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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

or

Commission File Number 000-31103

LEXAR MEDIA, INC.

(Exact name of Registrant as specified in its charter)

47421 Bayside Parkway, Fremont, California 94538

(Address of principal executive offices, including zip code)

(510) 413-1200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.0001 par value per share

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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

As of June 28, 2002, the aggregate market value of the shares of common stock held by non-affiliates of the Registrant (based on the closing price for the registrants common stock as quoted by the Nasdaq National Market on that date), was approximately $155,092,040.

As of March 7, 2003, there were 66,825,442 shares of the Registrant’s common stock, $0.0001 par value per share, outstanding. This is the only outstanding class of stock of the Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held in May 2003 are incorporated by reference into Part III of this report on Form 10-K.

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LEXAR MEDIA, INC.

FORM 10-K

For The Year Ended December 31, 2002

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The Lexar Media name and logo are trademarks that are federally registered in the United States. The titles and logos associated with our products appearing in this report, including JumpShot and JumpDrive, are either federally registered trademarks or are subject to pending applications for registration. Our trademarks may also be registered in other jurisdictions. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners.

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CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project” or “continue” and variations of these words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, level of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risks That Could Affect Future Results,” as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

PART I

Company Overview

We design, develop and market high-performance flash cards and connectivity products that we market as “digital film” to the digital photography market as well as to other markets utilizing portable digital storage media for the capture and retrieval of digital content. Flash memory is a type of nonvolatile memory, meaning that it retains data without power being supplied. There are several reasons that nonvolatile memory, such as flash memory, is preferable to other types of data storage, such as a hard disk: (1) it is noiseless; (2) it allows for faster access; (3) it is smaller and lighter; and (4) it has no moving parts and is therefore more durable.

Our digital film products enable customers to capture digital images and download them quickly to a personal computer for editing, distributing and printing. We offer flash cards in the five primary media formats currently used by digital cameras and other electronic devices: CompactFlash, Memory Stick, SmartMedia, Secure Digital Card and MultiMedia Card. We also recently began selling the xD Picture Card which is currently marketed and sold only as digital film, although it may in the future be marketed for use in other electronic devices, as well as the Memory Stick Pro, which is gradually being incorporated in devices offered by Sony. Of those seven formats, we currently manufacture CompactFlash and Memory Stick, and are planning to expand to additional formats in 2003. In both cases, we combine flash memory from leading suppliers with our patented controller technology. A controller determines, among other things, the manner in which data is written to and read from the flash memory and is important in determining the overall performance of the flash card. We believe our high-performance CompactFlash cards can record data faster than other CompactFlash cards. This performance advantage is particularly noticeable when used in advanced digital cameras that take advantage of our digital film’s write speed, or the rate at which our digital film can capture a digital image. Our digital film is compatible with substantially all digital cameras, including those manufactured by Agfa, Canon, Casio, Epson, Fuji, Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus, Polaroid, Ricoh, Sony and Yashica.

In addition, to address the growing market for compact digital data and media storage solutions, during the third quarter of 2002, we introduced and began selling JumpDrive^™, a new, high-speed portable universal serial bus, or USB, flash drive for consumer applications that serves a variety of uses, including floppy disk replacement. A USB flash drive is a device that connects flash memory directly through a USB connector to a user’s USB port. During the fourth quarter of 2002, we introduced JumpDrive 2.0 Pro, which is the first product in the industry that is certified by the USB Integrator’s Forum for USB 2.0 speeds. We have incorporated our high-speed Lexar technology into JumpDrive 2.0 Pro, making it capable of operating at 40X, or 6 megabytes per second, sustained minimum write speed. We offer JumpDrive 2.0 Pro in capacities up to 256 megabytes. We also recently introduced JumpDrive Trio. This product can connect a user’s Memory Stick, Secure Digital Card or MultiMedia Card directly to a USB port. We intend to continue to expand our JumpDrive product line in the upcoming year.

Our digital media reader/writers are products that facilitate the transfer of digital images to personal computers and other devices without a direct connection to the digital camera. Because they connect the memory to another device, we generally refer to these as connectivity products. Our line of JumpShot reader products connect our USB-enabled CompactFlash digital film directly to a user’s USB port to quickly, inexpensively and easily transfer images.

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We also license our proprietary controller technology and sell controllers to other manufacturers of flash storage media to address markets adjacent to digital photography. Our controller technology can be applied to a variety of consumer electronic applications such as digital music players, laptop computers, personal digital assistants, telecommunication and network devices and digital video recorders. In order to extend our technology into these markets, we have selectively sold our products and licensed our technology to third parties. For example, during 2001 we entered into an agreement to sell controllers to SMART Modular and during 2002 we entered into an agreement to sell controllers to InterWorks, which was merged with Viking into Viking-Interworks, a business unit of the Sanmina-SCI Modular Solutions Division. In the case of Viking-Interworks, we supply ATA flash controllers for its flash memory products. Viking-InterWorks integrates our high-performance controller into their business sectors such as data communications, telecommunications, industrial, computing and embedded markets. We also sell the controllers for our USB flash drives to customers such as SMART Modular and Samsung that integrate these controllers in their USB Flash Drives and market them to major PC OEM customers. Generally, our agreements with our controller customers have a one-year term and are automatically renewed for an additional one-year term unless either party provides the other party with written notice of non-renewal at least ninety days prior to the end of the initial one-year term. We also provide the purchaser with a one-year warranty and intellectual property indemnification.

In April 2001, we finalized a supply agreement and license agreement with Samsung Electronics Co., Ltd. Under the supply agreement, we purchase substantially all of our flash memory from Samsung, which is priced based upon an agreed upon methodology. Samsung has guaranteed a certain allocation of flash memory production capacity to us. In addition, Samsung also has the right to purchase our flash memory controllers. Under the agreement, Samsung provides us with intellectual property indemnification for the products we purchase from Samsung, as well as industry standard warranties . The supply agreement runs through March 29, 2006 unless we and Samsung agree to mutually extend the agreement. Either party can terminate the agreement in the event of the other party’s breach of the agreement or bankruptcy.

Under the license agreement, Samsung entered into a royalty-bearing license for our technology for some of their products. We received the first payment under the license agreement in April 2001. The license payments were fixed through the first three years of the agreement and were to become variable thereafter based on the types and volumes of flash cards sold by Samsung. In March 2002, we terminated our prior license agreement with Samsung and executed a new license agreement that renewed and extended the prior license. Under this new agreement, Samsung prepaid fixed royalties due under the prior license agreement at a 5% discount rate. Samsung also paid additional licensing fees for expanded rights to license our technology. We also have a cross-license from Samsung to manufacture and sell flash products. The license payments are fixed through the first eight quarters of the agreement through March 31, 2004 and become variable thereafter based on the types and volumes of flash cards sold by Samsung. Whether we will be paid any royalties under the variable royalty obligations depends on a number of factors, including which flash products Samsung manufactures and sells and in what volumes, as well as our relative market shares and our aggregate purchases from Samsung. We cannot assure you that we will be paid any amounts in variable royalties. Either party can terminate the agreement only in the event of the other party’s breach of this agreement, the supply agreement or bankruptcy. We have the right to assign this license in the event we are acquired. We do not provide any intellectual property indemnification to Samsung under the license agreement.

Under our cross-license agreements with Sony and Samsung, each party may manufacture and sell products that incorporate technology covered by the other party’s patent or patents related to flash memory devices. As we continue to license our patents to certain of our competitors, competition will increase and may harm our business, financial condition or results of operations. Currently we are engaged in licensing discussions and/or litigation with several of our competitors. There can be no assurance that we will be successful in concluding licensing agreements under terms that are favorable to us, or at all.

We incorporated in California in September 1996 under the name Lexar Microsystems, Inc, and changed our name to Lexar Media, Inc. in February 1998. We reincorporated in Delaware in August 2000. Our principal executive offices are located at 47421 Bayside Parkway, Fremont, California 94538, and our telephone number is 510-413-1200. Our website address is www.lexarmedia.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. As of December 15, 2002, we began making available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Our Products and Services

Flash Cards.    We offer flash cards in a variety of speeds and capacities in the five primary media formats currently used by digital cameras and other electronic devices: CompactFlash, Memory Stick, SmartMedia, Secure Digital Card and MultiMedia Card. We also sell the xD Picture Card, which is currently marketed and sold only as digital film although it may in the future be marketed for use in other electronic devices as well, as well as the Memory Stick Pro, which is gradually being incorporated in devices offered by Sony. Each of these types of flash cards are referred to as a distinct “form factor.” Each form factor generally is of a unique size and each has a different set of connections to its intended device. A Memory Stick is approximately the size of a piece of chewing gum, while a Secure Digital Card is approximately the size of a postage stamp. A device that takes a Memory Stick would not typically be able to accept a Secure Digital Card, as the cards are physically and mechanically incompatible. For example, at this time, Sony products accept only the Memory Stick, cameras manufactured by Fuji and Olympus accept only the xD Picture Card or Smart Media, cameras sold by other manufacturers (such as Nikon, Canon and Kodak) generally vary between Compact Flash and Secure Digital formats. A number of cell phone manufacturers have announced that they will soon be introducing products that accept MultiMedia Cards. Of these seven formats, we currently manufacture CompactFlash and Memory Stick, and are planning to expand into additional formats in 2003. Flash products manufactured by us, such as CompactFlash and Memory Stick are subjected to rigorous design and testing procedures that we believe are more comprehensive than the standards for compatibility set by the industry in general. We guarantee that our digital film will work seamlessly with any digital camera that uses the particular form factor.

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We label our CompactFlash products for write speed performance in which 1x is equal to a write speed of 150 kilobytes per second, nomenclature similar to that used in the CD-ROM industry. For example, our 4x CompactFlash digital film is capable of sustained write speeds of at least 600 kilobytes per second. Currently, we offer CompactFlash with write speeds ranging from 4x to 40x.

In addition, to address the growing market for compact digital data and media storage solutions, during the third quarter of 2002, we introduced and began selling our JumpDrive^™, a new, high-speed portable USB flash drive for consumer applications that serves a variety of uses including floppy disk replacement.

Flash card sales represented 85.4% of our gross revenues in 2002, 84.8% of our gross revenues in 2001 and 79.1% of our gross revenues in 2000.

The table below provides information on our currently offered flash media products as of March 31, 2003:

Flash Memory Products

Connectivity Products.    We offer a broad line of digital film reader/writers that facilitate the transfer of digital images to personal computers and other devices without a direct connection to the digital camera.

The table below provides information on our connectivity products:

Connectivity Products

Software Products

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Other

Controllers/Licensing.    We sell our controllers as a stand-alone product to flash card manufacturers and license this technology to original equipment manufacturers, or OEMs. These customers primarily target adjacent markets such as industrial or commercial computers. We believe that our controllers have advantages in speed, connectivity, cost and compatibility, which we believe make them some of the premier controllers in the industry. We further believe that a number of the solid-state storage controllers currently on the market infringe our patents, and we are in litigation or negotiations with a number of such companies. In 2002, our revenue from controller sales was approximately $2.7 million.

Our controller technology and products can be used in a number of significant emerging markets other than digital film that require high-performance, low power and durable data storage. For example, our technology can be used in mobile computing such as notebooks, handheld personal computers and PDAs; internal or external storage for personal computers and mobile phones; networking applications such as routers and switches; data communications devices; consumer digital applications such as MP3-players and Digital Video Recorders, electronic books, Internet appliances and television; automotive applications such as navigation systems; government applications such as flight recorders and field computers; and general industrial applications such as retail check-out systems, meters, test equipment, sensing and medical instruments. We are actively pursuing relationships and licensing arrangements with companies to address these adjacent markets. Our controller technology can also be used for industrial CompactFlash, certain PC Cards, flash drives and other flash memory based storage applications. Our revenue from licensing our controller technology was approximately $17.3 million in 2002, $11.7 million in 2001, and $0.8 million in 2000.

Sales and Marketing

We sell our digital media and connectivity products to end-users primarily through mass market, photo and OEM channels. The mass-market channel includes national and regional retailers and select corporate accounts. We also use a direct sales force, as well as distributors, value-added resellers and independent sales representatives, for the mass market. The photo channel includes specialty stores targeted at professional photographers and enthusiasts. OEMs consist of digital camera manufacturers and other private label resellers.

Our growth in the retail channel was a major factor in the significant growth in our product revenues during 2002. Increased sales into the retail market introduced an element of seasonality to our business that we had not experienced previously. For example, retail sales were very strong in the fourth quarter of 2002 due to seasonal consumer demand during the holidays.

We currently sell our products in the United States, Asia, Europe and other parts of the world, either directly, through our wholly owned subsidiaries located in Japan and the U.K., or through international distributors. We also market our products directly to end users through our website. In connection with the majority of our distributor sales, we pay commissions to independent contractors based upon the sales to their clients from our distributors.

To support our sales efforts, we conduct marketing programs designed to educate our target markets about the differences in digital media offerings. Our retail marketing programs include merchandising programs, in-store promotions, trade events and print advertising. We also support our marketing strategy by bundling our CompactFlash digital film with the digital cameras of OEMs such as Canon, Casio, Minolta, Nikon and Pentax.

We also sell and market our controllers to manufacturers of flash memory based products.

Customers

Our customers include retailers, distributors, OEMs and licensees. During 2002, gross revenues from two customers, Walmart and Wynit, each represented greater than 10% of our gross revenues.

During 2002, approximately 31.0% of our total net revenues were generated by customers outside the United States, including approximately 11.0% from Europe, 9.6% from Japan, 9.4% from Korea and 1.0% from others.

We protect some of our customers against the effects of price decreases on their inventories. Accordingly, if we reduce our prices, we pay certain distributors and consumer retailers for the difference between the price paid for the product still in their inventory and the new price. Additionally, we permit some of our customers to return limited amounts of products still in their inventory for credit or in exchange for new products. We also offer in-store and mail in rebates to end-users through some of our customers.

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Competition

We compete in an industry characterized by intense price competition, rapidly changing form factors and competitive conditions, evolving industry standards and rapid product obsolescence. Our competitors include many large semiconductor companies that have substantially broader product lines, greater financial and technical resources, vertical integration, and superior cost structures.

Our primary competitors sell flash cards into the same channels we do: mass market, photo and OEM channels. Some of these companies are manufacturers with both controller and flash memory capabilities, such as Samsung, SanDisk, Toshiba and Hitachi. Infineon has recently announced plans to manufacture and begin selling its own flash memory and flash cards in the second quarter of this year, and we believe that Micron, AMD, Intel and others may also working on products that will compete directly with our product offerings. Other companies, such as Matrix, are working on flash technologies that would replace today’s industry-standard NAND flash.

Our markets historically have not lent themselves to standardized definitions. Accordingly, our market data is not broken down in any standardized fashion. This is in part because our products involve rapidly evolving technologies, and because demand for our products is derivative of host technologies that are themselves evolving. As a result, we believe that market data is inconclusive as an indication of total sales or relative share. Lexar, by some estimates, is the second largest seller of flash cards through U.S. retail channels. According to some data, we hold a top vendor position in certain narrowly delineated categories, (such as measuring certain categories of U.S. retail sales) though we are unable to confirm these estimates or measurements. We do not have reliable total market data for international or OEM sales, which comprise a sizable part of our business. Other measures of market performance, such as by worldwide NAND flash sales, do not typically include us at all, though we have sales in these product categories. Performance measured in these categories may not be a meaningful predictor of future sales.

We believe the principal competitive factors in this market are performance, service and price, the technologies adopted in host devices, monetary exchange rates and other factors that affect demand for our products. We compete by offering premium products with superior performance and service, and competitive prices. We believe that the superior performance of products manufactured with our proprietary controller, such as our CompactFlash cards and JumpDrive products, is primarily related to their capability for higher sustained write speeds, which means that data can be written to the flash card more quickly. This is particularly important to enable users to capture multiple photos in quick succession or to write full motion video to a flash card. Our CompactFlash cards and JumpDrive products are also “USB-enabled” which means that USB capabilities are integrated directly into the controller and therefore allows a user to connect to a USB port using a passive wire rather than a more expensive reader. Many of our competitors are larger than we are and, because they manufacture their own controllers and flash memory, do not depend to the extent we do on third parties to supply them with those products. We believe that our supply relationship with Samsung, however, helps mitigate any manufacturing advantage our competitors may have.

An increasing number of companies are manufacturing their own controllers, including KTC, SanDisk, Silicon Storage Technologies (SST), Solid State System Co. Ltd. (3-S), and a number of other Taiwanese companies. Such companies either combine their controller with flash memory from third parties to manufacture their own flash cards or sell their controllers to third parties who use them to assemble flash cards. Additionally, major semiconductor companies such as Infineon, Hitachi, Samsung and Toshiba have also developed or are currently developing their own controllers that will likely compete with our controller and card sales.

We also face significant competition from manufacturers or card assemblers and resellers that either resell flash cards purchased from others or assemble cards from controllers and flash memory chips purchased from companies such as Hitachi or Toshiba, into flash cards. These companies, include Crucial, Dane-Elec, Delkin Devices, Eastman Kodak, Feiya Corporation, Fuji, Hagiwara, Hewlett Packard, I/O Data, Infineon, Kingston Technology, M-Systems, Matsushita, Memorex, Memory Plus, Micron, PNY, Pretec, PQI, Ritek, Samsung, Silicon Storage Technology, Silicon Tek, Simple Technology, SMART Modular Technologies, Sony, TDK, Transcend, Viking Components and many others.

Many companies have introduced USB Drives that compete directly with our JumpDrive line of products. These include Apacer, Belkin, Iomega, JM Tek, M-Systems, Netac, PenDrive, Samsung, SanDisk, Simple, Trek and many others.

Several companies have introduced competing technologies for use in digital cameras. These include products such as IBM’s MicroDrive. Although the cost per megabyte of rotating media such as the MicroDrive is lower than that of flash cards, rotating media has higher power consumption and lower reliability than flash cards. Compact discs can also be used as a storage medium for digital cameras and other devices, and, while inexpensive, are quite bulky.

Our competitors have also introduced additional flash card formats. For example, a consortium consisting of SanDisk, Matsushita and Toshiba have developed the Secure Digital Card, a media format used in digital cameras as well as in other electronic applications and Fuji and Olympus have introduced the xD Picture Card. Although we currently sell these products which we source from third parties, we do not manufacture them, and we may not be able to do so in the future at a reasonable rate or at all. If we are unable to obtain the rights to manufacture these products, our business will be adversely affected.

Technology

Our technology is the result of more than ten years of research and development. Our engineering group initially pioneered mass storage controller devices to work with magnetic devices. This expertise expanded into controllers for solid-state storage systems, and more specifically for flash memory. Solid-state storage systems have no moving parts. As of March 28, 2003, we had 62 patents granted or allowed in the United States or other countries, while an additional 89 remain pending in the United States Patent and Trademark

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Office and foreign jurisdictions. Most of our patents revolve around our core expertise in developing and designing a programmable controller and achieving system-level performance. We are actively pursuing companies which are marketing products that we believe infringe our patents.

Our patented system and circuit technology and proprietary Space Manager enable high write speed operations to the flash memory with minimal overhead. We achieve this in part by using our proprietary indirect mapping methodology, a technique for storing, accessing and erasing information within a flash device. We believe our high-speed technology provides a significant advantage when used in applications requiring large amounts of data to be transferred quickly, such as digital imaging and digital sound recordings. Our controllers integrate various digital and advanced analog modules by using proprietary tools. We believe our controller technology enables us to provide a high performance solution to our customers, while remaining cost-effective.

Our patented controller architecture also allows the controller’s operating software, which we refer to as firmware, to reside in the flash storage device. The firmware is downloaded into the controller’s internal random access memory for execution and can easily be upgraded using simple utilities. This feature allows us to reprogram the firmware for any specific host requirements, e.g. optimized firmware for digital cameras or other digital device. As a result, we provide digital film solutions with high-performance and low power consumption without physically altering the digital storage device.

Our USB-enabled CompactFlash digital film combined with our JumpShot cable enables users to transfer their digital images or data to or from the computer with ease at higher performance and lower cost than standard digital film reader/writers. Our JumpShot cable does not require the user to connect the camera to a computer, which avoids the drain on digital camera batteries caused by using the serial port or USB port of the digital camera to transfer digital images.

Our JumpDrive products enable a user to connect solid-state memory directly to the USB port of a computer or other device. Our JumpDrive 2.0 Pro incorporates our high-speed technology making it capable of operating at a sustained write speed of 40X, or 6 megabytes per second. Our JumpDrive Trio can connect a user’s Memory Stick, Secure Digital Card or MultiMedia Card directly to the USB port of a computer or other device.

Research and Development

We believe that in order to compete successfully, we must continually design, develop and introduce new products that take advantage of market opportunities and address emerging standards. As of March 1, 2003, we had a staff of 31 research, development and engineering personnel. In addition, we have, on occasion, engaged outside consultants to assist in the development of technologies to our specifications. We intend to continue this selective use of outside consultants in the future. During 2000, 2001 and 2002, we spent approximately $7.0 million, $5.6 million and $5.3 million, respectively, on research and development activities. The reduction in costs in 2002 compared to 2001 was due to our disposition of Printroom.com and was offset by increases related to employee and patent related costs. The reduction in costs in 2001 compared to 2000 was due primarily to our disposition of Printroom.com during the third quarter of 2001.

In addition, we endeavor to develop and maintain close relationships with key suppliers of components and technologies in order to enable us to quickly introduce new products that incorporate the latest technologies. We also frequently receive prototypes of digital camera models from manufacturers prior to their market introduction to ensure compatibility with our digital film. We have also worked with some digital camera manufacturers to optimize the performance of their digital camera when used with our digital film. We believe our relationships with digital camera manufacturers provide valuable insights into their current and future digital film requirements.

Manufacturing and Operations

We currently manufacture CompactFlash and Memory Stick, and are planning to expand into additional flash card formats in 2003. We also manufacture our JumpDrive products, our JumpShot reader and software for security and image recovery. We contract with an independent foundry and assembly and testing organizations to manufacture these flash card products. This allows us to focus on our design efforts, minimize fixed costs and capital expenditures and gain access to advanced manufacturing capabilities. We maintain a comprehensive quality testing program to help ensure that our products meet our quality standards. We also require that all subcontractors are ISO 9002 certified.

There are three major types of flash memory: NAND, AND and NOR. We use industry standard NAND flash memory. We currently purchase substantially all of our NAND flash memory from Samsung. Our controllers can also be configured to work with NAND flash memory produced by Toshiba, flash memory produced by Advanced Micro Devices and Fujitsu or AND flash memory produced by Hitachi. Our controller technology can also be applied to other proprietary types of flash memory or other solid-state storage devices. Infineon has recently announced that it will shortly be introducing a new type of flash memory called NROM.

United Microelectronics Corporation, or UMC, based in Taiwan, currently manufactures our controller chips. We have also qualified Taiwan Semiconductor Manufacturing Corporation, or TSMC, to produce our controller chips. Our flash cards are

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assembled at Venture Manufacturing Services, in Newark, California, Venture Manufacturing in Singapore and Bintan, Malaysia, Vitron in San Jose, California and PC Partner in China. Additionally, our controllers are assembled, tested and packaged primarily by Advanced Semiconductor Engineering, Inc. in Taiwan and Multitech Design & Test, Inc. in Sunnyvale, California.

We sell our products pursuant to standard purchase orders, which are officially acknowledged by us according to our standard terms and conditions. Due to industry practice, which allows customers to cancel or reschedule orders with limited advance notice to us prior to shipment without significant penalties, we believe that our backlog, while useful for scheduling production, is not a meaningful indicator of future sales.

We maintain significant levels of inventories to meet customer demand for products that we do not manufacture.

Employees

At March 1, 2003, we had 148 employees, of which 48 were employed in marketing and sales, 31 in research, development and engineering, 27 in operations and 42 in administration. These numbers include 9 part-time employees and consultants. Our continued success will depend, in part, on our ability to attract and retain skilled and motivated personnel. None of our employees is represented by labor unions. We believe that we have good relations with our employees.

Our corporate headquarters and principal operating facility are located in Fremont, California. Our headquarters is comprised of approximately 34,400 square feet and is the primary location for all our engineering, operations, administrative and worldwide sales and marketing functions. We occupy approximately 25,500 square feet of this facility under a lease that expires on December 31, 2003 and have an option to renew this lease for an additional five-year period. During the third quarter of 2001, as a result of restructuring our organization, we vacated approximately 8,500 square feet in our Fremont headquarters. This space was subsequently subleased during the first quarter of 2002. The sublease will expire on August 1, 2003. We believe that our offices in Fremont will be adequate to meet our needs for at least the next 12 months.

We also lease facilities in Woking, England, Tokyo, Japan and Boca Raton, Florida. We use our Woking, England office for sales, marketing and distribution operations under a lease that expires on December 21, 2005. We lease office space in Tokyo, Japan for sales, marketing and distribution operations. The lease for our Japan facility will expire in October 2003, after which the lease automatically converts to a month to month rental agreement. We lease approximately 2,200 square feet of office space in Boca Raton, Florida for product development activities. The lease for the Florida office expires on May 31, 2006.

Legal Proceedings.

Litigation Against Fuji, Memtek and PNY

On July 11, 2002, we filed a lawsuit in the United States District Court for the Eastern District of Texas against Fuji Photo Film USA, Memtek Products, Inc. and PNY Technologies Inc. for patent infringement. We alleged that the defendants infringe: U.S. Patent Nos. 5,479,638; 5,907,856; 5,930,815; 6,034,897; 6,134,151; 6,141,249; 6,145,051; and 6,262,918. We sought injunctive relief and damages against all defendants.

On November 4, 2002, we filed an amended complaint against Fuji Photo Film USA. In the amended complaint, we allege that Fuji Photo Film USA infringes U.S. Patent Nos. 5,479,638, 6,145,051, 6,262,918; 6,141,249; and 6,397,314 through the sale of its flash memory products and digital cameras. We are seeking injunctive relief and damages against Fuji. Memtek Products, Inc. and PNY Technologies, Inc. are no longer parties to this particular action. On December 9, 2002, Fuji filed an answer in which they seek declaratory relief that they do not infringe the five patents in suit as well as our U.S. Patent Nos. 6,134,151; 5,930,815; 5,907,856 and 6,034,897.

On January 8, 2003, the United States District Court for the Eastern District of Texas ordered this case transferred to the United States District Court for the Northern District of California where it is now pending. On March 11, 2003, the court held a status conference regarding scheduling but has not yet issued an order setting the case schedule. Discovery has commenced.

Litigation with Toshiba

On November 1, 2002, Toshiba Corporation filed a lawsuit seeking declaratory judgment that Toshiba does not infringe our U.S. Patent Nos. 5,479,638; 5,818,781; 5,907,856; 5,930,815; 6,034,897; 6,040,997; 6,134,151; 6,141,249; 6,145,051; 6,172,906; 6,202,138; 6,262,918; 6,374,337; and 6,397,314 or that these patents are invalid. This suit was filed in the United States District Court for the Northern District of California. We believe that Toshiba’s claims are without merit and intend to contest this lawsuit vigorously.

On November 21, 2002, we filed an answer and counterclaim in which we alleged that Toshiba infringed our U.S. Patent Nos. 5,818,781; 5,907,856; 5,930,815; 6,034,897; 6,040,997; 6,134,151; 6,172, 906; 6,202,138; and 6,374,337. We seek an injunction and damages against Toshiba.

On December 20, 2002, Toshiba filed its first amended complaint in which Toshiba dropped its allegations that our patents are unenforceable.

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On February 28, 2003, we filed an answer and our first amended counterclaim against Toshiba for infringement of our U.S. Patent Nos. 5,479,638; 5,818,781; 5,907,856; 5,930,815; 6,034,897; 6,040,997; 6,134,151; 6,141,249; 6,145,051; 6,172,906; 6,202,138; 6,262,918; 6,374,337; and 6,397,314. We are seeking damages as well as an injunction against Toshiba for its products that infringe our patents, including its flash memory chips, flash cards and digital cameras. On March 11, 2003, the court held a status conference regarding scheduling but has not yet issued an order setting the case schedule. Discovery has commenced.

On November 4, 2002, we filed a lawsuit against Toshiba Corporation, Toshiba America, Inc. and Toshiba America alleging theft of trade secrets and breach of fiduciary duty. The basis of the allegations is that since our inception in 1996, and including the period from 1997 through 1999 when Toshiba was represented on our Board of Directors, Toshiba had access to and was presented with details of our methods of achieving high performance flash devices that Toshiba has now incorporated into its flash chips and flash systems. This lawsuit is pending in Santa Clara County Superior Court. We are seeking damages as well as an injunction against Toshiba. We have filed a description of our trade secrets and discovery has commenced.

On January 13, 2003, Toshiba Corporation filed a lawsuit against us in the United States District Court for the Northern District of California, alleging that we infringe U.S. Patent Nos. 6,145,023; 5,546,351; 5,724,300; 5,793,696; 5,946,231; 5,986,933; 6,292,850; and 6,338,104. On February 7, 2003, Toshiba Corporation filed an amended complaint and now alleges that we infringe U.S. Patent Nos. 5,546,351; 5,724,300; 5,793,696; 5,946,231; 5,986,933; 6,094,697; 6,292,850; 6,338,104; and 5,611,067. In this action, Toshiba Corporation seeks injunctive relief and damages. Toshiba’s patents appear to primarily relate to flash components that we purchase from vendors who provide us with indemnification. On March 5, 2003, we filed an answer in which we seek a judgment that we do not infringe these patents or that they are invalid or unenforceable. We believe that Toshiba’s claims are without merit and intend to contest this lawsuit vigorously. On March 11, 2003, the court held a status conference regarding scheduling but has not yet issued an order setting the case schedule.

Litigation with SimpleTech, Inc.

On October 1, 2002, SimpleTech, Inc. filed a lawsuit against us in Orange County Superior Court alleging trade libel, libel per se, intentional interference with prospective economic advantage, California unfair competition, violation of the California Unfair Trade Practices Act, violation of the Sherman Antitrust Act, and violation of common law unfair competition. SimpleTech’s lawsuit arose from correspondence between ourselves and SimpleTech and one of its customers regarding our belief that certain of SimpleTech’s products infringe our patents. SimpleTech is seeking damages, including treble damages under its Sherman Act claim, punitive damages, and injunctive relief. On October 30, 2002, we removed this case to federal court. It is now pending in the United States District Court for the Central District of California, in Santa Ana.

On November 6, 2002, we filed a motion to dismiss SimpleTech’s complaint. On November 14, 2002, SimpleTech amended its complaint. On December 4, 2002, we filed a motion to dismiss SimpleTech’s amended complaint. On January 8, 2003, the Court ordered that SimpleTech’s claims under the California Unfair Trade Practices Act, the Sherman Antitrust Act, and common law unfair competition be dismissed. On January 27, 2003, the judge dismissed the remainder of SimpleTech’s complaint for lack of prosecution. On January 31, 2003 SimpleTech sought to reinstate its complaint. On February 14, 2003, the Court agreed to set aside its dismissal after imposing a monetary sanction on SimpleTech. On March 20, 2003, we filed an answer and counterclaim for patent infringement. In our counterclaim, we allege that Simple’s sale of flash memory products infringes our U.S. Patent No. 5,479,638. We are seeking damages as well as an injunction against Simple. A scheduling conference is currently set for May 5, 2003.

We believe that SimpleTech’s lawsuit is without merit and intend to vigorously defend ourselves in this matter.

Litigation Against Pretec, PNY, Memtek and C-One

On December 22, 2000, we sued Pretec Electronics Corporation and PNY for patent infringement. We sued Pretec and PNY on the basis of four patents: U.S. Patent Nos. 5,818,781; 5,907,856; 5,930,815; and 6,145,051. The suit is pending in the United States District Court for the Northern District of California. We are seeking injunctive relief and damages against all defendants.

On April 13, 2001, we filed an amended complaint in our litigation with Pretec, naming Memtek as an additional defendant. On June 26, 2001, the Court allowed us to file our second amended complaint in our litigation with Pretec, naming C-One as an additional defendant and adding our U.S. Patent No. 5,479,638 against all of the defendants. In this action we allege that Memtek and the other defendants infringe our U.S. Patent Nos. 5,479,638, 5,818,781, 5,907,856, 5,930,815 and 6,145,051. This suit is pending in the United States District Court for the Northern District of California. We are seeking injunctive relief and damages against all of the defendants. On March 11, 2003, the court held a status conference regarding scheduling but has not yet issued an order setting the case schedule. Discovery has commenced.

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Not applicable.

The following table presents information concerning our executive officers as of March 1, 2003.

Petro Estakhri has served as our Chief Technology Officer since April 1999 and as our Executive Vice President, Engineering since August 1997. Mr. Estakhri has served as one of our directors since August 1997, and was the Chairman of our board of directors from August 1997 through June 2001. Mr. Estakhri also served as our Vice President, Systems from September 1996 to August 1997. From January 1993 to August 1996, Mr. Estakhri served as the Senior Director of Mass Storage Controller Engineering at Cirrus Logic, a supplier of semiconductors for Internet entertainment electronics. Mr. Estakhri is a co-author of many patents related to magnetic media, flash storage controller and systems architecture. Mr. Estakhri holds a B.S. and an M.S. in electrical and computer engineering from the University of California at Davis.

Eric B. Stang has served as our Chief Executive Officer since June 2001, as our Chief Operating Officer from November 1999 through June 2001 and as a director since January 2000. From June 1998 to November 1999, Mr. Stang was Vice President and General Manager of the Radiation Therapy Products Division of ADAC Laboratories, a medical equipment and software company. From January 1995 to May 1998, he was Director of Operations at Raychem Corporation, a material science company. Mr. Stang holds a B.A. in economics from Stanford University and an M.B.A. from the Harvard Business School.

Michael J. Perez has served as our Vice President, Finance and Chief Financial Officer since July 2001. From July 1999 to July 2001, Mr. Perez was the Vice President of Finance of the Monterey Bay Aquarium. From April 1982 to July 1999, Mr. Perez served as the Vice President of Finance at various technology companies including O.R. Technology, Sydis, Symantec and Syquest Technology. Mr. Perez holds a B.S. in accounting from San Jose State University and an M.B.A. from the University of Santa Clara.

Eric S. Whitaker has served as our Vice President, Technology Licensing since November 2000 and as our General Counsel and Secretary since April 2000. Mr. Whitaker previously served as our Director of Legal Affairs from December 1999 until April 2000. From October 1995 to December 1999, Mr. Whitaker was in private law practice with Latham & Watkins. Mr. Whitaker holds a B.A. in politics from Princeton University and a J.D. from Stanford Law School.

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PART II