Short-Term Investments
     Shipping and Handling Costs
  Stock-based Compensation
  8




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Three months endedMarch 31, 2006( in thousands,except per shareamounts )Loss before income taxes
    
    $
    1,919Net loss
    
    $
    1,919Net loss per common shareBasic:Loss before income taxes
    
    $
    0.02Net loss
    
    $
    0.02Net loss per common shareDiluted:Loss before income taxes
    
    $
    0.02Net loss
    
    $
    0.02
  9




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##### Table of Contents



Three months endedApril 1, 2005( in thousands,except per shareamounts )Net loss per common share, as reported
    
    $
    9,586Add: Total stock-based compensation
expense determined under the fair
value based method, net of related
tax effects
    
    
    4,304Net loss, pro forma
    
    $
    13,890Net loss per common shareBasic:As reported
    
    $
    0.12Pro forma
    
    $
    0.17Net loss per common shareDiluted:As reported
    
    $
    0.12Pro forma
    
    $
    0.17
  2006
    
    2006
    
    2005
    
    2005Options
    
    ESPP
    
    Options
    
    ESPPWeighted average fair value per option
    
    $
    4.81
    
    
    $
    3.70
    
    
    $
    3.28
    
    
    $
    1.49Risk free interest rate
    
    
    4.49
    %
    
    
    4.49
    %
    
    
    3.71
    %
    
    
    2.71
    %Expected life (years)
    
    
    3.73
    
    
    
    1.25
    
    
    
    4.08
    
    
    
    0.5Expected stock price volatility
    
    
    93
    %
    
    
    84
    %
    
    
    88
    %
    
    
    87
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Product Warranties
   Three Months EndedMarch 31, 2006
    
    
    April 1, 2005(in thousands)
    
    
    (in thousands)Balance as of the beginning of the period
    
    $
    1,083
    
    
    $
    1,083Provision for warranty liability for sales made during the period
    
    
    105
    
    
    
    276Warranty costs during the period
    
    
    (105
    )
    
    
    (276
    )Balance as of the end of the period
    
    $
    1,083
    
    
    $
    1,083
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Note 4-Restricted Cash
  Note 5-Balance Sheet Disclosures (tables in thousands):
  March 31,
    
    
    December 31,2006
    
    
    2005Inventories:Raw materials
    
    $
    20,974
    
    
    $
    31,103Controllers
    
    
    4,319
    
    
    
    4,969Flash memory products
    
    
    44,162
    
    
    
    78,918Ancillary products
    
    
    1,333
    
    
    
    2,065$
    70,788
    
    
    $
    117,055
   March 31, 2006
    
    
    December 31, 2005Computer and other equipment
    
    $
    6,117
    
    
    $
    5,984Engineering equipment
    
    
    7,507
    
    
    
    7,360Software
    
    
    4,619
    
    
    
    4,293Furniture, fixtures and improvements
    
    
    2,946
    
    
    
    2,813Construction in progress
    
    
    1,672
    
    
    
    2,09122,861
    
    
    
    22,541Less: accumulated depreciation and amortization
    
    
    (12,046
    )
    
    
    (11,718
    )$
    10,815
    
    
    $
    10,823
   March 31, 2006
    
    
    December 31, 2005Goodwill
    
    $
    246
    
    
    $
    246Patents
    
    
    7,473
    
    
    
    456Less: accumulated amortization
    
    
    (593
    )
    
    
    (456
    )Patents, net
    
    
    6,880
    
    
    
    $
    7,126
    
    
    $
    246
   11




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March 31, 2006
    
    
    December 31, 2005Accrued price protection
    
    $
    22,721
    
    
    $
    12,995Market development fund
    
    
    14,639
    
    
    
    19,843Accrued rebates and volume incentive rebates
    
    
    12,611
    
    
    
    13,824Accrued freight and fulfillment
    
    
    1,863
    
    
    
    2,298Payroll and related amounts
    
    
    3,479
    
    
    
    2,965Accrued incentive compensation
    
    
    400
    
    
    
    2,190Accrued accounting and audit fees
    
    
    1,001
    
    
    
    1,639Accrued commission
    
    
    982
    
    
    
    1,455Accrued legal
    
    
    9,994
    
    
    
    4,157Raw material purchase commitments
    
    
    1,716
    
    
    
    2,616Other
    
    
    7,722
    
    
    
    9,346$
    77,128
    
    
    $
    73,328
   March 31, 2006
    
    
    December 31, 2005Deferred license revenue
    
    $
    31,043
    
    
    $
    16,173Deferred product margin
    
    
    2,637
    
    
    
    13,06333,680
    
    
    
    29,236Less: Amount classified as current liabilities
    
    
    14,680
    
    
    
    25,236Deferred license revenue, net of current portion
    
    $
    19,000
    
    
    $
    4,000
 Note 6-Net Loss Per Common Share (in thousands, except per share data):
  Three Months EndedMarch 31,
    
    April 1,2006
    
    2005Numerator:Net loss
    
    $
    (36,817
    )
    
    $
    (9,586
    )Denominator for net loss per common share-basic and diluted:Weighted average common shares outstanding
    
    
    81,530
    
    
    
    79,519Net loss per common share-basic and diluted
    
    $
    (0.45
    )
    
    $
    (0.12
    )
 Anti-dilutive Securities
  Three Months EndedMarch 31,
    
    April 1,2006
    
    2005Weighted average shares under warrants for common stock
    
    
    
    
    
    
    41Weighted average shares under options for common stock
    
    
    20,590
    
    
    
    19,461Weighted average shares under senior convertible note
    
    
    10,476
    
    
    
    197
 12




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Note 7-Stock Compensation Plans
 The Companys 1996 Stock Option / Stock Issuance Plan
   The 2000 Equity Incentive Plan
     
    
    any shares of common stock issued under the 1996 Stock Option / Stock Issuance Plan that
are repurchased by the Company at the original purchase price;
    
    any shares of common stock issuable upon exercise of options granted under the 1996
Stock Option / Stock Issuance Plan that expired without having been exercised in full.
   13




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Options OutstandingShares
    
    
    Number ofShares
    
    
    Weighted AverageAvailable for Grant
    
    
    (000s)
    
    
    Exercise PriceBalances, January 1, 2005
    
    
    171
    
    
    
    19,564
    
    
    $
    6.15Additional shares reserved
    
    
    3,961
    
    
    
    
    
    
    
    Granted
    
    
    (2,493
    )
    
    
    2,493
    
    
    
    5.73Exercised
    
    
    
    
    
    
    (1,192
    )
    
    
    1.52Forfeited and Expired
    
    
    1,106
    
    
    
    (1,106
    )
    
    
    10.10Balances, December 31, 2005
    
    
    2,745
    
    
    
    19,759
    
    
    
    6.16Additional shares reserved
    
    
    4,050
    
    
    
    
    
    
    
    Granted
    
    
    (635
    )
    
    
    635
    
    
    
    7.39Exercised
    
    
    
    
    
    
    (1,028
    )
    
    
    3.77Forfeited and Expired
    
    
    192
    
    
    
    (192
    )
    
    
    6.71Balances, March 31, 2006
    
    
    6,352
    
    
    
    19,174
    
    
    $
    6.32
  Stock Options Outstanding
    
    
    Stock Options ExercisableAverage
    
    
    Weighted
    
    
    Aggregate
    
    
    
    
    
    
    Weighted
    
    
    AggregateRemaining
    
    
    Average
    
    
    Intrinsic
    
    
    
    
    
    
    Average
    
    
    IntrinsicRange of
    
    Shares
    
    
    Contractual
    
    
    Exercise
    
    
    Value
    
    
    Shares
    
    
    Exercise
    
    
    ValueExercise Prices
    
    (000s)
    
    
    Life (Years)
    
    
    Price
    
    
    (000s)
    
    
    (000s)
    
    
    Price
    
    
    (000s)$0.20 to $1.03
    
    
    3,201
    
    
    
    5.12
    
    
    $
    0.95
    
    
    $
    24,435
    
    
    
    3,201
    
    
    $
    0.95
    
    
    $
    24,435$1.17 to $2.69
    
    
    3,097
    
    
    
    6.22
    
    
    
    2.63
    
    
    
    18,421
    
    
    
    2,716
    
    
    
    2.62
    
    
    
    16,175$2.76 to $5.50
    
    
    2,678
    
    
    
    6.14
    
    
    
    4.96
    
    
    
    9,692
    
    
    
    2,093
    
    
    
    4.96
    
    
    
    7,570$5.51 to $8.51
    
    
    3,422
    
    
    
    8.48
    
    
    
    6.48
    
    
    
    7,195
    
    
    
    982
    
    
    
    6.89
    
    
    
    1,659$8.60 to $11.20
    
    
    6,176
    
    
    
    7.67
    
    
    
    10.52
    
    
    
    
    
    
    
    5,570
    
    
    
    10.65
    
    
    
    $12.76 to $23.65
    
    
    600
    
    
    
    7.77
    
    
    
    15.87
    
    
    
    
    
    
    
    556
    
    
    
    15.82
    
    
    
    Total
    
    
    19,174
    
    
    
    
    
    
    $
    6.32
    
    
    $
    59,743
    
    
    
    15,118
    
    
    $
    6.31
    
    
    $
    49,839
      14




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##### Table of Contents



Employee Stock Purchase Plan
 The 2000 Employee Stock Purchase Plan
   Shares
    
    Purchase
    
    Weighted AverageReserved
    
    Price
    
    Purchase PriceBalance, January 1, 2005
    
    
    1,978Additional shares reserved
    
    
    793Shares purchased
    
    
    (564
    )
    
    $
    3.24-$3.26
    
    
    $
    3.25Balance, December 31, 2005
    
    
    2,207Additional shares reserved
    
    
    810Shares purchased
    
    
    (367
    )
    
    $
    3.24-$4.23
    
    
    $
    3.32Balance, March 31, 2006
    
    
    2,650
 Note 8-Short Term Bank Borrowings:
    15




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Note 9-Operating Segments and Geographic Information (in thousands)
     Three Months EndedMarch 31, 2006
    
    
    April 1, 2005Retail
    
    $
    102,831
    
    
    $
    196,645OEM
    
    
    17,802
    
    
    
    34,988License and royalty
    
    
    4,041
    
    
    
    809Total revenues
    
    
    124,674
    
    
    
    232,442Retail
    
    
    106,049
    
    
    
    173,372OEM
    
    
    19,247
    
    
    
    29,688License and royalty
    
    
    
    
    
    
    Total cost of product revenues
    
    
    125,296
    
    
    
    203,060Gross marginRetail
    
    
    (3,218
    )
    
    
    23,273OEM
    
    
    (1,445
    )
    
    
    5,300License and royalty
    
    
    4,041
    
    
    
    809Total gross margin
    
    
    (622
    )
    
    
    29,382Operating expenses:Research and development
    
    
    3,744
    
    
    
    3,392Sales and marketing
    
    
    15,032
    
    
    
    19,934General administration
    
    
    13,678
    
    
    
    15,164Total operating expenses
    
    
    32,454
    
    
    
    38,490Net operating loss
    
    
    (33,076
    )
    
    
    (9,108
    )
 16




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##### Table of Contents



Three Months EndedMarch 31, 2006
    
    
    April 1, 2005Other expense
    
    
    (733
    )
    
    
    (460
    )Net loss before income taxes
    
    
    (33,809
    )
    
    
    (9,568
    )Income taxes
    
    
    3,008
    
    
    
    18Net loss
    
    $
    (36,817
    )
    
    $
    (9,586
    )
  Three Months EndedMarch 31, 2006
    
    
    April 1, 2005Revenues:United States
    
    $
    80,778
    
    
    $
    134,966United Kingdom
    
    
    7,252
    
    
    
    10,418Germany
    
    
    3,112
    
    
    
    6,942South Korea
    
    
    3,449
    
    
    
    2,244Japan
    
    
    3,612
    
    
    
    11,309Canada
    
    
    1,170
    
    
    
    9,092France
    
    
    2,385
    
    
    
    6,348Rest of Europe
    
    
    5,920
    
    
    
    14,922Rest of world
    
    
    16,996
    
    
    
    36,201Total net revenues
    
    $
    124,674
    
    
    $
    232,442
  March 31, 2006
    
    
    December 31, 2005Long-lived assets:Property and equipment, net:United States
    
    $
    9,516
    
    
    $
    9,708Japan
    
    
    13
    
    
    
    16Europe
    
    
    1,143
    
    
    
    947Rest of the World
    
    
    143
    
    
    
    152Total long-lived assets
    
    $
    10,815
    
    
    $
    10,823
 Note 10Comprehensive Loss:
  Three Months EndedMarch 31, 2006
    
    
    April 1, 2005Net loss
    
    $
    (36,817
    )
    
    $
    (9,586
    )Other comprehensive income (loss)
    
    
    (16
    )
    
    
    120Comprehensive loss
    
    $
    (36,833
    )
    
    $
    (9,466
    )
  Note 11-Hedging:
  17




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Note 12-Contingencies:
 Indemnifications
   Litigation with Toshiba
  In the Matter of Certain Flash Memory Chips, Flash Memory Systems, and Products Containing
Same: United States International Trade Commission
   Lexar Media, Inc. v. Toshiba Corporation, Toshiba America, Inc. and Toshiba America
Electronics Corporation
  18




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Toshiba Corporation v. Lexar Media, Inc.; Lexar Media, Inc. v. Toshiba Corporation
     19




---



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Toshiba Corporation v. Lexar Media, Inc.
    Litigation Against Fuji, Memtek and PNY
    20




---



##### Table of Contents



Litigation Against Pretec, PNY, Memtek and C-One
    Litigation With Willem Vroegh
   21




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Stockholder Litigation
   Note 13-Recent Accounting Pronouncements
    
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  22




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Overview
    23




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Revenues.
  24




---



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Cost of Product Revenues.
 25




---



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Research and Development.
 Sales and Marketing.
 General and Administrative.
 26




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Stock-based compensation
    Three months endedMarch 31, 2006( in thousands,except per shareamounts )Loss before income taxes
    
    $
    1,919Net loss
    
    $
    1,919Net loss per common shareBasic:Loss before income taxes
    
    $
    0.02Net loss
    
    $
    0.02Net loss per common shareDiluted:Loss before income taxes
    
    $
    0.02Net loss
    
    $
    0.02
 27




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Three months endedApril 1, 2005( in thousands,except per shareamounts )Net loss per
common share, as reported
    
    $
    9,586Add: Total
stock-based compensation expense determined under the fair value based
method, net of related tax effects
    
    
    4,304Net loss, pro forma
    
    $
    13,890Net loss per common shareBasic:As reported
    
    $
    0.12Pro forma
    
    $
    0.17Net loss per common shareDiluted:As reported
    
    $
    0.12Pro forma
    
    $
    0.17
  Three Months EndedMarch 31,
    
    
    April 1,2006
    
    
    2005Cost of product revenues
    
    $
    208
    
    
    $
    Research and development
    
    
    370
    
    
    
    Selling and marketing
    
    
    613
    
    
    
    General and administrative
    
    
    728
    
    
    
    Total
    
    $
    1,919
    
    
    $
    
 Critical Accounting Policies and Estimates
    A.
    
    Revenue recognition, including price protection, rebates and other customer programs,B.
    
    Valuation allowance and accrued liabilities, including sales returns and other
allowances, inventory reserves, warranty accruals, the allowance for doubtful accounts and
deferred tax asset valuation allowances; andC.
    
    Stock-based compensation.
 28




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Revenue Recognition
 Product Revenues
      License and Royalty Revenues
   Valuation Allowances and Accrued Liabilities
 Valuation of Inventory
   29




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Deferred Tax Valuation Allowance
  Other Valuation Allowances and Accrued Liabilities
  Allowance for Doubtful Accounts
  Stock-based compensation
  30




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Results of Operations
  Revenues, Cost of Product Revenues and Gross Margin
  Three Months Ended% changeMarch 31, 2006
    
    
    April 1, 2005
    
    
    2005 to 2006Retail
    
    $
    102,831
    
    
    $
    196,645
    
    
    
    (47.7
    %)OEM
    
    
    17,802
    
    
    
    34,988
    
    
    
    (49.1
    %)Product revenues
    
    
    120,633
    
    
    
    231,633
    
    
    
    (47.9
    %)License and royalty
    
    
    4,041
    
    
    
    809
    
    
    
    399.5
    %Total net revenue
    
    
    124,674
    
    
    
    232,442
    
    
    
    (46.4
    %)Retail
    
    
    106,049
    
    
    
    173,372
    
    
    
    (38.8
    %)OEM
    
    
    19,247
    
    
    
    29,688
    
    
    
    (35.2
    %)License and royalty
    
    
    
    
    
    
    Total cost of
product revenues
    
    
    125,296
    
    
    
    203,060
    
    
    
    (38.3
    %)Retail
    
    
    (3,218
    )
    
    
    23,273
    
    
    
    (113.8
    %)OEM
    
    
    (1,445
    )
    
    
    5,300
    
    
    
    (127.3
    %)License and royalty
    
    
    4,041
    
    
    
    809
    
    
    
    399.5
    %Total gross margin
    
    $
    (622
    )
    
    $
    29,382
    
    
    
    (102.1
    %)
  Three Months EndedMarch 31, 2006
    
    April 1, 2005Retail
    
    
    82.5
    %
    
    
    84.6
    %OEM
    
    
    14.3
    %
    
    
    15.1
    %Product revenues
    
    
    96.8
    %
    
    
    99.7
    %License and royalty
    
    
    3.2
    %
    
    
    0.3
    %Total net revenue
    
    
    100.0
    %
    
    
    100.0
    %Retail
    
    
    85.1
    %
    
    
    74.6
    %OEM
    
    
    15.4
    %
    
    
    12.8
    %License/ Royalty
    
    
    
    
    
    
    Total cost of product revenues
    
    
    100.5
    %
    
    
    87.4
    %Retail
    
    
    (2.6
    %)
    
    
    10.0
    %OEM
    
    
    (1.1
    %)
    
    
    2.3
    %License and royalty
    
    
    3.2
    %
    
    
    0.3
    %Total gross margin
    
    
    (0.5
    %)
    
    
    12.6
    %
  31




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Three Months EndedMarch 31, 2006
    
    April 1, 2005Retail
    
    
    85.2
    %
    
    
    84.9
    %OEM
    
    
    14.8
    %
    
    
    15.1
    %Product revenues
    
    
    100.0
    %
    
    
    100.0
    %Retail
    
    
    87.9
    %
    
    
    74.9
    %OEM
    
    
    16.0
    %
    
    
    12.8
    %Cost of product revenues
    
    
    103.9
    %
    
    
    87.7
    %Retail
    
    
    (2.7
    %)
    
    
    10.0
    %OEM
    
    
    (1.2
    %)
    
    
    2.3
    %Total gross margin
    
    
    (3.9
    %)
    
    
    12.3
    %
 Revenues
      Cost of Product Revenues
  32




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Gross Margin
  Operating Expenses
  Three Months Ended% ChangeMarch 31, 2006
    
    
    April 1, 2005
    
    
    2005 to 2006Research and development
    
    $
    3,744
    
    
    $
    3,393
    
    
    
    10.3
    %Sales and marketing
    
    
    15,032
    
    
    
    19,934
    
    
    
    (24.6
    %)General and administrative
    
    
    13,678
    
    
    
    15,163
    
    
    
    (9.8
    %)Total operating expenses
    
    $
    32,454
    
    
    $
    38,490
    
    
    
    (15.7
    %)
  Three Months EndedMarch 31, 2006
    
    April 1, 2005Research and development
    
    
    3.0
    %
    
    
    1.5
    %Sales and marketing
    
    
    12.0
    %
    
    
    8.6
    %General and administrative
    
    
    11.0
    %
    
    
    6.5
    %Total operating expenses
    
    
    26.0
    %
    
    
    16.6
    %
 33




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Research and Development
  Sales and Marketing
  General and Administrative
  Income Taxes
  Other Income and Expense
   Liquidity and Capital Resources
 Liquidity and Capital Resources
  Three Months EndedMarch 31, 2006
    
    April 1, 2005Net cash provided by operating activities
    
    $
    1,087
    
    
    $
    35,947Net cash provided by (used in) investing activities
    
    $
    (7,186
    )
    
    $
    6,937Net cash provided by (used in) financing activities
    
    $
    (49,626
    )
    
    $
    50,782
  34




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Three Months EndedMarch 31, 2006
    
    April 1, 2005Days sales outstanding (net of change in deferred revenue)
    
    
    48
    
    
    
    35Inventory turns per year (net of change in deferred cost)
    
    
    5
    
    
    
    4
     35




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
    
    the option to receive, if and only to the extent the holders convert their Notes into
our common stock, a make-whole premium of additional shares of common stock equal to the
approximate lost option time value, if any, plus accrued but unpaid interest, if any, up to
but excluding the conversion date; or
 36




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
    
    the right to require us to purchase for cash any or all of its Notes at a repurchase
price equal to the principal amount of the Notes being repurchased plus accrued but unpaid
interest, if any, up to but excluding the repurchase date.
  
    
    We declare certain dividends or distributions;
    
    We effect a stock split or combination;
    
    We offer certain rights or warrants to all or substantially all our stockholders; and
    
    We purchase shares of our common stock pursuant to a tender or exchange offer under certain circumstances.
    Commitments
    37




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Payments due by period (in thousands)Total amount
    
    
    Less than
    
    
    1-3
    
    
    
    
    
    
    Aftercommitted
    
    
    1 year
    
    
    years
    
    
    3-5 years
    
    
    5 yearsContractual obligations and commercial commitments:Senior Convertible NotesPrincipal
    
    $
    70,000
    
    
    $
    
    
    
    $
    
    
    
    $
    70,000
    
    
    $
    Interest
    
    
    15,750
    
    
    
    3,938
    
    
    
    7,875
    
    
    
    3,937
    
    
    
    Open purchase orders with vendors and suppliers*
    
    
    18,806
    
    
    
    18,806
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    5,450
    
    
    
    1,401
    
    
    
    2,361
    
    
    
    660
    
    
    
    1,028Standby letters of credit**
    
    
    5,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations and commercial commitments
    
    $
    115,006
    
    
    $
    29,145
    
    
    $
    10,236
    
    
    $
    74,597
    
    
    $
    1,028
 
 *
    
    At any given point in time, in the normal course of business, we place cancelable purchase
orders with our vendors and suppliers.**
    
    This standby letters of credit expired on May 2, 2006.  Off Balance Sheet Arrangements
  Indemnifications
   Warranties
  38




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Recent Accounting Developments
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
  39




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Interest Rate Risk
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
  Managements Report on Internal Control Over Financial Reporting
   Internal ControlIntegrated Framework
  40




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A.
    
    Revenue recognition:We did not maintain effective controls to ensure revenue and
deferred revenue were accurately recorded in accordance with generally accepted accounting
principles. Specifically, we did not maintain effective controls to accurately: (i) account
for all price reductions and promotional commitments, including rebate programs offered to
customers; (ii) record deferred revenue based on actual sales price and inventory
movements; (iii) record revenue and inventory adjustments for returns of product by
customers; and (iv) record concessions provided to certain customers as a reduction of
revenue.B.
    
    Accounting for Inventory:We did not maintain effective controls over the existence and
valuation of inventory. Specifically, we did not maintain effective controls to: (i)
accurately track, confirm and reconcile inventory movements to ensure the timely
recognition of cost of product revenues; (ii) ensure the existence of inventory and the
appropriate valuation of returned inventory; (iii) identify and accurately adjust inventory
for excess and slow moving products or components and record necessary write-downs of
inventory to lower of cost or market; and (iv) accurately accrue for the obligations to
purchase inventory at costs in excess of net realizable value.
  Internal Control-Integrated Framework
 Changes in Internal Control Over Financial Reporting.
  Managements Remediation Initiatives
  A.
    
    Revenue recognition:We have taken the following remediation actions to ensure revenue
and deferred revenue are accurately recorded in accordance with generally accepted
accounting principles:
 1.
    
    Instituted controls to review sales related accruals in more detail by customer
and incentive program;2.
    
    Enhanced information technology systems to automate controls and procedures; and3.
    
    Continued to increase training and awareness to sales and marketing
representatives on our processes and procedures.
 B.
    
    Accounting for inventory:We have taken the following remediation actions to improve
our internal control over the existence and valuation of inventory:
 1.
    
    Performance of monthly reconciliations of inventory movements and period end
inventory on hand to information obtained from our subcontractors and resellers;2.
    
    Performance of additional and more frequent inventory observations to validate
the existence of inventory recorded in our financial reporting systems;3.
    
    Increased management oversight of the analysis and review of inventory valuation
reserves; and4.
    
    Enhanced information technology systems to automate controls and procedures.
  41




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PART II-OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 Litigation with Toshiba
  In the Matter of Certain Flash Memory Chips, Flash Memory Systems, and Products Containing
Same: United States International Trade Commission
   Lexar Media, Inc. v. Toshiba Corporation, Toshiba America, Inc. and Toshiba America
Electronics Corporation
      42




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Toshiba Corporation v. Lexar Media, Inc.; Lexar Media, Inc. v. Toshiba Corporation
         Toshiba Corporation v. Lexar Media, Inc.
  43




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Litigation Against Fuji, Memtek and PNY
         Litigation Against Pretec, PNY, Memtek and C-One
   44




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Litigation With Willem Vroegh
    Stockholder Litigation
   
 ITEM 1A. RISK FACTORS
 RISKS THAT COULD AFFECT FUTURE RESULTS
  Risks Related to Our Business
 Failure to complete the merger with Micron could materially and adversely affect our results of
operations and our stock price.
  45




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
    
    we may not realize any or all of the potential benefits of the merger, including any
potential synergies that could result from combining the financial, technical and
manufacturing resources of Micron and Lexar;
    
    we will remain liable for significant transaction costs, including legal, accounting,
financial advisory and other costs relating to the merger;
    
    under some circumstances, we may have to pay a termination fee to Micron in the amount
of $22.0 million;
    
    any operational investments that we may delay due to the pending transaction would need
to be made, potentially on an accelerated timeframe, which could then prove costly and more
difficult to implement; and
    
    the market price of our common stock may decline to the extent that the current market
price reflects a market belief that the merger will be completed.
  
    
    the attention of our management and our employees may be diverted from day-to-day
operations;
    
    our customers and suppliers may seek to modify or terminate existing agreements, or
prospective customers may delay entering into new agreements or purchasing our products as
a result of the announcement of the merger; and
    
    our ability to attract new employees and retain our existing employees may be harmed by
uncertainties associated with the merger.
    Stockholder securities lawsuits have been filed against us and our directors challenging the
merger, and an unfavorable judgment or ruling in these lawsuits could prevent or delay the
consummation of the merger and result in substantial costs to us.
  46




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We have a history of losses and may not be able to become profitable.
  Our products are characterized by average selling prices that have historically declined over
relatively short time periods and we are currently in a period of very significant price declines.
If we are unable to effectively manage our inventories and channel inventories, reduce our costs,
introduce new products with higher average selling prices or increase our sales volumes, our
revenues and gross margins will be negatively impacted.
   Because we protect many of our retail customers and distributors against the effects of price
decreases on their inventories of our products, we have in the past and may in the future incur
large price protection charges if we reduce our prices when there are large quantities of our
products in our distribution channel.
  We have written down and may need to further write-down our inventory if our sales levels do not
match our expectations or if selling prices decline more than we anticipate, which could adversely
impact our revenues and gross margins.
 47




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Our operating results and gross margins have fluctuated in the past, may fluctuate significantly in
the future and are difficult to predict. If our future results are below the financial guidance
provided by us or the expectations of investors or securities analysts, the market price of our
common stock could decline significantly.
  
    
    competitive pricing pressures for the products we sell, including the timing and amount
of any reductions in the average selling prices of our products and services;
    
    the failure of cost decreases to keep up with price decreases for our products;
    
    the timing and amount of expenses related to obsolescence and disposal of excess
inventory and the difficulty of forecasting and managing our inventory levels, including
inventories on consignment and at contract manufacturers;
    
    the amount of price protection, volume incentive rebates, discounts, market development
funds, cooperative advertising payments and other concessions and discounts that we may
need to provide to some of our customers due to competitive pricing pressures;
    
    the mix of business between retail, OEM and licensing;
    
    whether we can sell controllers, digital media accessories and other components in the
volumes and at the prices we anticipate;
    
    fluctuation in demand for our products, including seasonal demand for our products and
the volume and timing of potential retail customer and distributor orders;
    
    the timely availability of flash memory, particularly flash memory that meets our
technological requirements and the availability to us of lower cost multi-level cell, or
MLC, flash memory;
 48




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##### Table of Contents




    
    the decision of our customers to return products or rotate their stock;
    
    the inability of suppliers to fully indemnify us should we be subjected to litigation;
    
    the availability of sufficient silicon wafer foundry capacity and product components to meet customer demand;
    
    the difficulty of forecasting sell-through rates of our products and their impact on
inventory levels at our resellers if sell-through data is not timely reported to us, which
may result in additional orders being delayed or reduced and inventory being returned;
    
    price reductions in key components, such as flash memory, which could result in reduced
margins when selling products that include previously purchased components held in
inventory;
    
    increases in costs charged by our component or card suppliers or the failure of our
suppliers to decrease the prices they charge to us when industry prices decline;
    
    the timing and amount of orders or cancellations from existing and new customers and
penalties imposed by customers for failure to meet their requirements;
    
    the commencement of, involvement in or the expansion, appeal or settlement of our litigation;
    
    any changes in the trend of declining average selling prices per unit sold of digital storage media;
    
    competing flash card standards, which displace the standards used in our products and our customers products;
    
    shortages of components such as capacitors and printed circuit boards required for the manufacturing of our products;
    
    exchange rate fluctuations, particularly the U.S. dollar to British pound and Japanese
yen and the British pound to Euro exchange rates;
    
    the announcement or introduction of products and technologies by competitors; and
    
    potential product quality problems which could raise return or rework costs.
  An unfavorable outcome or delays with respect to our on-going trade secrets litigation with Toshiba
could lead to a decline in our stock price.
   49




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We have changed our pricing strategy to aggressively match our competitors product price declines,
which could result in reductions to our revenues, gross margins and market share.
  If our controller and other component sales decline in 2006 or beyond, our revenues, gross margins
and results of operations would be negatively impacted.
  If we are unable to continue to develop, competitively market and successfully sell our JumpDrive
portable flash storage product line, our revenues, gross margins and results of operations will be
negatively impacted.
  50




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We depend on a few key customers and the loss of any of them could significantly reduce our
revenues.
    A lack of effective internal control over financial reporting could result in an inability to
accurately report our financial results that could lead to a loss of investor confidence in our
financial reports and have an adverse effect on our stock price.
  
    
    revenue recognition; and
    
    the accounting for inventory.
  Our strategic partnership with Kodak and our ongoing relationships with OEM customers pose
significant challenges for us, and if we are unable to manage these relationships, our business and
operating results will be adversely affected.
  
    
    properly manage the distribution and use of the KODAK brand;
 51




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
    
    control the sales and marketing expenses associated with launching the brand in new channels;
    
    plan for anticipated changes in demand;
    
    effectively leverage the KODAK brand to achieve premium pricing and grow market share;
    
    maintain the market share position of the Lexar brand; and
    
    appropriately allocate resources to support a dual branding strategy.
   We are substantially leveraged, which could adversely affect our ability to adjust our business, to
develop or enhance our products, expand our operations, respond to competitive pressures or obtain
additional financing.
   
    
    our ability to obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate or other purposes may be limited;
    
    a substantial portion of our cash flow from operations will be dedicated to the payment
of the principal and interest on our indebtedness;
    
    if we elect to pay any premium on the senior convertible notes with shares of our common
stock or we are required to pay a make-whole premium with our shares of common stock, our
existing stockholders interest in us would be diluted; and
    
    we may be more vulnerable to economic downturns, less able to withstand competitive
pressures and less flexible in responding to changing business and economic conditions.
  52




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We primarily depend upon Samsung for our flash memory. If Samsung is unable to provide us with
sufficient quantities of flash memory when we need it at prices and sales terms that allow us to be
competitive in the marketplace, if Samsung is unable to remain technologically competitive, or if
Samsung were to reduce or eliminate our credit terms, we would not be able to manufacture and
deliver digital media to our customers in accordance with their volume, price and schedule
requirements, which would have a serious negative impact on our revenues and margins.
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In 2005, we modified our pricing strategy and significantly reduced our promotional programs and,
in the first quarter of 2005, we increased prices on certain products to most of our customers
which resulted in a loss of product placements. Many of our retail customers and distributors have
rights of return, and if they decide to terminate their relationships with us and purchase from
other vendors as a result of our promotion and pricing actions, similar future actions or
otherwise, we may be required to take back large quantities of unsold customer inventory which
could have an adverse effect on our revenues.
   We depend on single suppliers for certain key components and products. We do not have long-term
supply contracts with many of these suppliers and we are therefore exposed to certain risks,
including price increases, late deliveries, poor component quality and a potential inability to
obtain an adequate supply of components. In addition, there is a risk that we will have inadequate
or incomplete indemnification from these suppliers, so we also face the risk that our margins and
operating results would be severely negatively impacted if such components or products infringe the
intellectual property rights of a third party or if we are found to owe license fees or royalties
relating to these products.
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If we are unable to generate increased revenue from licensing our intellectual property, our gross
margins and results of operations would be negatively impacted.
  We need to improve our operations infrastructure and our supply chain.
    The solid-state storage market is evolving and we may not have rights to manufacture and sell
certain types of flash card formats or we may be forced to pay a royalty to sell digital media in
these formats. Future digital media formats may not use our core technology.
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We market our digital media primarily on the basis of its superior technology. If we are unable to
achieve or maintain technological leadership or gain commercial acceptance of the performance and
technology advantages of our products, our revenues and gross margins would likely decline
significantly.
  Increased competition in the digital media market may lead to a decrease in our revenues and market
share.
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If we are unable to develop and introduce, on a timely basis, new products or services that are
accepted by our customers and consumers, we will not be able to compete effectively in our market.
  If we are unable to develop or maintain the strategic relationships necessary to develop, sell and
market products that are commercially viable and widely accepted, the growth and success of our
business may be limited.
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We rely to a significant degree on retailers to sell our digital media products and our inability
to control the activities of such retailers could cause our operating results and gross margins to
fluctuate significantly.
  
    
    continued downward pricing pressure in the retail channel has necessitated, and we
expect will continue to necessitate, price protection of the inventories of our products
that many of our customers carry;
    
    retailers may emphasize our competitors products over our products or decline to carry
our products or we may lose our exclusive relationship with certain retailers;
    
    loss of market share if the retailers that carry our products do not grow as quickly and
sell as many digital media products as the retailers that carry the digital media products
of our competitors;
    
    loss of business or monetary penalties if we are unable to satisfy the product needs of
these customers or fulfill their orders on a timely basis;
    
    increased sales and marketing expenses if we are unable to accurately forecast our
customers orders, including, among other items, increased freight and fulfillment costs if
faster shipping methods are required to meet customer demand;
    
    product returns could increase as a result of our strategic interest in assisting retailers in balancing their inventories;
    
    reduced ability to forecast sales; and
    
    reduced gross margins, delays in collecting receivables and increased inventory levels
due to the increasing tendency for some retailers to require products on a consignment
basis.
  We depend primarily on United Microelectronics Corporation, or UMC and Silicon Motion, Inc., or
SMI, to manufacture our controllers, and if we are unable to obtain from UMC or SMI sufficient
quantities of controllers at acceptable quality, yields and prices, and in a timely manner, we may
not be able to meet customer demand for our products, which could limit the growth and success of
our business.
  
    
    reduced control over delivery schedules, quality assurance, manufacturing yields and production costs; and
    
    unavailability of, or delayed access to, next-generation or key process technologies.
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We depend solely on third-party subcontractors for assembly and testing of our digital media
products, which could result in product shortages or delays or increase our costs of manufacturing,
assembling or testing our products.
  If our efforts to optimize our supply chain are unsuccessful and we are unable to meet our
customers requirements, our business could be negatively impacted.
  Our failure to successfully promote our brand and achieve strong brand recognition in target
markets could limit or reduce the demand for our products and services.
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If we encounter difficulties in attracting and retaining qualified personnel, particularly in light
of the potential merger with Micron and the resulting uncertainty, we may not be able to
successfully execute our business strategy, we may need to grant large stock-based incentives that
could be dilutive to our stockholders and we may be required to pay significant salaries which
would increase our general and administrative costs.
   If our products contain defects, we may incur unexpected and significant operating expenses to
correct the defects, we may be required to pay damages to third parties and our reputation may
suffer serious harm.
  Our significant sales outside the United States subject us to increasing foreign political and
economic risks, including foreign currency fluctuations, and it may be difficult for us to
anticipate demand and pricing in those regions or effectively manage the distributor channels and
relationships in those regions.
  
    
    foreign currency exchange fluctuations;
    
    political and economic instability;
    
    delays in meeting customer commitments due to difficulties associated with managing an
international distribution system;
    
    increased time to collect receivables caused by slower payment practices that are common in many international markets;
    
    difficulties associated with managing export licenses, tariffs and other regulatory issues pertaining to international trade;
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
    
    increased effort and costs associated with the protection of our intellectual property in foreign countries;
    
    natural disasters, political uncertainties and changing regulatory environments in foreign countries; and
    
    difficulties in hiring and managing employees in foreign countries.
   If our suppliers or customers elect to compete with us in the digital media market, our revenues
and gross margins would likely decline.
  Our financial results may be affected by mandated changes in accounting and financial reporting.
   Our stock price and those of other technology companies have experienced extreme price and volume
fluctuations, and, accordingly, our stock price may continue to be volatile.
  
    
    variations in our quarterly operating results;
    
    announcements regarding the progress of the proposed merger with Micron;
    
    announcements of technological innovations by us or by our competitors;
    
    introductions of new products or new pricing policies by us or by our competitors;
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
    
    departure of key personnel;
    
    the gain or loss of significant orders or customers;
    
    sales of common stock by our officers and directors;
    
    changes in the estimates of our operating performance or changes in recommendations by securities analysts;
    
    announcements related to our outstanding litigation; and
    
    market conditions in our industry and the economy as a whole.
   Risks Related to Our Industry
 Our business will not succeed unless the digital photography market and other markets that
continues to grow or unless we diversify our product sales into adjacent markets.
  
    
    the availability of digital cameras at prices and with performance characteristics
comparable to traditional cameras;
    
    the availability of digital media that meets users requirements with respect to price,
speed, connectivity, capacity and compatibility;
    
    the speed at which digital cameras are able to take successive photographs;
    
    the ease with which digital files can be transferred to a personal computer or printer;
    
    the availability of digital image prints comparable in quality and price to traditional photographs; and
    
    market conditions in the industry and the economy as a whole.
  
    
    marketing campaigns that increase brand awareness in end-user markets, both domestically and internationally;
    
    increased association between brand names and attractive price and performance characteristics; and
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
    
    heightened consumer confidence in digital photography technology.
    General economic conditions, political and military conditions associated with current worldwide
conflicts and similar events may prevent consumers from purchasing our products, and reduced demand
for digital media and related products may prevent us from achieving targeted revenues and
profitability.
  If digital camera manufacturers do not develop and promote products that are able to take advantage
of our fastest digital media products, the growth and success of our business may be limited.
  The manufacturing of our products is complex and subject to yield problems, which could decrease
available supply and increase costs.
  Risks Related to Intellectual Property
 If we are unable to adequately protect our intellectual property, our competitors may gain access
to our technology, which could harm our ability to successfully compete in our market.
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
    
    any of our existing or future patents will not be invalidated;
    
    patents will be issued for any of our pending applications;
    
    any claims allowed from existing or pending patents will have sufficient scope or strength; or
    
    our patents will be issued in the primary countries where our products are sold in order
to protect our rights and potential commercial advantage.
  We are involved in intellectual property litigation, and expect to become involved in additional
litigation that could divert managements time and attention, and be time-consuming and expensive
to defend and an unfavorable outcome in such litigation could limit our access to important
technology, negatively impact our ability to increase licensing revenues or result in our paying
significant damages, incurring other costs or having our products enjoined.
   
    
    pay damages on products that were found to infringe the other partys intellectual property;
    
    stop selling products or using technology that contain the allegedly infringing intellectual property;
    
    attempt to obtain a license to the relevant intellectual property, which license may not
be available on reasonable terms or at all; and
    
    attempt to redesign those products that contain the allegedly infringing intellectual
property.
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We purchase a number of components and products from third parties and if those products were
alleged to violate the intellectual property rights of a third party, we could become involved in
additional litigation that could be time-consuming and expensive to defend or we could be forced to
pay damages or royalties.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURE
  LEXAR MEDIA, INC./s/ Michael P. ScarpelliMichael P. ScarpelliExecutive Vice President and Chief Financial Officer(Principal Financial Officer and Duly Authorized Officer)
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INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.