SIMPLE TECHNOLOGY INC, 424B4, 2000-09-29

SIMPLE TECHNOLOGY INC
424B4, 2000-09-29
COMPUTER STORAGE DEVICES

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<PAGE>
PROSPECTUS

6,364,000 SHARES

[LOGO]

COMMON STOCK

------------------------------------------------------------

This is our initial public offering of common stock. We are offering
6,364,000 shares of common stock. No public market currently exists for our
shares.

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "STEC."

INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 9.

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $11.00 $70,004,000
Underwriting Discount....................................... $ 0.77 $ 4,900,280
Proceeds to Simple Technology............................... $10.23 $65,103,720
</TABLE>

We have granted the underwriters a 30-day option to purchase up to 954,600
additional shares of common stock on the same terms and conditions as set forth
above to cover over-allotments, if any.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Lehman Brothers, on behalf of the underwriters, expects to deliver the
shares on or about October 4, 2000.

--------------------------------------------------------------------------------

LEHMAN BROTHERS

BANC OF AMERICA SECURITIES LLC

FIDELITY CAPITAL MARKETS

a division of National Financial
Services LLC

September 29, 2000
<PAGE>
INSIDE FRONT COVER

Across the top of the page is the phrase "DRAM Memory Modules." In the
center of the page is a large picture of a circuit board with stacked memory
modules. The three pictures around the large center picture of the circuit board
depict: (1) a close up of stacked memory modules; (2) equipment used in
manufacturing or testing of the memory modules with the phrase "One of our
assembly machines" appearing below; and (3) an engineer examining a computer
monitor showing a schematic of a memory module with the phrase "The module
design process" appearing below. The Simple Technology logo appears in the upper
right corner of the page.

INSIDE GATEFOLD

<S> <C>
Inside Gatefold Across the top of the page is the phrase "Flash Cards." The
Left Page: phrase "Our Flash cards are used in these types of products
which are available from other manufacturers" appears below.
Under the label "Flash Cards," there are pictures of a Flash
storage card and a CompactFlash-TM- card, both branded with
the Simple Technology logo. To the right is a picture of a
digital camera with the phrase "Digital Cameras" appearing
below. On the lower right of the page is a picture of an MP3
digital audio player with the phrase "MP3 Digital Audio
Players" appearing above. On the lower left of the page is a
picture of a personal digital assistant with the phrase
"Personal Digital Assistants (PDAs)" appearing to the right.
The Simple Technology logo appears in the lower right corner
of the page.

Inside Gatefold The Simple Technology logo is at the center of the page.
Right Page: Above the logo are the words "Engineering," "Manufacturing"
and "Testing," accompanied by three pictures: (1) an
engineer at a computer workstation; (2) a factory worker on
the manufacturing or testing lines; and (3) two engineers
handling a memory card while engaged in a discussion. A
caption superimposed over the first two pictures reads, "The
product design and testing process." A caption superimposed
on the third picture reads, "One of our production lines."

To the right of the logo are the words "Memory," "Flash" and
"Solid State Devices," accompanied by two pictures. The
first picture depicts a circuit board with memory modules
and the second picture depicts a Simple Technology
CompactFlash-TM- card.

Below the logo is the phrase "Worldwide Support & Sales,"
accompanied by three pictures and an image of a globe. The
pictures depict: (1) the Simple Technology sales force at
work; (2) a sales or service employee on the phone and
another sales or service employee in the background; and (3)
Simple Technology's headquarters.
</TABLE>
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary..................... 4
Risk Factors........................... 9
Forward-Looking Statements............. 19
S Corporation Status and Conversion.... 20
Use of Proceeds........................ 23
Dividend Policy........................ 23
Capitalization......................... 25
Dilution............................... 26
Selected Consolidated Financial Data... 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 29
</TABLE>

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Business............................... 42
Management............................. 63
Certain Transactions................... 77
Principal Shareholders................. 82
Description of Capital Stock........... 84
Shares Eligible for Future Sale........ 87
Underwriting........................... 89
Legal Matters.......................... 92
Experts................................ 92
Where You Can Find Additional
Information.......................... 92
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful.

Until October 23, 2000, all dealers selling shares of our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

In this prospectus, "Simple Technology," "we," "us" and "our" refer to
Simple Technology, Inc., a California corporation, and our subsidiaries.

This prospectus includes statistical data regarding our company and the
industries in which we compete. These data are based on our records taken or
derived from information published or prepared by various sources, including
Dataquest. Market data used throughout this prospectus relating to our relative
position in our industry are based upon industry sources and the good faith
estimates of our management, based upon relevant information known to them.

We own or have rights to product names, trade names and trademarks that we
use in conjunction with the sale of our products, including
Simple-Registered Trademark-, Simple Technology-Registered Trademark-,
SiliconTech-TM-, IC Tower-TM- and CompactFlash-TM-. The CompactFlash Association
makes the CompactFlash name and logo available royalty-free to member companies.
References in this prospectus to CompactFlash are references only to our
products unless otherwise indicated. This prospectus also contains other product
names, trade names and trademarks that belong to other organizations.

3
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION WE PRESENT MORE FULLY ELSEWHERE
IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF
THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS DESCRIBED UNDER THE
HEADING "RISK FACTORS" AND IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.

OUR COMPANY

Simple Technology is an independent provider of standard and custom memory
solutions, with products based on dynamic random access memory, or DRAM, static
random access memory, or SRAM, and Flash memory technologies, such as
CompactFlash. We design, manufacture and market a comprehensive line of over
2,500 memory and storage products, as well as connectivity products that connect
memory cards and hard drive upgrade kits to PCs. These products are used in high
performance computing, networking and communications, consumer electronics and
industrial applications. We believe our comprehensive line of products allows
our customers to efficiently manage their inventory purchases by consolidating
their sources for memory, storage and connectivity products. Our patented IC
Tower stacking technology allows multiple memory chips to be stacked together to
increase the capabilities of memory modules without increasing the product
footprint. Our CompactFlash cards provide portable digital devices, such as
digital cameras and MP3 digital audio players, with increased storage
capabilities in a smaller size product. Our Original Equipment Manufacturer, or
OEM, Division, known as SiliconTech, primarily sells custom memory products for
newly manufactured systems. Our Aftermarket Division primarily sells standard
and custom memory and storage products which are mainly used as upgrades to
existing systems.

The demand for memory products in digital electronic systems has been
growing rapidly. The development of high performance PCs and servers and the
evolution of Internet infrastructure have increased the demand for greater
capabilities in the storage, manipulation, transfer and management of digital
data. According to Dataquest, the worldwide market for DRAM is expected to grow
at a compound annual growth rate of 48.7% from $23.1 billion in 1999 to
$76.0 billion in 2002, the worldwide market for SRAM is expected to grow at a
compound annual growth rate of 13.6% from $4.5 billion in 1999 to $6.6 billion
in 2002 and the worldwide market for Flash memory is expected to grow at a
compound annual growth rate of 19.7% from $3.9 billion in 1999 to $8.0 billion
in 2003.

As a result of increased demand for consumer electronics and high density
memory products used in Internet infrastructure and embedded applications, the
percentage of our revenues derived from the sale of Flash memory and IC Tower
stacking products increased from 13.0% in 1998 to 20.8% in 1999 and 33.2% in the
first half of 2000. In 1999 and the first half of 2000, our highest profit
margin products were our IC Tower stacking products. We believe that Flash
memory and high density memory products will continue to represent an increasing
percentage of our product mix as demand for these applications expands.

As product development times shorten and the ability of manufacturers to
bring products to market quickly becomes more critical in product adoption and
success, OEMs are increasingly outsourcing the design, development and
manufacture of memory products to third-party memory providers. We believe our
technical capabilities and volume manufacturing strengths allow our OEM Division
customers to cost-effectively design and implement customized, advanced memory
chip technology in high volume product applications. In addition, we believe our
design, manufacturing, testing and logistics expertise, along with our
proprietary technologies, enable us to respond to our customers' rapidly
changing product and service requirements by providing our customers with timely
access to higher speed and higher density memory products, increasing our
customers' ability to bring

4
<PAGE>
products to market quickly, and decreasing our customers' capital requirements
and production and inventory costs.

Our goal is to be a worldwide leader in the design, manufacture and
marketing of standard and custom memory solutions. The following are key
elements of our strategy:

- Expand and broaden our product line;

- Maintain and extend our technological and engineering expertise;

- Increase and expand our sales and marketing efforts;

- Increase our manufacturing efficiencies;

- Further penetrate international markets; and

- Pursue acquisitions of complementary businesses and technologies.

We cannot assure you that we will be able to achieve our business objectives
in the face of a variety of risks as summarized under "Risk Factors."

In the first half of 2000, our principal direct OEM Division customers
included Alcatel, Cisco Systems, Motorola, Silicon Graphics and Unisys. In 1999,
our principal direct OEM Division customers included Dell Products, Mitsubishi,
Motorola, Unisys and Xerox. In the first half of 2000, our principal Aftermarket
Division customers included CDW Computer Centers, Costco Wholesale, Ingram
Micro, PC Connection and Synnex Information Technologies. In 1999, our principal
Aftermarket Division customers included Avnet Computer, CDW Computer Centers,
Costco Wholesale, Ingram Micro and Micro Warehouse. Other than CDW Computer
Centers, no customer accounted for more than 10.0% of our total revenues in 1999
or in the first half of 2000.

CORPORATE INFORMATION

Simple Technology, Inc. was incorporated in California in March 1990. Our
principal executive offices are located at 3001 Daimler Street, Santa Ana,
California 92705-5812. Our telephone number is (949) 476-1180. Our website is
located at www.simpletech.com. INFORMATION CONTAINED ON OUR WEBSITE IS NOT PART
OF THIS PROSPECTUS.
------------------------

UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT:

- EACH SHARE OF OUR COMMON STOCK HAS BEEN SPLIT ON A 5.07 FOR 1 BASIS;

- THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION TO PURCHASE
UP TO 954,600 ADDITIONAL SHARES OF OUR COMMON STOCK;

- OUR S CORPORATION STATUS UNDER SUBCHAPTER S OF THE INTERNAL REVENUE CODE
WAS TERMINATED AS OF SEPTEMBER 26, 2000;

- ON SEPTEMBER 26, 2000, WE ISSUED UNDISTRIBUTED EARNINGS NOTES TO OUR
SHAREHOLDERS OF RECORD AS OF SEPTEMBER 20, 2000 IN AN AGGREGATE PRINCIPAL
AMOUNT EQUAL TO OUR UNDISTRIBUTED EARNINGS FROM THE DATE OF OUR FORMATION
THROUGH SEPTEMBER 26, 2000;

- ON SEPTEMBER 26, 2000, WE ISSUED ADDITIONAL PAID-IN CAPITAL NOTES TO OUR
SHAREHOLDERS OF RECORD AS OF SEPTEMBER 20, 2000 IN AN AGGREGATE PRINCIPAL
AMOUNT OF $3.0 MILLION, REPRESENTING ADDITIONAL PAID-IN CAPITAL THAT THEY
INVESTED PREVIOUSLY; AND

- UPON THE COMPLETION OF THIS OFFERING, WE WILL USE A PORTION OF THE NET
PROCEEDS FROM THIS OFFERING TO PAY OFF THE UNDISTRIBUTED EARNINGS NOTES
AND THE ADDITIONAL PAID-IN CAPITAL NOTES HELD BY OUR SHAREHOLDERS OF
RECORD AS OF SEPTEMBER 20, 2000.

------------------------

5
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common stock offered by Simple Technology......... 6,364,000 shares
Common stock to be outstanding after the 37,572,667 shares
offering........................................
Use of proceeds................................... We intend to use a portion of the net proceeds
from this offering for the payment of amounts
outstanding at the completion of this offering
under our line of credit and the payment of the
undistributed earnings notes and additional
paid-in capital notes held by our shareholders
of record as of September 20, 2000. We intend to
use the balance of the net proceeds for working
capital and general corporate purposes. See "Use
of Proceeds."
Nasdaq National Market symbol..................... STEC
</TABLE>

The number of shares of common stock to be outstanding after this offering
is based upon 31,208,667 shares of common stock outstanding as of September 28,
2000 and the 6,364,000 shares of common stock being sold by us in this offering,
and excludes:

- 6,425,365 shares of common stock reserved for future issuance under our
2000 Stock Incentive Plan, which amount includes 2,771,421 shares of
common stock issuable upon exercise of stock options outstanding as of
September 28, 2000 under our 1996 Stock Option Plan at a weighted average
exercise price of $1.08 per share and 3,454,000 shares of common stock
issuable upon exercise of stock options which we granted on September 28,
2000 to our employees and consultants, other than our Chief Executive
Officer, President and Chief Operating Officer, at an exercise price per
share equal to the initial public offering price of $11.00.

- 360,000 shares of common stock reserved for future issuance under our 2000
Employee Stock Purchase Plan; and

- Up to 954,600 shares of common stock to be sold by us if the underwriters
exercise their over-allotment option in full, as described in
"Underwriting."

Our 1996 Stock Option Plan will be succeeded by our 2000 Stock Incentive
Plan upon the completion of this offering. You should read the discussion under
"Management--Stock Plans/ Employee Compensation Programs" for additional
information concerning our 2000 Stock Incentive Plan and our 2000 Employee Stock
Purchase Plan.

6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables set forth summary consolidated financial data for
Simple Technology. The historical results presented are not necessarily
indicative of future results. The summary consolidated balance sheet data as of
June 30, 2000 and consolidated statement of operations data for the six months
ended June 30, 2000 and 1999 were derived from our unaudited financial
statements and, in the opinion of management, reflect and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such results. The summary consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues........................... $206,756 $163,716 $159,088 $122,288 $192,593 $83,278 $132,647
Cost of revenues....................... 181,595 137,442 131,094 97,930 152,743 68,351 103,237
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........................... 25,161 26,274 27,994 24,358 39,850 14,927 29,410
Total operating expenses............... 13,832 22,920 26,905 24,901 25,737 12,304 17,238
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations.......... 11,329 3,354 1,089 (543) 14,113 2,623 12,172
Interest and other expense, net........ 1,997 1,473 1,713 1,597 2,128 971 805
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes........... 9,332 1,881 (624) (2,140) 11,985 1,652 11,367
Provision (benefit) for income taxes... 133 (201) 2 23 (518) (71) 175
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...................... $ 9,199 $ 2,082 $ (626) $ (2,163) $ 12,503 $ 1,723 $ 11,192
========== ========== ========== ========== ========== ========== ==========

PRO FORMA DATA(1):
Income (loss) before provision
(benefit) for income taxes........... $ 9,332 $ 1,881 $ (624) $ (2,140) $ 11,985 $ 1,652 $ 11,367
Pro forma provision (benefit) for
income taxes......................... 3,546 715 (237) (813) 4,554 628 4,319
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)............ $ 5,786 $ 1,166 $ (387) $ (1,327) $ 7,431 $ 1,024 $ 7,048
========== ========== ========== ========== ========== ========== ==========
Pro forma net income (loss) per
share(2)
Basic................................ $ 0.19 $ 0.04 $ (0.01) $ (0.04) $ 0.24 $ 0.03 $ 0.23
Diluted.............................. $ 0.19 $ 0.04 $ (0.01) $ (0.04) $ 0.23 $ 0.03 $ 0.21
Weighted average shares outstanding(2)
Basic................................ 30,601,027 30,601,027 30,601,027 30,601,027 30,601,027 30,601,027 30,601,027
Diluted.............................. 30,601,027 30,601,027 30,601,027 30,601,027 32,657,993 31,924,155 33,360,582

SUPPLEMENTAL PRO FORMA DATA(3):
Supplemental pro forma net income...... $ 8,260 $ 7,427
========== ==========
Supplemental pro forma net income per
share
Basic................................ $ 0.26 $ 0.22
Diluted.............................. $ 0.24 $ 0.21

Supplemental pro forma weighted average
shares outstanding
Basic................................ 32,199,874 33,181,357
Diluted.............................. 34,256,840 35,940,912
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
-------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 23 $ 23 $20,015
Working capital............................................. 36,245 17,803 57,381
Total assets................................................ 75,282 76,031 96,022
Long-term portion of debt and capital
lease obligations......................................... 25,646 25,646 2,371
Total shareholders' equity.................................. 19,355 98 62,952
</TABLE>

------------------------------

7
<PAGE>
income taxes. Pro forma net income (loss) has been computed as if we had
been fully subject to federal and state income taxes as a C corporation for
all periods presented. We terminated our S corporation status as of
September 26, 2000, after which time we are required to pay federal and
state corporate-level income taxes as a C corporation. See "S Corporation
Status and Conversion," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and note 13 of the notes to our
consolidated financial statements.

(2) Reflects a 5.07 for 1 stock split of our common stock on September 8, 2000.
All share and per share amounts have been adjusted to give retroactive
effect to the stock split.

(3) Reflects the pro forma sale of 1,134,425 shares as of December 31, 1999 and
2,115,908 shares as of June 30, 2000 of our common stock at the initial
public offering price of $11.00 per share. Such shares solely represent the
amounts necessary to pay down our existing line of credit, which
indebtedness amounted to $12.5 million at December 31, 1999 and
$23.3 million at June 30, 2000. Supplemental pro forma net income reflects
the pro forma elimination of interest expense related to this line of
credit, net of federal and state corporate-level income taxes, equal to
$829,000 for the year ended December 31, 1999 and $379,000 for the six
months ended June 30, 2000. In addition, the weighted average shares
outstanding for the year ended December 31, 1999 and the six month period
ended June 30, 2000 include a computational increase of 464,422 shares
sufficient to cover the excess of pro forma distributions to shareholders
calculated as of June 30, 2000, compared to the Company's pro forma net
income for the period from January 1, 1999 through June 30, 2000. Refer to
Note 2 of the notes to the consolidated financial statements, "pro forma as
adjusted data" caption.

(4) Adjusted to reflect our payment of the undistributed earnings notes held by
our shareholders of record as of September 20, 2000 in the aggregate
principal amount equal to our undistributed earnings from the date of our
formation through June 30, 2000, equal to approximately $16.6 million,
including a net increase in net deferred income tax assets of approximately
$330,000 assuming our S corporation status terminated on June 30, 2000 and
our payment of the additional paid-in capital notes in an aggregate
principal amount of $3.0 million. See "S Corporation Status and Conversion."

(5) As adjusted to reflect the sale of 6,364,000 shares of common stock by us at
the initial public offering price of $11.00 per share, and the application
of the estimated net proceeds from this offering as described under "Use of
Proceeds."

8
<PAGE>
RISK FACTORS

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE RISK FACTORS DESCRIBED BELOW, AND ALL OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON
STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE INTENDED TO BE THE
MATERIAL RISKS THAT ARE SPECIFIC TO US, TO OUR INDUSTRY OR TO COMPANIES GOING
PUBLIC. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS COULD BE HARMED. THIS COULD CAUSE THE TRADING PRICE OF
OUR COMMON STOCK TO DECLINE, AND YOU MIGHT LOSE PART OR ALL OF YOUR INVESTMENT.

RISKS RELATED TO OUR BUSINESS

DECLINES IN OUR AVERAGE SALES PRICES MAY RESULT IN DECLINES IN OUR GROSS
MARGINS.

During 1998, production overcapacity in the memory product market caused the
prices of our memory products to decline, which negatively impacted our
revenues, gross margins and profitability. In addition, declines in
semiconductor prices could affect the valuation of our inventory which could
harm our business. We expect production overcapacity will reoccur in the future.
Our ability to maintain or increase revenues will depend upon our ability to
increase unit sales volumes of existing products and to introduce and sell new
products in quantities sufficient to offset anticipated declines in sales
prices. Our efforts to reduce costs and develop new products to offset the
impact of further declines in average sales prices may not be successful.
Declines in average sales prices also would result in more memory being built
into products by original equipment manufacturers, or OEMs, which would favor
our largest competitors and reduce the demand for our aftermarket memory
products.

BECAUSE WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR IC DEVICES, ANY DISRUPTION
IN OUR SUPPLY RELATIONSHIPS COULD HARM OUR ABILITY TO FULFILL ORDERS.

We have no long-term supply contracts and are dependent on a small number of
suppliers to supply integrated circuit, or IC, devices which represent
approximately 95% of our component costs. Our dependence on a small number of
suppliers and our lack of long-term supply contracts expose us to several risks,
including the inability to obtain an adequate supply of components, price
increases, late deliveries and poor component quality. Hitachi Semiconductor
(America) Inc. supplies substantially all of the IC devices used in our Flash
memory products. In addition, Hitachi Semiconductor (America) Inc., Hyundai
Electronics America, Inc., NEC Electronics, Inc. and Samsung Semiconductor, Inc.
currently supply a majority of the dynamic random access memory, or DRAM, IC
devices used in our DRAM memory products. A disruption in or termination of our
supply relationship with any of these significant suppliers by natural disaster
or otherwise, or our inability to develop relationships with new suppliers, if
required, would cause delays, disruptions or reductions in product shipments or
require product redesigns which could damage relationships with our customers,
and would increase our costs and/or prices. In particular, if our supply
relationship with Hitachi Semiconductor (America) Inc. is disrupted or
terminated, our ability to manufacture and sell our Flash products would be
limited and our Flash business would be adversely affected. See
"Business--Suppliers."

WE MAY BE UNABLE TO MAINTAIN A STEADY SUPPLY OF COMPONENTS.

The electronics industry has experienced in the past, and may experience in
the future, shortages in IC devices, including DRAM, static random access
memory, or SRAM, and Flash memory. We have experienced and may continue to
experience delays in component deliveries and quality problems which have caused
and could in the future cause delays in product shipments and have required and
could in the future require the redesign of some of our products. In addition,
industry capacity has, from time to time, become constrained such that some
vendors which supply components for our products have placed their customers,
ourselves included, on allocation. This means that while we may have customer
orders, we may not be able to obtain the materials that we need to fill those
orders in a timely manner. See "Business--Suppliers."

9
<PAGE>
SALES TO A SMALL NUMBER OF CUSTOMERS REPRESENT A SIGNIFICANT PORTION OF OUR
REVENUES AND THE LOSS OF ANY KEY CUSTOMER WOULD MATERIALLY REDUCE OUR SALES.

Our dependence on a small number of customers means that the loss of a major
customer or any reduction in orders by a major customer would materially reduce
our sales. Historically, a relatively small number of customers have accounted
for a significant percentage of our revenues. Our ten largest OEM Division
customers accounted for an aggregate of 77.0% of our OEM Division revenues or
27.7% of our total revenues in the first half of 2000 and 75.4% of our OEM
Division revenues or 19.4% of our total revenues in 1999. No OEM Division
customer accounted for more than 10.0% of our total revenues in the first half
of 2000 or 1999. Our ten largest Aftermarket Division customers accounted for an
aggregate of 50.1% of our Aftermarket Division revenues or 32.1% of our total
revenues in the first half of 2000 and 47.6% of our Aftermarket Division
revenues or 35.3% of our total revenues in 1999. Our largest Aftermarket
Division customer, CDW Computer Centers, Inc., accounted for 30.0% of our
Aftermarket Division revenues or 19.2% of our total revenues in the first half
of 2000 and 26.1% of our Aftermarket Division revenues or 19.4% of our total
revenues in 1999. Consolidation in some of our customers' industries may result
in increased customer concentration and the potential loss of customers as a
result of acquisitions. In addition, the composition of our major customer base
changes from quarter to quarter as the market demand for our customers' products
changes and we expect this variability will continue in the future. We expect
that sales of our products to a small number of customers will continue to
contribute materially to our revenues in the foreseeable future and believe that
our financial results will depend in significant part upon the success of our
customers' products. See "Business--Customers."

THREE OF OUR BENEFICIAL SHAREHOLDERS HAVE SUBSTANTIAL INFLUENCE OVER OUR
OPERATIONS AND CAN SIGNIFICANTLY INFLUENCE MATTERS REQUIRING SHAREHOLDER
APPROVAL.

Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director of Simple Technology, are brothers and will
beneficially own approximately 81.4% of our common stock following the
completion of this offering, or approximately 79.4% if the underwriters'
over-allotment option is exercised in full. As a result, they will have the
ability to control all matters requiring approval by our shareholders, including
the election and removal of directors, approval of significant corporate
transactions and the ability to control the decision of whether a change in
control will occur. See "Principal Shareholders."

SHAREHOLDERS OF RECORD AS OF SEPTEMBER 20, 2000 WILL RECEIVE MATERIAL BENEFITS
IN CONNECTION WITH THIS OFFERING.

Shareholders of record as of September 20, 2000 will receive a portion of
the net proceeds from this offering upon our payment of the undistributed
earnings notes in an amount equal to our undistributed earnings from the date of
our formation through September 26, 2000. As of June 30, 2000, the aggregate
principal amount of these notes would have been approximately $16.6 million. The
actual principal amount of the undistributed earnings notes will be increased by
the amount of our earnings from July 1, 2000 through September 26, 2000, less
distributions made to our shareholders during such period. In addition, upon
completion of this offering, our shareholders of record as of September 20, 2000
will also receive $3.0 million of the net proceeds from this offering upon our
payment of the additional paid-in capital notes. See "S Corporation Status and
Conversion."

WE ARE INVOLVED FROM TIME TO TIME IN CLAIMS AND LITIGATION OVER INTELLECTUAL
PROPERTY RIGHTS, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND SELL
OUR PRODUCTS.

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have received, and may continue to receive in the future, notices that claim we
have infringed upon, misappropriated or misused other parties' proprietary
rights, which claims could result in litigation. Such litigation would likely
result in significant expense to us and divert the efforts of our technical and
management personnel. In the event of an adverse result in such litigation, we
could be required to pay substantial damages, cease the manufacture, use and
sale of certain products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to use
the infringed technology. Such a license may not be available on commercially
reasonable terms, if at all. Our failure to obtain a license or our failure to
obtain a license on commercially reasonable terms could cause us to incur
substantial costs and suspend manufacturing products using the infringed
technology. If we obtain a license, we would likely be required to make royalty
payments for sales under the license. Such payments would increase our costs of
revenues and reduce our gross profit.

We are currently a party to two lawsuits regarding intellectual property as
described below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Legal Proceedings" and "Business--Legal
Proceedings." The outcome of litigation is inherently uncertain and we cannot
predict the outcome of these lawsuits with certainty. These lawsuits have
diverted, and are expected to continue to divert, the efforts and attention of
our key management and technical personnel. In addition, we have incurred, and
expect to continue to incur, substantial legal fees and expenses in connection
with these lawsuits. As a result, our defense of these lawsuits, regardless of
their eventual outcomes, has been, and will continue to be, costly and time
consuming. In addition, if our IC Tower stacking patent is found to be invalid,
our ability to exclude competitors from making, using or selling the same or
similar products to our IC Tower stacking products would cease. In addition, if
we are found to infringe valid patents of others, we may be excluded from using
the infringed technology without a license, which may not be available on
commercially reasonable terms, if at all.

SUCCESS BY INTERACTIVE FLIGHT TECHNOLOGIES AND AVNET IN THEIR LAWSUIT AGAINST US
RELATING TO OUR SALE OF ALLEGEDLY DEFECTIVE PRODUCTS WOULD HARM OUR BUSINESS.

On August 18, 2000, the court entered a ruling granting Avnet's motion for
summary judgment requiring us to indemnify Avnet for damages and attorneys' fees
incurred by Avnet in its defense of Interactive Flight's lawsuit. On
September 1, 2000, the court entered a ruling in favor of Avnet and us by
granting our joint motion for partial summary judgment against Interactive
Flight. The effect of this ruling is to ban Interactive Flight from pursuing
claims for either incidental or consequential damages against Avnet and us. It
is possible that this ruling may be reversed if Interactive Flight decides to
file a motion for reconsideration or appeal. On September 13, 2000, the court
granted a motion for summary judgment in favor of Bell Microsystems and against
us, effectively eliminating our claim against Bell Microsystems for
indemnification. Trial began on September 26, 2000.

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We are the beneficiary of a potential insurance claim against the Chubb
Group based on a $2.0 million policy of insurance originally issued to Integral
and assigned to us as part of a settlement reached in Integral's bankruptcy
proceedings. Such policy applies only to property damage. To date, Chubb has
denied our claims under the policy.

In connection with this lawsuit, we have incurred, and expect to continue to
incur, substantial legal fees and expenses. This lawsuit has diverted, and is
expected to continue to divert, the efforts and attention of our key management
and technical personnel. As a result, our defense of this lawsuit, regardless of
its eventual outcome, has been, and will continue to be, costly and time
consuming. If we are unsuccessful in this lawsuit, we would be required to pay
significant monetary damages to Interactive Flight and Avnet and our business
would be harmed. In addition, we can give no assurance that Chubb will honor our
claim for coverage. For more details concerning this lawsuit, see "Business--
Legal Proceedings--Interactive Flight Technologies, Inc."

IF INDUSTRY SALES OF PRODUCTS USING FLASH MEMORY DO NOT GROW, OUR REVENUES,
GROSS MARGINS AND PROFITABILITY WOULD BE HARMED.

The market for consumer electronics incorporating Flash memory is relatively
new and emerging. The success of our Flash business will depend largely on the
level of consumer interest in consumer electronics utilizing Flash memory, such
as digital cameras, MP3 digital audio players and personal digital assistants,
or PDAs, many of which have only recently been introduced to the market. If
sales of products using Flash memory do not increase, we will be unable to grow
our Flash business. In addition, if we are unable to anticipate and fulfill
customer demand for our products, we may lose sales to our competitors.

DEMAND FOR OUR PRODUCTS WOULD DECLINE IF THE MARKET FOR FLASH MEMORY DOES NOT
DEVELOP, OR IF A COMPETING TECHNOLOGY DISPLACES FLASH MEMORY.

There is currently an absence of a single Flash memory standard. It is
possible that Flash memory standards other than those to which our products
conform will emerge as the industry standard. If we are unable to anticipate and
adequately allocate our resources in a timely and efficient manner toward the
production and development of industry-standard Flash memory products, we may
experience significant delays in releasing new and commercially viable products.
These delays would provide a competitor a first-to-market opportunity and allow
a competitor to achieve greater market share. Some of our competitors are in a
better financial and marketing position from which to influence industry
acceptance of a particular Flash memory standard or competing technology than we
are. In particular, a primary source of competition may come from companies that
offer alternative technologies such as ferroelectric random access memory
products. If a competing technology replaces or takes significant market share
from the Flash memory market, we would not be able to sell our Flash products.

THE EXECUTION OF OUR GROWTH STRATEGY DEPENDS ON OUR ABILITY TO RETAIN KEY
PERSONNEL, INCLUDING OUR EXECUTIVE OFFICERS, AND TO ATTRACT QUALIFIED PERSONNEL.

Competition for employees in our industry is intense. We have had and may
continue to have difficulty hiring the necessary engineering, sales and
marketing and management personnel to support our growth. The successful
implementation of our business model and growth strategy depends on the
continued contributions of our senior management and other key research and
development, sales and marketing and operations personnel, including Manouch
Moshayedi, our Chief Executive Officer, Mike Moshayedi, our President, and Mark
Moshayedi, our Chief Operating Officer, Chief Technical Officer and Secretary.
The loss of any key employee, the failure of any key employee to perform in his
or her current position, or the inability of our officers and key employees to
expand, train and manage our employee base would prevent us from executing our
growth strategy. See "Management."

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WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.

We incurred net losses on a pro forma basis of $1.3 million in 1998 and
$387,000 in 1997. Although we earned net income on a pro forma basis of
$7.0 million in the first half of 2000 and $7.4 million in 1999, we may incur
operating losses and negative cash flows in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

OUR PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY MAY NOT BE ADEQUATELY
PROTECTED, WHICH COULD HARM OUR COMPETITIVE POSITION.

Our proprietary technology and other intellectual property are critical to
our success. We protect our intellectual property rights through patents,
trademarks, copyrights and trade secret laws, confidentiality procedures and
employee disclosure and invention assignment agreements. It is possible that our
efforts to protect our intellectual property rights may not:

- prevent the challenge, invalidation or circumvention of our existing
patents;

- result in patents that lead to commercially viable products or provide
competitive advantages for our products;

- prevent our competitors from independently developing similar products,
duplicating our products or designing around the patents owned by us;

- prevent third-party patents from having an adverse effect on our ability
to do business;

- result in patents with claims that are sufficiently broad to preclude
competition;

- provide adequate protection for our intellectual property rights;

- prevent disputes with third parties regarding ownership of our
intellectual property rights;

- prevent disclosure of our trade secrets and know-how to third parties or
into the public domain; and

- result in patents from any of our pending applications.

As part of our confidentiality procedures, we enter into non-disclosure and
invention assignment agreements with all of our employees and attempt to control
access to and distribution of our technology, documentation and other
proprietary information. However, if such agreements are found to be
unenforceable, we may be unable to adequately protect our intellectual property
rights. In addition, despite these procedures, third parties could copy or
otherwise obtain and make unauthorized use of our technologies or independently
develop similar technologies.

We have not applied and do not expect to apply for patent protection in
foreign countries. In addition, the laws of foreign countries may not adequately
protect our intellectual property rights. Many U.S. companies have encountered
substantial infringement problems in some foreign countries. Because we sell
some of our products overseas, we have exposure to foreign intellectual property
risks. See "Business--Intellectual Property Rights."

OUR INDEMNIFICATION OBLIGATIONS FOR THE INFRINGEMENT BY OUR PRODUCTS OF THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD REQUIRE US TO PAY SUBSTANTIAL
DAMAGES.

We currently have in effect a number of agreements in which we have agreed
to defend, indemnify and hold harmless certain of our customers and suppliers
from damages and costs which may arise from the infringement by our products of
third-party patents, trademarks or other proprietary rights. We may periodically
have to respond to claims and litigate these types of indemnification
obligations. Any such indemnification claims could require us to pay substantial
damages. Our insurance does not cover intellectual property infringement.

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OUR INDEMNIFICATION OBLIGATIONS TO OUR CUSTOMERS AND SUPPLIERS FOR PRODUCT
DEFECTS COULD REQUIRE US TO PAY SUBSTANTIAL DAMAGES.

A number of our product sales and product purchase agreements provide that
we will defend, indemnify and hold harmless our customers and suppliers from
damages and costs which may arise from product warranty claims or claims for
injury or damage resulting from defects in our products. We maintain insurance
to protect against certain claims associated with the use of our products, but
our insurance coverage may not be adequate to cover all or any part of the
claims asserted against us. A successful claim brought against us that is in
excess of, or excluded from, our insurance coverage could substantially harm our
business, financial condition and results of operations. See "--Success by
Interactive Flight Technologies and Avnet in their lawsuit against us relating
to our sale of allegedly defective products would harm our business" and
"Business--Legal Proceedings--Interactive Flight Technologies, Inc."

OUR LIMITED EXPERIENCE IN ACQUIRING OTHER BUSINESSES, PRODUCT LINES AND
TECHNOLOGIES MAY MAKE IT DIFFICULT FOR US TO OVERCOME PROBLEMS ENCOUNTERED IN
CONNECTION WITH ANY ACQUISITIONS WE MAY UNDERTAKE.

While we have no agreements or negotiations currently underway, we intend to
pursue selective acquisitions to complement our internal growth. If we make any
future acquisitions, we could issue stock that would dilute our shareholders'
percentage ownership, incur substantial debt or assume contingent liabilities.
We have limited experience in acquiring other businesses, product lines and
technologies. In addition, the attention of our small management team may be
diverted from our core business if we undertake an acquisition. Potential
acquisitions also involve numerous risks, including, among others:

- Problems assimilating the purchased operations, technologies or products;

- Costs associated with the acquisition;

- Adverse effects on existing business relationships with suppliers and
customers;

- Risks associated with entering markets in which we have no or limited
prior experience;

- Potential loss of key employees of purchased organizations; and

- Potential litigation arising from the acquired company's operations before
the acquisition.

Our inability to overcome problems encountered in connection with such
acquisitions could divert the attention of management, utilize scarce corporate
resources and harm our business. In addition, we are unable to predict whether
or when any prospective acquisition candidate will become available or the
likelihood that any acquisition will be completed.

WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND CHANGES
FROM THE CURRENT POINT IN THE CYCLE COULD ADVERSELY AFFECT OUR BUSINESS.

The semiconductor industry, including the memory markets in which we
compete, is highly cyclical and is characterized by constant and rapid
technological change, rapid product obsolescence and price erosion, evolving
standards, short product life cycles and wide fluctuations in product supply and
demand. The industry has experienced significant downturns, often connected
with, or in anticipation of, maturing product cycles of both semiconductor
companies' and their customers' products and declines in general economic
conditions. These downturns have been characterized by diminished product
demand, production overcapacity, high inventory levels and accelerated erosion
of average selling prices. Any future downturns could have a material adverse
effect on our business and operating results. Furthermore, any upturn in the
semiconductor industry could result in increased demand for, and possible
shortages of, components we use to manufacture and assemble our ICs. Such
shortages could have a material adverse effect on our business and operating
results.

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PRODUCT RETURNS, PRICE PROTECTIONS AND ORDER CANCELLATIONS COULD REDUCE OUR
REVENUES.

To the extent we manufacture products in anticipation of future demand that
does not materialize, or in the event a customer cancels outstanding orders, we
could experience an unanticipated increase in our inventory. A lack of consumer
demand for our products may also cause increased product returns. A majority of
our sales through aftermarket channels include limited rights to return unsold
inventory. In addition, while we may not be contractually obligated to accept
returned products, we may determine that it is in our best interest to accept
returns in order to maintain good relations with our customers. Product returns
would increase our inventory and reduce our revenues. We have had to write-down
inventory in the past for reasons such as obsolescence, excess quantities and
declines in market value below our costs. These inventory write-downs were
approximately $365,000 in the first half of 2000, $1.2 million in 1999, $364,000
in 1998 and $474,000 in 1997. In addition, we offer some of our aftermarket
customers limited price protection rights for inventories of our products held
by them. If we reduce the list price of our products, these customers may
receive credits from us. We incurred price protection charges of approximately
$662,000 in the first half of 2000, $367,000 in 1999, $721,000 in 1998 and
$429,000 in 1997.

We are also subject to repurchase agreements with various financial
institutions in connection with wholesale inventory financing. Under these
agreements, we may be required to repurchase inventory upon customer default
with a financing institution and then resell the inventory through normal
distribution channels. As of June 30, 2000, we have not been required to
repurchase inventory in connection with the customer default agreements noted
above. However, it may be possible that we will be required to repurchase
inventory, upon customer default, in the future. Sales under such agreements
were approximately $1.3 million in the first half of 2000, $2.0 million in 1999,
$1.7 million in 1998 and $3.6 million in 1997.

We have no long-term volume commitments from our customers. Sales of our
products are made through individual purchase orders and, in certain cases, are
made under master agreements governing the terms and conditions of the
relationships. Customers may change, cancel or delay orders with limited or no
penalties. We have experienced cancellations of orders and fluctuations in order
levels from period-to-period and we expect to continue to experience similar
cancellations and fluctuations in the future which could result in fluctuations
in our revenues.

WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE MEMORY INDUSTRY.

We conduct business in an industry characterized by intense competition,
rapid technological change, evolving industry standards, declining average sales
prices and rapid product obsolescence. Our competitors include many large
domestic and international companies that have substantially greater financial,
technical, marketing, distribution and other resources, broader product lines,
lower cost structures, greater brand recognition and longer-standing
relationships with customers and suppliers. As a result, our competitors may be
able to respond better to new or emerging technologies or standards and to
changes in customer requirements. Our competitors may also be able to devote
greater resources to the development, promotion and sale of products, and may be
able to deliver competitive products at a lower price.

We expect to face competition from existing competitors and new and emerging
companies that may enter our existing or future markets that have similar or
alternative products which may be less costly or provide additional features. In
addition, some of our significant suppliers are also our competitors, many of
whom have the ability to manufacture competitive products at lower costs as a
result of their higher levels of integration. We also face competition from
current and prospective customers that evaluate our capabilities against the
merits of manufacturing products internally. Competition may arise due to the
development of cooperative relationships among our current and

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potential competitors or third parties to increase the ability of their products
to address the needs of our prospective customers. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share.

We expect our competitors will continue to improve the performance of their
current products, reduce their prices and introduce new products that may offer
greater performance and improved pricing, any of which could cause a decline in
sales or loss of market acceptance of our products. In addition, our competitors
may develop enhancements to or future generations of competitive products that
may render our technology or products obsolete or uncompetitive. See
"Business--Competition."

WE MAY LOSE OUR COMPETITIVE POSITION IF WE FAIL TO DEVELOP NEW AND ENHANCED
PRODUCTS AND INTRODUCE THEM IN A TIMELY MANNER.

The high performance computing, networking and communications, consumer
electronics and industrial markets are subject to rapid technological change,
product obsolescence, frequent new product introductions and enhancements,
changes in end-user requirements and evolving industry standards. Our ability to
compete in these markets will depend in significant part upon our ability to
successfully develop, introduce and sell new and enhanced products on a timely
and cost-effective basis, and to respond to changing customer requirements.

We have experienced, and may in the future experience, delays in the
development and introduction of new products. Our product development is
inherently risky because it is difficult to foresee developments in technology,
coordinate our technical personnel, and identify and eliminate design flaws.
Defects or errors found in our products after commencement of commercial
shipments, could result in delays in market acceptance of these products. Delays
in developing, manufacturing or marketing new or enhanced products could give
our competitors an advantage, hurt our reputation and harm our business,
financial condition and results of operations. Such products, even if
introduced, may not gain market acceptance. In addition, we may not be able to
respond effectively to new technological changes or new product announcements by
others.

OUR REPORTING AS AN S CORPORATION COULD EXPOSE US TO LIABILITY AND ADVERSELY
AFFECT OUR PROFITABILITY.

Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986 and comparable state tax laws and have filed our
federal and state income tax returns on that basis. On May 14, 1999, one of our
shareholders transferred a portion of his shares to a trust established for the
benefit of one of his children. This trust did not make an election to be
treated as an eligible S corporation shareholder within the time prescribed by
law, and the failure of the trust to make the election in a timely manner caused
an inadvertent termination of our S corporation status as of May 13, 1999.
However, we filed a statement with the IRS to obtain automatic approval of the
trust's late election to be treated as an eligible S corporation shareholder,
and have received verbal confirmation that the statement has been received and
approved by the IRS. As a consequence of this approval, the trust's original
failure to file a timely election did not cause a termination of our
S corporation status. There can be no assurance that an event has not occurred
that has resulted in the termination of our S corporation status prior to the
termination of our S corporation status in connection with this offering.

In connection with this offering, we terminated our S corporation status on
September 26, 2000, after which time we are required to pay federal and state
corporate-level income taxes as a C corporation. If the IRS or any state taxing
authority were to challenge our prior S corporation status, we could be liable
to pay corporate-level taxes on our income, at the effective corporate tax rate,
for all or part of the period in which we operated as an S corporation, plus
interest and possible penalties.

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OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH COULD
IMPAIR THE VALUE OF YOUR INVESTMENT.

If we expand more rapidly than currently anticipated or if our working
capital needs exceed our current expectations, we may need to raise additional
capital through public or private equity offerings or debt financings. Our
future capital requirements depend on many factors including our research,
development, sales and marketing activities. We do not know whether additional
financing will be available when needed, or will be available on terms favorable
to us. If we cannot raise needed funds on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. To the extent we
raise additional capital by issuing equity securities, our shareholders may
experience substantial dilution and the new equity securities may have greater
rights, preferences or privileges than our existing common stock.

WE FACE RISKS ASSOCIATED WITH DOING BUSINESS IN FOREIGN COUNTRIES, INCLUDING
FOREIGN CURRENCY FLUCTUATIONS AND TRADE BARRIERS, THAT COULD LEAD TO A DECREASE
IN DEMAND FOR OUR PRODUCTS OR AN INCREASE IN THE COST OF COMPONENTS USED IN OUR
PRODUCTS.

The volatility of general economic conditions and fluctuations in currency
exchange rates affect the prices of our products and the prices of the
components used in our products. International sales of our products accounted
for 16.0% of our revenues in the first half of 2000, 15.0% of our revenues in
1999, 19.0% of our revenues in 1998 and 22.5% of our revenues in 1997. No single
foreign country accounted for more than 10.0% of our revenues in the first half
of 2000, or in the years 1999, 1998 or 1997. For the first half of 2000 and the
year ended 1999, over 95.0% of our international sales were denominated in U.S.
dollars. However, if there is a significant devaluation of the currency in a
specific country, the prices of our products will increase relative to that
country's currency and our products may be less competitive in that country. In
addition, we cannot be sure that our international customers will continue to be
willing to place orders denominated in U.S. dollars. If they do not, our
revenues and results of operations will be subject to foreign exchange
fluctuations which could harm our business. We do not hedge against foreign
currency exchange rate risks.

In addition, we purchase substantially all of the IC devices used in our
products from local distributors of foreign suppliers. Although our purchases of
IC devices are currently denominated in U.S. dollars, devaluation of the U.S.
dollar relative to the currency of a foreign supplier would likely result in an
increase in our cost of IC devices.

Our international sales also are subject to certain other risks, including
regulatory risks, tariffs and other trade barriers, timing and availability of
export licenses, political and economic instability, difficulties in accounts
receivable collections, difficulties in managing distributors, lack of a local
sales presence, difficulties in obtaining governmental approvals, compliance
with a wide variety of complex foreign laws and treaties and potentially adverse
tax consequences. In addition, the United States or foreign countries may
implement quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of our products, leading to a reduction in sales and
profitability in that country.

DISRUPTION OF OUR OPERATIONS IN OUR SANTA ANA, CALIFORNIA MANUFACTURING FACILITY
WOULD SUBSTANTIALLY HARM OUR BUSINESS.

All of our manufacturing operations are located in our facility in Santa
Ana, California. Due to this geographic concentration, a disruption of our
manufacturing operations, resulting from sustained process abnormalities, human
error, government intervention or natural disasters such as earthquakes, fires
or floods could cause us to cease or limit our manufacturing operations and
consequently harm

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our business, financial condition and results of operations. See
"Business--Design, Manufacturing and Test" and "Business--Facilities."

COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS COULD HARM OUR OPERATING
RESULTS.

We are subject to a variety of environmental laws and regulations governing,
among other things, air emissions, waste water discharge, waste storage,
treatment and disposal, and remediation of releases of hazardous materials. Our
failure to comply with present and future requirements could harm our ability to
continue manufacturing our products. Such requirements could require us to
acquire costly equipment or to incur other significant expenses to comply with
environmental regulations. The imposition of additional or more stringent
environmental requirements, the results of future testing at our facilities, or
a determination that we are potentially responsible for remediation at other
sites where problems are not presently known to us, could result in expenses in
excess of amounts currently estimated to be required for such matters.

RISKS RELATED TO THIS OFFERING

MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING, INCLUDING THE ABILITY TO APPLY THE PROCEEDS TO USES THAT DO NOT
INCREASE OUR OPERATING RESULTS OR MARKET VALUE.

We intend to use a portion of the net proceeds from this offering for the
payment of amounts outstanding at the completion of this offering under our line
of credit and the payment of the undistributed earnings notes and additional
paid-in capital notes held by our shareholders of record as of September 20,
2000. We intend to use the estimated remaining net proceeds of approximately
$20.6 million, which amount is based on the aggregate principal amount of the
undistributed earnings notes as of June 30, 2000, the $3.0 million aggregate
principal amount of the additional paid-in capital notes, and amounts
outstanding under our line of credit as of September 28, 2000, representing
approximately 32.8% of the total net proceeds, for working capital and general
corporate purposes, including expansion of sales and marketing activities,
enhancement of our technology, possible acquisitions and possible international
expansion. The estimated net proceeds of approximately $20.6 million will be
reduced by the increase in the amount of the undistributed earnings notes
accounting for the amount of our earnings from July 1, 2000 through
September 26, 2000, less distributions made to our shareholders during such
period. We have not reserved or allocated the balance of the net proceeds for
any specific transaction, and we cannot specify with certainty how we will use
the balance of the net proceeds. Accordingly, our management will have
considerable discretion in the application of the balance of the net proceeds,
and you will not have the opportunity, as part of your investment decision, to
assess whether the balance of the net proceeds is being used appropriately. The
balance of the net proceeds may be used for corporate purposes that do not
increase our operating results or market value. Pending application of the
balance of the net proceeds, they may be placed in investments that do not
produce income or that lose value. See "Use of Proceeds."

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND STOCK OPTION PLAN COULD
PREVENT OR DELAY A CHANGE IN CONTROL AND, AS A RESULT, NEGATIVELY IMPACT OUR
SHAREHOLDERS.

We have taken a number of actions that could have the effect of discouraging
a takeover attempt. For example, provisions of our amended and restated articles
of incorporation and amended and restated bylaws could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
shareholders. These provisions also could limit the price that certain investors
might be willing to pay in the future for shares of our common stock.

These provisions include:

- Limitations on who may call special meetings of shareholders;

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- Advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon by shareholders
at shareholder meetings;

- Elimination of cumulative voting in the election of directors;

- The right of a majority of directors in office, although less than a
quorum, to fill vacancies on the board of directors; and

- The ability of our board of directors to issue, without shareholder
approval, "blank check" preferred stock to increase the number of
outstanding shares and thwart a takeover attempt.

Provisions of our 2000 Stock Incentive Plan allow for the automatic vesting
of all outstanding options granted under the 2000 Stock Incentive Plan upon a
change in control under certain circumstances. Such provisions may have the
effect of discouraging a third party from acquiring us, even if doing so would
be beneficial to our shareholders. See "Management--Stock Plans/Employee
Compensation Programs."

INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION OF
THEIR INVESTMENT.

The initial public offering price is substantially higher than the pro forma
net tangible book value per share of our outstanding common stock. Our
shareholders paid an average of $0.03 per share for their common stock, which is
considerably less than the amount to be paid for the common stock in this
offering. At the initial public offering price of $11.00 per share, investors
purchasing common stock in this offering will incur immediate dilution of $9.30
in pro forma net tangible book value per share of common stock as of June 30,
2000. We have also issued options to acquire common stock at prices
significantly below the initial public offering price. On September 28, 2000, we
granted options to purchase a total of 3,454,000 shares to our employees and
consultants, other than our Chief Executive Officer, President and Chief
Operating Officer, at an exercise price per share equal to the initial public
offering price per share of $11.00. To the extent those outstanding options are
ultimately exercised, there will be further dilution to investors in this
offering. See "Dilution."

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties, including statements concerning conditions in the memory, high
performance computing, networking and communications, consumer electronics and
industrial industries, and our business, financial condition and operating
results, including in particular statements relating to our business and growth
strategies, our product development efforts, and our operational and legal
risks. We use words like "believe," "expect," "anticipate," "intend," "future,"
"plan" and other similar expressions to identify forward-looking statements.
Investors should not place undue reliance on these forward-looking statements,
which speak only as of the date of this prospectus. These forward-looking
statements are based on our current expectations, and are subject to a number of
risks and uncertainties, including those identified under "Risk Factors" and
elsewhere in this prospectus. Our actual results could differ materially from
those predicted in these forward-looking statements, and the events anticipated
in the forward-looking statements may not actually occur. Although we believe
that the expectations reflected in these forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to reflect the occurrence of unanticipated events, unless
required by law.

19
<PAGE>
S CORPORATION STATUS AND CONVERSION

On May 14, 1999, one of our shareholders transferred a portion of his shares
to a trust established for the benefit of one of his children. This trust did
not make an election to be treated as an eligible S corporation shareholder
within the time prescribed by law, and the failure of the trust to make the
election in a timely manner caused an inadvertent termination of our
S corporation status as of May 13, 1999. However, we filed a statement with the
IRS to obtain automatic approval of the trust's late election to be treated as
an eligible S corporation shareholder, and have received verbal confirmation
that the statement has been received and approved by the IRS. As a consequence
of this approval, the trust's original failure to file a timely election did not
cause a termination of our S corporation status. We have also received an
opinion from PricewaterhouseCoopers LLP, our tax advisors, that, if the IRS
processes our statement in accordance with current IRS regulations, we will not
suffer an adverse tax consequence related to this inadvertent termination of our
S corporation status. In addition, certain of our other shareholders transferred
their shares of our common stock to trusts established for the benefit of their
children and themselves, however, we have received written confirmation from the
IRS that these transfers did not cause a termination of our S corporation
status. There can be no assurance that an event has not occurred that has
resulted in the termination of our S corporation status prior to the termination
of our S corporation status in connection with this offering.

In connection with this offering, we terminated our S corporation status on
September 26, 2000, after which time we are required to pay federal and state
corporate-level income taxes as a C corporation. Upon the termination of our S
corporation status, we were required to record a nonrecurring income tax benefit
and a corresponding net increase in net deferred income tax assets equal to the
difference in our basis for assets and liabilities for financial reporting and
income tax purposes. As of June 30, 2000, the amount of this income tax benefit
and net increase in net deferred income tax assets would have been approximately
$330,000. This amount will be adjusted for the period from June 30, 2000 through
September 26, 2000.

We have made cash distributions of a portion of our earnings to certain of
our shareholders which were not in proportion to their ownership of our shares.
The reasons for these non-proportional distributions, including payment of some
of our shareholders' overall personal income tax liabilities, are detailed
below. All of these amounts have been treated as distributed to those
shareholders for financial statement purposes. However, to comply with
applicable tax laws regarding distribution rights on S corporation stock, some
of our shareholders have transferred a portion of the amount which was in excess
of their pro rata share of the distributions to some of our other shareholders
so as to make the distributions proportional to all shareholders. The remaining
portion of the excess distributions, to the extent not transferred as provided
in the preceding sentence, have been treated as loans to some shareholders from
us for income tax purposes. In addition to the distributions, during certain
periods such shareholders have received income tax refunds which have been
remitted to us as contributions to capital for financial statement purposes and
as repayment of shareholder loans for tax purposes.

20
<PAGE>
The following table summarizes the distributions to, and contributions from,
our shareholders for the years ended December 31, 1997, 1998 and 1999, and for
the six months ended June 30, 2000:

<TABLE>
<CAPTION>
NET CASH
DISTRIBUTIONS/ XYZ AND DISTRIBUTIONS/
DISTRIBUTIONS/ (CONTRIBUTIONS) QUALCENTER (CONTRIBUTIONS)
(CONTRIBUTIONS) FOR TAXES DISTRIBUTIONS FOR FINANCIAL
FOR TAXES UNRELATED TO FOR LOAN OTHER STATEMENT
BENEFICIAL SHAREHOLDER RELATED TO US US REPAYMENT(1) DISTRIBUTIONS PURPOSES
---------------------- --------------- --------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Manouch Moshayedi....................... $ (62,000) $ -- $ -- $118,000 $ 56,000
Mike Moshayedi.......................... (62,000) 408,000 -- 23,000 369,000
Mark Moshayedi.......................... (62,000) (3,000) -- 20,000 (45,000)
---------- -------- ---------- -------- ----------
Total for the year ended
December 31, 1997................... $ (186,000) $405,000 $ -- $161,000 $ 380,000
========== ======== ========== ======== ==========
Manouch Moshayedi....................... $ (69,000) $ 28,000 $ -- $ 26,000 $ (15,000)
Mike Moshayedi.......................... (69,000) -- -- 31,000 (38,000)
Mark Moshayedi.......................... (69,000) -- 17,000 (52,000)
---------- -------- ---------- -------- ----------
Total for the year ended
December 31, 1998................... $ (207,000) $ 28,000 $ -- $ 74,000 $ (105,000)
========== ======== ========== ======== ==========
Manouch Moshayedi....................... $ 35,000 $ 43,000 $ 362,000 $116,000 $ 556,000
Mike Moshayedi.......................... 35,000 61,000 362,000 120,000 578,000
Mark Moshayedi.......................... 35,000 -- 362,000 106,000 503,000
---------- -------- ---------- -------- ----------
Total for the year ended
December 31, 1999................... $ 105,000 $104,000 $1,086,000 $342,000 $1,637,000
========== ======== ========== ======== ==========
Manouch Moshayedi....................... $1,987,000 $287,000 $ -- $ -- $2,274,000
Mike Moshayedi.......................... 1,992,000 186,000 -- -- 2,178,000
Mark Moshayedi.......................... 2,021,000 329,000 -- -- 2,350,000
Mark Moshayedi, as Trustee for the M.
and S. Moshayedi Investment Trust..... 266,000 25,000 -- -- 291,000
Mark Moshayedi and Kamran Ghadimi, as
Trustees for the M. and P. Moshayedi
Investment Trust...................... 261,000 54,000 -- -- 315,000
Manouch Moshayedi & Ali Dariushnia, as
Trustees for the D. and N. Moshayedi
Investment Trust...................... 232,000 -- -- -- 232,000
---------- -------- ---------- -------- ----------
Total for the six months ended
June 30, 2000....................... $6,759,000 $881,000 $ -- $ -- $7,640,000
========== ======== ========== ======== ==========
</TABLE>

------------------------------
(1) See "Certain Transactions" for a description of the XYZ and QualCenter
Distributions for loan repayment.

On September 26, 2000, we entered into a Distribution and Tax Indemnity
Agreement with our shareholders of record as of September 20, 2000. Under this
agreement, we distributed to our shareholders of record as of September 20,
2000, in proportion to their ownership of our shares, notes in an aggregate
principal amount equal to our undistributed earnings from the date of our
formation through September 26, 2000. The principal amount of the undistributed
earnings notes is based upon the following calculation: Earnings for tax
purposes will be derived by adding earnings for financial statement purposes to
the shareholder loan balances. Earnings for tax purposes will then be divided
pro-rata based upon the relative ownership percentages of our shareholders of
record as of September 20, 2000, yielding the amount of the shareholder
distributions for tax purposes. We will use a portion of the net proceeds from
this offering to pay off the principal amount of such notes upon the completion
of this offering as described under "Use of Proceeds." The aggregate principal
amount of the undistributed earnings notes, as of June 30, 2000, would have been
approximately $16.6 million. The actual principal amount of the undistributed
earnings notes will be increased by the amount of our

21
<PAGE>
earnings from July 1, 2000 through September 26, 2000, less distributions made
to our shareholders during such period, the amount of which will further
decrease the net proceeds from this offering.

For federal income tax purposes, we will report distributions to our
shareholders of record as of September 20, 2000 in amounts equal to their
proportionate share of our undistributed earnings calculated for tax purposes.
The amount of the distributions reported will include "deemed" distributions of
cash to our shareholders of record as of September 20, 2000 with outstanding
loans, as set forth in the table below. For federal income tax purposes, these
"deemed" distribution amounts will be treated as having been recontributed to us
by the respective shareholders in payment of the outstanding loans. This tax
treatment ensures that our shareholders of record as of September 20, 2000
receive distributions for federal income tax purposes in accordance with their
respective proportionate share ownership.

<TABLE>
<CAPTION>
AMOUNT OF
SHAREHOLDER UNDISTRIBUTED EARNINGS
PRINCIPAL AMOUNT LOANS FOR TAX CALCULATED FOR
OF THE UNDISTRIBUTED PURPOSES TAX PURPOSES
EARNINGS NOTES AS OF AS OF AS OF
BENEFICIAL SHAREHOLDER JUNE 30, 2000 JUNE 30, 2000(1) JUNE 30, 2000
---------------------- -------------------- ----------------- ----------------------
<S> <C> <C> <C>
Manouch Moshayedi................................. $ 4,812,000 $ 535,000 $ 5,347,000
Mike Moshayedi.................................... 4,838,000 523,000 5,361,000
Mark Moshayedi.................................... 4,970,000 440,000 5,410,000
Mark Moshayedi, as Trustee for the M. and
S. Moshayedi Investment Trust................... 679,000 37,000 716,000
Mark Moshayedi and Kamran Ghadimi, as Trustees
for the M. and P. Moshayedi Investment Trust.... 635,000 67,000 702,000
Manouch Moshayedi & Ali Dariushnia, as Trustees
for the D. and N. Moshayedi Investment Trust.... 653,000 -- 653,000
----------- ---------- -----------
Total as of June 30, 2000....................... $16,587,000 $1,602,000 $18,189,000
=========== ========== ===========
</TABLE>

--------------------------
(1) Represents shareholder loans equal to the amount by which net cash
distributions for financial statement purposes exceeded cash distributions
for tax purposes. These loans accrue interest at a rate of 8.5% and are
included in the calculation of undistributed earnings for tax purposes.

Our board of directors has determined that the distribution and payment of
the undistributed earnings notes to our shareholders of record as of
September 20, 2000 are reasonable and appropriate in light of such shareholders'
investment in and ownership risks associated with us before the distribution of
these notes. Purchasers of common stock in this offering will not be entitled to
receive any portion of these notes or any portion of the net proceeds from this
offering used to pay off these notes.

The Distribution and Tax Indemnity Agreement requires our shareholders of
record as of September 20, 2000 to reimburse us for income tax liabilities that
we incur for periods before September 26, 2000, including penalties and
interest, if the IRS or any state taxing authority determines that our S
corporation status lapsed during all or a portion of such periods. In addition,
our shareholders of record as of September 20, 2000 will be required to make a
payment to us with respect to periods after the date of this offering if our
taxable income is increased for any taxable period on or after the date of this
offering and there is a related, corresponding decrease in the taxable income of
such shareholders for a year in which we were an S corporation. In general, the
obligation of such shareholders to make payments to us under the indemnity
described in the preceding sentence will be limited to the lesser of the amount
we distributed to such shareholders with respect to the year in which their
taxable income is decreased, or our increased tax liability.

Finally, the Distribution and Tax Indemnity Agreement provides that payment
will be made by us to our shareholders of record as of September 20, 2000 in the
event their taxable income during years

22
<PAGE>
in which we were an S corporation is increased because and to the extent that
there is a related, corresponding reduction in our taxable income with respect
to any year in which we are taxable as a C corporation.

In addition to the distribution and payment of the undistributed earnings
notes, we issued, on September 26, 2000, additional paid-in capital notes to our
shareholders of record as of September 20, 2000 in an aggregate principal amount
of $3.0 million, which amount represents additional paid-in capital previously
invested by them. We intend to use a portion of the net proceeds from this
offering to pay off the additional paid-in capital notes. See "Use of Proceeds."

USE OF PROCEEDS

The net proceeds to us from the sale of the 6,364,000 shares being offered
by us at the initial public offering price of $11.00 per share, after deducting
underwriting discounts and commissions and offering expenses, are
$62.9 million, or $72.6 million if the underwriters' over-allotment option is
exercised in full.

We intend to use the estimated remaining net proceeds of approximately
$20.6 million, which amount is based on the amount of undistributed earnings
notes as of June 30, 2000 and amounts outstanding under our line of credit as of
September 28, 2000, representing approximately 32.8% of the total net proceeds,
for working capital and general corporate purposes, including expansion of sales
and marketing activities, enhancement of our technology, possible acquisitions
and possible international expansion. We have not reserved or allocated the
balance of the net proceeds for any specific transaction, and we cannot specify
with certainty how we will use the balance of the net proceeds. The amounts and
timing of our actual expenses will depend on numerous factors, including the
status of our product development efforts, sales and marketing activities,
technological advances, the amount of cash generated or used by our operations
and competition. We may find it necessary or advisable to use portions of the
balance of the net proceeds for other purposes, and we will have broad
discretion in the application of the balance of the net proceeds. Pending these
other uses, we intend to invest the balance of the net proceeds in short-term,
interest-bearing, investment grade securities.

DIVIDEND POLICY

On September 26, 2000 we made distributions of notes to our shareholders of
record as of September 20, 2000 in an aggregate amount equal to our total
earnings from the date of our formation through September 26, 2000. Upon the
completion of this offering, we will pay off the undistributed earnings notes
and the additional paid-in capital notes held by our shareholders of record as
of September 20, 2000. Purchasers of common stock in this offering will not be
entitled to receive any portion of these payments or distributions. See "S
Corporation Status and Conversion" and "Use of Proceeds."

23
<PAGE>
After the completion of this offering, we do not anticipate paying any cash
or other property dividends in the foreseeable future and intend to retain our
future earnings for use in our business. Any determination to pay dividends in
the future will be at the discretion of our board of directors and will depend
principally upon our results of operations, financial condition, capital
requirements and contractual restrictions under our credit facilities. In
connection with our line of credit with Comerica Bank, we have agreed not to
declare or pay any cash dividends or make any other cash distribution with
respect to shares of our capital stock without the prior written consent of
Comerica Bank, except distributions to our shareholders of record as of
September 20, 2000 to cover their income tax liabilities resulting from our
operations plus up to an additional $750,000 per year in the aggregate to cover
their personal income tax liabilities unrelated to our operations. We are also
subject to various covenants under an equipment note payable agreement for one
of our equipment leases that limits distributions and dividends to our
shareholders without the prior written consent of the lender. We have received
from the lender its consent for issuance and payment of the undistributed
earnings notes and additional paid-in capital notes to our shareholders of
record as of September 20, 2000 upon the completion of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for further details regarding the
material terms of our line of credit and equipment leases.

24
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000 on:

- an actual basis;

- a pro forma basis to give effect to the distribution to our shareholders
of record as of September 20, 2000 of the undistributed earnings notes in
an aggregate principal amount equal to our undistributed earnings through
June 30, 2000 of approximately $16.6 million, including accounting
adjustments required in connection with our change from an S corporation
to a C corporation and the payment of the additional paid-in capital notes
in an aggregate amount of $3.0 million from the net proceeds of this
offering to our shareholders of record as of September 20, 2000; and

- a pro forma as adjusted basis to reflect our sale of 6,364,000 shares of
common stock in this offering at the initial public offering price of
$11.00 per share, and our application of the estimated net proceeds from
this offering after deducting underwriting discounts and commissions and
offering expenses.

See "Use of Proceeds," "S Corporation Status and Conversion" and "Description of
Capital Stock."

The capitalization information set forth in the table below is qualified by
the more detailed consolidated financial statements and related notes appearing
elsewhere in this prospectus and should be read in conjunction with such
financial statements and related notes. The table does not include 7,033,005
shares of common stock then reserved for future issuance under our 2000 Stock
Incentive Plan, which amount includes 3,385,061 shares of common stock issuable
upon exercise of options outstanding as of June 30, 2000 at a weighted average
exercise price of $1.08 per share and 3,454,000 shares of common stock issuable
upon exercise of stock options subsequently granted on September 28, 2000 to our
employees and consultants, other than our Chief Executive Officer, President and
Chief Operating Officer at an exercise price per share equal to the initial
public offering price of $11.00. The table also assumes that the underwriters do
not exercise their over-allotment option. See "Management--Stock Plans/Employee
Compensation Programs."

<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of capital lease obligations.............. $ 941 $ 941 $ 941
Current portion of long-term debt......................... 729 729 729
Distributions payable to shareholders..................... -- 19,587 --
------- ------- -------
Total short-term debt................................... $ 1,670 $21,257 $ 1,670
======= ======= =======
Long-term debt:
Line of credit............................................ $23,275 $23,275 $ --
Long-term portion of capital lease obligations, net of
current................................................. 899 899 899
Long-term debt, net of current............................ 1,472 1,472 1,472
------- ------- -------
Total long-term debt.................................... 25,646 25,646 $ 2,371
------- ------- -------
Shareholders' equity:
Preferred Stock, par value $0.001, 20,000,000 shares
authorized, no shares issued and outstanding............ -- -- --
Common stock, par value $0.001, 100,000,000 shares
authorized, 30,601,027 shares issued and outstanding,
actual and pro forma; and 36,965,027 shares issued and
outstanding, pro forma as adjusted...................... 31 31 37
Additional paid-in capital.................................. 3,283 283 63,131
Unearned stock based compensation........................... (119) (119) (119)
Retained earnings........................................... 16,257 -- --
Accumulated other comprehensive loss........................ (97) (97) (97)
------- ------- -------
Total shareholders' equity.............................. 19,355 98 62,952
------- ------- -------
Total capitalization........................................ $45,001 $25,744 $65,323
======= ======= =======
</TABLE>

25
<PAGE>
DILUTION

Our net tangible book value as of June 30, 2000 was approximately
$18.4 million, or $0.60 per share of common stock. Net tangible book value per
share is calculated by subtracting our total liabilities from our total tangible
assets, which equals total assets less intangible assets, and dividing this
amount by the number of shares of common stock outstanding as of June 30, 2000.
Assuming the distribution to our shareholders of record as of June 30, 2000 of
the undistributed earnings notes in an aggregate principal amount equal to our
undistributed earnings through June 30, 2000 of approximately $16.6 million, the
distribution to our shareholders of record as of June 30, 2000 of the additional
paid-in capital notes in an aggregate principal amount of $3.0 million, and the
sale by us of 6,364,000 shares of common stock in this offering at the initial
public offering price of $11.00 per share and the application of the estimated
net proceeds from this offering, our pro forma net tangible book value as of
June 30, 2000 would have been approximately $63.0 million, or $1.70 per share of
common stock. See "S Corporation Status and Conversion." Upon completion of this
offering, there will be an immediate increase in the pro forma net tangible book
value of approximately $1.10 per share to shareholders of record as of June 30,
2000 and an immediate dilution in the pro forma net tangible book value of
approximately $9.30 per share to new investors. The following table illustrates
this per share dilution:

<S> <C> <C>
Initial public offering price per share..................... $11.00
Net tangible book value per share as of June 30, 2000..... $ 0.60
Increase per share attributable to new investors.......... 1.10
------
Pro forma net tangible book value after the offering........ 1.70
------
Dilution per share to new investors......................... $ 9.30
======
</TABLE>

The foregoing net tangible book value per share as of June 30, 2000 does not
give effect to the issuance and payment of the undistributed earnings notes and
the additional paid-in capital notes, the amount of which would have reduced
book value as of June 30, 2000.

The following table summarizes on a pro forma basis, as of June 30, 2000,
the difference between our shareholders of record as of June 30, 2000 and new
investors with respect to the number of shares of common stock purchased from
us, the total cash consideration paid to us and the average price per share
paid. The following table does not include 7,033,005 shares of common stock then
reserved for future issuance under our 2000 Stock Incentive Plan, which amount
includes 3,385,061 shares subject to outstanding options under our 1996 Stock
Option Plan as of June 30, 2000 and 3,454,000 shares of common stock issuable
upon exercise of stock options which we granted on September 28, 2000 to our
employees and consultants, other than our Chief Executive Officer, President and
Chief Operating Officer, at an exercise price per share equal to the initial
public offering price of $11.00. To the extent that outstanding options are
exercised and shares of common stock are issued, there will be further dilution
to new investors. Our 1996 Stock Option Plan will be succeeded by our 2000 Stock
Incentive Plan upon the completion of this offering. See "Management--Stock
Plans/Employee Compensation Programs."

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 30,601,027 82.8% $ 304,000 0.4% $ 0.01
New investors............................ 6,364,000 17.2% 70,004,000 99.6% 11.00
---------- ----- ----------- -----
Total.................................... 36,965,027 100.0% $70,308,000 100.0%
========== ===== =========== =====
</TABLE>

If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by new investors will increase to 7,318,600
shares, or approximately 19.3% of the total number of shares of common stock to
be outstanding immediately after this offering.

26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997 through 1999 and the
consolidated balance sheet data at December 31, 1998 and 1999 were derived from
our consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. The consolidated statement of operations data for the years
ended December 31, 1995 and 1996 and the consolidated balance sheet data at
December 31, 1995 through 1997 were derived from our consolidated financial
statements that have been audited and are not included in this prospectus. The
selected consolidated balance sheet data as of June 30, 2000 and consolidated
statement of operations data for the six months ended June 30, 2000 and 1999
were derived from our unaudited financial statements and, in the opinion of
management, reflect and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such results.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................. $206,756 $163,716 $159,088 $122,288 $192,593 $83,278 $132,647
Cost of revenues............. 181,595 137,442 131,094 97,930 152,743 68,351 103,237
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit................. 25,161 26,274 27,994 24,358 39,850 14,927 29,410
Operating expenses
Research and development... 1,609 1,911 2,154 2,180 1,832 974 1,513
Sales and marketing........ 7,824 12,557 15,971 13,340 14,150 7,034 9,461
General and
administrative........... 4,399 8,452 8,780 9,381 9,755 4,296 6,264
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............... 13,832 22,920 26,905 24,901 25,737 12,304 17,238
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations................. 11,329 3,354 1,089 (543) 14,113 2,623 12,172
Interest and other expense,
net........................ 1,997 1,473 1,713 1,597 2,128 971 805
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
provision (benefit) for
income taxes............... 9,332 1,881 (624) (2,140) 11,985 1,652 11,367
Provision (benefit) for
income taxes............... 133 (201) 2 23 (518) (71) 175
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............ $ 9,199 $ 2,082 $ (626) $ (2,163) $ 12,503 $ 1,723 $ 11,192
=========== =========== =========== =========== =========== =========== ===========
PRO FORMA DATA(1):
Income (loss) before
provision (benefit) for
income taxes............... $ 9,332 $ 1,881 $ (624) $ (2,140) $ 11,985 $ 1,652 $ 11,367
Pro forma provision (benefit)
for income taxes........... 3,546 715 (237) (813) 4,554 628 4,319
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income
(loss)..................... $ 5,786 $ 1,166 $ (387) $ (1,327) $ 7,431 $ 1,024 $ 7,048
=========== =========== =========== =========== =========== =========== ===========
Pro forma net income (loss)
per share(2)
Basic...................... $ 0.19 $ 0.04 $ (0.01) $ (0.04) $ 0.24 $ 0.03 $ 0.23
Diluted.................... $ 0.19 $ 0.04 $ (0.01) $ (0.04) $ 0.23 $ 0.03 $ 0.21
Weighted average shares
outstanding(2)
Basic...................... 30,601,027 30,601,027 30,601,027 30,601,027 30,601,027 30,601,027 30,601,027
Diluted.................... 30,601,027 30,601,027 30,601,027 30,601,027 32,657,993 31,924,155 33,360,582
SUPPLEMENTAL PRO FORMA
DATA(3):
Supplemental pro forma net
income..................... $ 8,260 $ 7,427
=========== ===========
Supplemental pro forma net
income per share
Basic...................... $0.26 $0.22
Diluted.................... $0.24 $0.21
Supplemental pro forma
weighted average shares
outstanding
Basic...................... 32,199,874 33,181,357
Diluted.................... 34,256,840 35,940,912
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 352 $ 2,265 $ 2,572 $ 817 $ 3,779 $ 23
Working capital............................................. 7,878 2,494 14,247 11,283 22,855 36,245
Total assets................................................ 59,149 45,466 41,873 40,087 55,131 75,282
Long-term portion of debt and
capital lease obligations................................. 371 2,476 18,401 18,132 15,681 25,646
Total shareholders' equity.................................. 10,941 7,886 6,862 4,760 15,780 19,355
</TABLE>

------------------------------

(1) Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of
the Internal Revenue Code of 1986 and comparable state tax laws and have
filed our federal and state income tax returns on that basis. Accordingly,
no provision has been made for federal or certain state income taxes. Pro
forma net income (loss) has been computed as if we had been fully subject to
federal and state income taxes as a C corporation for all periods presented.
We terminated our S corporation status on September 26, 2000, after which
time we are required to pay federal and state corporate-level income taxes
as a C corporation. See "S Corporation Status and Conversion," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and note 13 of the notes to our consolidated financial statements.

(2) Reflects a 5.07 for 1 stock split of our common stock on September 8, 2000.
All share and per share amounts have been adjusted to give retroactive
effect to the stock split.

(3) Reflects the pro forma sale of 1,134,425 shares as of December 31, 1999 and
2,115,908 shares as of June 30, 2000 of our common stock at the initial
public offering price of $11.00 per share. Such shares solely represent the
amounts necessary to pay down our existing line of credit, which
indebtedness amounted to $12.5 million at December 31, 1999 and
$23.3 million at June 30, 2000. Supplemental pro forma net income reflects
the pro forma elimination of interest expense related to this line of
credit, net of federal and state corporate-level income taxes, equal to
$829,000 as of December 31, 1999 and $379,000 as of June 30, 2000. In
addition, the weighted average shares outstanding for the year ended
December 31, 1999 and the six months period ended June 30, 2000 include a
computational increase of 464,422 shares sufficient to cover the excess of
pro forma distributions to shareholders calculated as of June 30, 2000,
compared to the Company's pro forma net income for the period from
January 1, 1999 through June 30, 2000. Refer to Note 2 of the notes to the
consolidated financial statements, "pro forma as adjusted data" caption.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THE RESULTS
DESCRIBED BELOW ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED IN
ANY FUTURE PERIOD. CERTAIN STATEMENTS IN THIS DISCUSSION AND ANALYSIS ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
OUR PREDICTIONS. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH UNDER THE CAPTION
"RISK FACTORS."

OVERVIEW

Incorporated in 1990, Simple Technology designs, manufactures and markets a
comprehensive line of memory and storage products, as well as connectivity
products that connect memory cards and hard drive upgrade kits to PCs. These
products are used in high performance computing, networking and communications,
consumer electronics and industrial applications. We initially focused on
designing and marketing dynamic random access memory, or DRAM, memory modules
primarily used in desktop PCs. In 1994, we began to manufacture substantially
all of our products internally and expand our product offerings to include
products used in mobile applications, such as memory cards, communications cards
and hard drive upgrade kits. In 1995, we further expanded our product line by
developing a line of Flash memory products used in networking and
communications, consumer electronics and industrial applications. In the same
year, we introduced a line of high density memory products using our
three-dimensional IC Tower stacking technology. As a result of increased demand
for consumer electronics and high density memory products used in Internet
infrastructure and embedded applications, the percentage of our revenues derived
from the sale of Flash memory and IC Tower stacking products increased from
13.0% in 1998 to 20.8% in 1999 and 33.2% in the first half of 2000. In 1999 and
the first half of 2000, our highest profit margin products were our IC Tower
stacking products. We believe that Flash memory and high density memory products
will continue to represent an increasing percentage of our product mix as demand
for these applications expands.

We sell our products through our Original Equipment Manufacturer, or OEM,
and Aftermarket Divisions. Our OEM Division was created in late 1998 to enhance
the marketing of our products to OEMs. Our Aftermarket Division sells our
products through the following five channels: value added reseller, or VAR, mail
order, commercial and industrial distribution, and retail. Before 1997, we
primarily concentrated our sales efforts on the VAR, mail order and OEM
channels. In 1997 and early 1998, we reallocated resources to focus on
penetrating the commercial and industrial distribution channels. As a result of
such reallocation, revenues from VARs declined from $71.3 million in 1997 to
$46.4 million in 1998. During 1999, we aggressively enhanced our presence in the
VAR channel, experienced rapid growth in sales through the mail order channel
and our OEM Division, and penetrated the retail channel with customers such as
Best Buy Co., Inc. and Costco Wholesale Corporation. From 1998 to 1999, sales
through the VAR channel increased 55.1%, sales through the mail order channel
increased 73.3% and sales through the retail channel increased 675.2%. During
that same period, our OEM Division sales increased 60.9%. These increases were
primarily attributable to our increase in sales personnel and marketing efforts.
For further details on how we market our products, see "Business--Sales and
Marketing." Combined growth in our OEM and Aftermarket Divisions contributed to
our revenue growth of 57.5% from 1998 to 1999. In the first half of 2000 and
1999, our highest profit margin division was our OEM Division. Although we began
tracking revenues and gross margins on a divisional basis in 1999, we have not
tracked, and do not intend to track, operating expenses on a divisional basis.

Our OEM Division addresses the increasing trend of OEMs to outsource the
design, development and manufacture of memory products. OEM outsourcing
practices are either on a turnkey basis, where

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<PAGE>
the OEM uses an outside supplier to procure components and design and
manufacture a specific product, or on a consignment basis, where the OEM employs
an outside supplier to design and manufacture a product using memory components
supplied by the OEM. Since revenue is not recognized on the integrated circuit,
or IC, devices used in products manufactured on a consignment basis, revenues
from consignment sales typically result in significantly lower average sales
prices than revenues from turnkey sales. Consignment sales increased from 1.7%
of revenues in 1997 to 3.1% of revenues in 1998, which contributed to a decline
in our average sales prices during this period. In late 1999, to improve our
profitability, we discontinued substantially all of our consignment sales and we
expect substantially all of our future revenues will be derived from turnkey
sales. Revenues from consignment sales accounted for 0.8% of revenues in the
first half of 2000.

Historically, a relatively small number of customers have accounted for a
significant percentage of our revenues. Our ten largest customers accounted for
an aggregate of 49.9% of our revenues in the first half of 2000, 44.3% of our
revenues in 1999, 38.8% of our revenues in 1998 and 36.8% of our revenues in
1997. Our ten largest OEM Division customers accounted for an aggregate of 77.0%
of our OEM Division revenues or 27.7% of our total revenues in the first half of
2000 and 75.4% of our OEM Division revenues or 19.4% of our total revenues in
1999. Our largest OEM Division customer accounted for 17.0% of our OEM Division
revenues or 6.1% of our total revenues in the first half of 2000 and 24.0% of
our OEM Division revenues or 6.2% of our total revenues in 1999. Our ten largest
Aftermarket Division customers accounted for an aggregate of 50.1% of our
Aftermarket Division revenues or 32.1% of our total revenues in the first half
of 2000 and 47.6% of our Aftermarket Division revenues or 35.3% of our total
revenues in 1999. Our largest Aftermarket Division customer, CDW Computer
Centers, Inc., accounted for 30.0% of our Aftermarket Division revenues or 19.2%
of our total revenues in the first half of 2000 and 26.1% of our Aftermarket
Division revenues or 19.4% of our total revenues in 1999. Other than CDW
Computer Centers, no customer accounted for more than 10.0% of our total
revenues in the first half of 2000, or in the years 1999, 1998 or 1997. The
composition of our major customer base changes from quarter to quarter as the
market demand for our customers' products changes and we expect this variability
will continue in the future. We expect that sales of our products to a small
number of customers will continue to contribute materially to our revenues in
the foreseeable future and believe that our financial results will depend in
significant part upon the success of our customers' products.

International sales of our products constituted 16.0% of our revenues in the
first half of 2000, 15.0% of our revenues in 1999, 19.0% of our revenues in 1998
and 22.5% of our revenues in 1997. No single foreign country accounted for more
than 10.0% of our revenues in the first half of 2000, or in the years 1999, 1998
or 1997. We focus our international sales efforts on OEM and aftermarket
customers, with sales to VARs constituting substantially all of our
international aftermarket sales. For the first half of 2000 and 1999, over 95.0%
of our international sales were denominated in U.S. dollars. Consequently, if
the value of the U.S. dollar increases relative to a particular foreign
currency, our products could become relatively more expensive, which could
result in a reduction of sales in a particular country. In addition, we purchase
substantially all of the IC devices used in our products from local distributors
of Japanese, Korean and Taiwanese suppliers. Although our purchases of IC
devices are currently denominated in U.S. dollars, devaluation of the U.S.
dollar relative to the currency of a foreign supplier would likely result in an
increase in our cost of IC devices. Our international sales also could be
adversely affected by risks including regulatory risks, tariffs and other trade
barriers.

In the past we have been impacted by seasonal purchasing patterns resulting
in higher sales in the third and fourth quarters of each year. Our ability to
adjust our short-term operating expenses in response to fluctuations in revenues
is limited. As a result, if revenues are lower than expected in any given
period, our results of operations could be harmed.

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<PAGE>
Over 95.0% of our revenues are recognized at the time of shipment. A
majority of our sales through aftermarket channels include limited rights to
return unsold inventory. In addition, while we may not be contractually
obligated to accept returned products, we may determine that it is in our best
interest to accept returns in order to maintain good relations with our
customers. Product returns would increase our inventory and reduce our revenues.
We have had to write-down inventory in the past for reasons such as
obsolescence, excess quantities and declines in market value below our costs.
These inventory write-downs were approximately $365,000 in the first half of
2000, $1.2 million in 1999, $364,000 in 1998 and $474,000 in 1997. Increased
inventory write-downs in 1999 were attributable to obsolescence charges related
to the termination of our modem product line. We also have price protection
agreements with a number of our aftermarket customers in which we retain limited
liability for price declines related to unsold inventory. If we reduce the list
price of our products, these customers may receive credits from us. We incurred
price protection charges of approximately $662,000 in the first half of 2000,
$367,000 in 1999, $721,000 in 1998 and $429,000 in 1997. Price protection
charges increased in the first half of 2000 primarily due to us reducing the
list price of our products to one of our commercial distribution customers in
order to assist them in selling their inventory of our products.

Our expansion of manufacturing, sales and support functions to Scotland and
Canada contributed to our net operating losses in 1998 and 1997. Our
subsidiaries in Scotland and Canada incurred combined net operating losses of
approximately $2.8 million in 1998 and $1.8 million in 1997. In 1998, we
incurred $397,000 in restructuring costs to reduce our operations in Scotland to
a regional sales office. Due to lower than expected sales in Canada and our
ability to reduce expenses by consolidating these operations in the U.S., we
discontinued the operations of our Canadian facility in 1998 at a nominal cost.
Currently, all of our manufacturing and support functions are consolidated in
Santa Ana, California.

Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986 and comparable state tax laws and have filed our
federal and state income tax returns on that basis. We terminated our
S corporation status on September 26, 2000, after which time we are required to
pay federal and state corporate-level income taxes as a C corporation. Upon the
termination of our S corporation status, we were required to record a
nonrecurring income tax charge and corresponding net increase in net deferred
income tax assets equal to the difference in our basis for assets and
liabilities for financial reporting and income tax purposes. As of June 30,
2000, the amount of this income tax charge and net increase in net deferred
income tax assets would have been approximately $330,000. This amount will be
adjusted for the period from June 30, 2000 through September 26, 2000.
See "S Corporation Status and Conversion."

CORPORATE STRUCTURE

We were incorporated in California on March 13, 1990. In February 1995, we
formed Simple Technology Canada Ltd. for manufacturing, selling and marketing
our products in Canada. Simple Technology Canada has been inactive since April
1998 when we discontinued our Canadian operations, and we are presently in the
process of dissolving the company. In May 1996, we formed S.T.I., LLC, our
majority owned California limited liability company, to limit our potential
liability from our European manufacturing, sales and marketing operations. In
June 1996, S.T.I., LLC formed Simple Technology Europe, its majority owned
privately-held unlimited company registered in Scotland, to serve as the sales
and marketing entity for our European operations. In January 1996, we launched
Simple Technology Limited, a privately-held limited company registered in
Scotland, to serve as the manufacturing entity for our European headquarters to
take advantage of local U.K. tax laws. Simple Technology Limited concluded its
manufacturing operations in April 1999 and is currently inactive.
Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and

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<PAGE>
director of Simple Technology, and certain of their affiliates own minority
interests in certain of our subsidiaries. For further details regarding these
ownership interests, see "Certain Transactions--Simple Technology Subsidiary
Ownership."

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
consolidated statement of operations data reflected as a percentage of revenues.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................................... 82.4 80.1 79.3 82.1 77.8
----- ----- ----- ----- -----
Gross profit........................................... 17.6 19.9 20.7 17.9 22.2
Operating expenses
Research and development............................. 1.4 1.8 1.0 1.2 1.1
Sales and marketing.................................. 10.0 10.9 7.3 8.3 7.2
General and administrative........................... 5.5 7.7 5.1 5.2 4.7
----- ----- ----- ----- -----
Total operating expenses........................... 16.9 20.4 13.4 14.7 13.0
----- ----- ----- ----- -----
Income (loss) from operations.......................... 0.7 (0.5) 7.3 3.2 9.2
Interest and other expense, net........................ 1.1 1.3 1.1 1.2 0.6
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for income
taxes................................................ (0.4) (1.8) 6.2 2.0 8.6
Pro forma provision (benefit) for income taxes......... (0.2) (0.7) 2.3 0.8 3.3
----- ----- ----- ----- -----
Pro forma net income (loss)............................ (0.2)% (1.1)% 3.9% 1.2% 5.3%
===== ===== ===== ===== =====
</TABLE>

COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999

NET REVENUES. Our revenues were $132.7 million in the first half of 2000,
compared to $83.3 million in the same period in 1999. Sales of memory products
accounted for 90.2% of our revenues in the first half of 2000, compared to 87.6%
in the same period in 1999. Revenues increased 59.3% over this period due to
increases in average sales prices and unit volume. Our average sales prices
increased from $71 in the first half of 1999 to $108 in the first half of 2000,
resulting from a shift in product mix to higher capacity DRAM, Flash products
and IC Tower stacking products. The mix of products sold varies from quarter to
quarter and may vary in the future, affecting our overall average sales prices
and gross margins. Overall unit volume increased 4.5%, comprised of unit volume
increases of 81.2% for Flash products, 135.6% for IC Tower stacking products and
14.8% for standard memory products, offset by a decrease in unit volume of 52.6%
for non-DRAM, non-Flash products such as SRAM, hard drive upgrade kits and
connectivity products. The decrease in unit volume for non-DRAM, non-Flash
products resulted from a substantial decline in the unit volume of products
manufactured on a consignment basis from the first half of 1999 to the first
half of 2000.

Our OEM Division revenues grew 112.9% from $22.4 million in the first half
of 1999 to $47.7 million in the first half of 2000. Although there was a decline
in total OEM Division unit volume of 34.4% for this period, OEM Division
revenues increased as a result of an increase in average sales prices from $52
in the first half of 1999 to $169 in the first half of 2000. This increase in
average sales prices resulted from a shift in product mix to a greater
concentration of higher margin, higher capacity DRAM, Flash memory and IC Tower
stacking products and a significantly reduced percentage of products
manufactured on a consignment basis. Our Aftermarket Division revenues grew
39.6% from $60.9 million in the first half of 1999 to $85.0 million in the first
half of 2000. Growth in Aftermarket

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Division revenues resulted from a 27.0% increase in unit volume and an increase
in the average sales prices for our Aftermarket Division from $82 in the first
half of 1999 to $90 in the first half of 2000.

Our combined backlog was $20.5 million as of June 30, 2000, consisting of
$18.1 million for the OEM Division and $2.4 million for the Aftermarket
Division. Our combined backlog was $13.2 million as of December 31, 1999,
consisting of $12.7 million for the OEM Division and $485,000 for the
Aftermarket Division. The increase in OEM Division backlog from December 31,
1999 to June 30, 2000 was primarily due to increasing OEM orders and the
lengthening of the time between our receipt of an OEM order and the required
ship date of the order. Aftermarket backlog is typically nominal since
substantially all aftermarket orders are filled on a same-day or next-day basis.
We include in our backlog only those customer orders for which we have accepted
purchase orders and to which we have assigned shipment dates within the upcoming
six months. Since orders constituting our backlog are subject to change due to,
among other things, customer cancellations and reschedulings, and our ability to
procure necessary components, backlog is not necessarily an indication of future
revenues.

COST OF REVENUES. Cost of revenues include component costs, personnel costs
related to manufacturing, testing, quality control and material management
employees, and depreciation costs on production, testing and quality control
equipment. Cost of revenues were $103.2 million in the first half of 2000,
compared to $68.4 million in the same period in 1999. Cost of revenues as a
percentage of revenues were 77.8% in the first half of 2000, compared to 82.1%
in the same period in 1999. The decrease in cost of revenues as a percentage of
revenues over this period resulted primarily from a shift in product mix to a
greater concentration of higher margin, higher capacity DRAM, Flash memory and
IC Tower stacking products.

GROSS PROFIT. Our gross profit was $29.4 million in the first half of 2000,
compared to $14.9 million in the same period in 1999. Gross profit as a
percentage of revenues was 22.2% in the first half of 2000, compared to 17.9% in
the same period in 1999. Gross profit for our OEM Division as a percentage of
revenues was 28.4% in the first half of 2000 compared to 28.5% in the first half
of 1999 and gross profit for our Aftermarket Division as a percentage of
revenues was 18.7% in the first half of 2000 compared to 17.9% in the first half
of 1999. In the first half of 2000, gross margins for both the OEM and
Aftermarket Divisions increased due to a shift in product mix to a greater
concentration of higher margin, higher capacity DRAM, Flash memory and IC Tower
stacking products.

RESEARCH AND DEVELOPMENT. Research and development expenses are primarily
comprised of personnel costs for our engineering and design staff and the cost
of prototype supplies. Research and development expenses were $1.5 million in
the first half of 2000, compared to $974,000 in the same period in 1999.
Research and development expenses as a percentage of revenues were 1.1% in the
first half of 2000, compared to 1.2% in the same period in 1999. In the first
half of 2000, we hired eight additional engineers to develop new and enhanced
products in an effort to respond to changing customer requirements for higher
density DRAM and Flash memory and storage products with smaller size, lower
power consumption and higher speeds. In addition, we anticipate hiring
approximately seven to nine more engineers in 2000, however, we may not be able
to find qualified personnel to fill these positions. Assuming we hire 15
engineers in 2000, the total cost associated with these new engineers is
anticipated to be approximately $500,000 per quarter. In addition, we expect to
incur additional capital expenditures of approximately $1.0 million for related
engineering equipment.

SALES AND MARKETING. Sales and marketing expenses are primarily comprised
of personnel costs and travel expenses for our domestic and international sales
and marketing employees, commissions paid to internal salespersons and
independent manufacturers' representatives, shipping costs and marketing
programs. Sales and marketing expenses were $9.5 million in the first half of
2000, compared to $7.0 million in the same period in 1999. Sales and marketing
expenses as a percentage of revenues were 7.2% in the first half of 2000,
compared to 8.3% in the same period in 1999. Sales and marketing

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<PAGE>
expenses increased over this period primarily due to an increase in personnel
costs related to the addition of internal salespersons and increased commissions
related to higher revenues.

GENERAL AND ADMINISTRATIVE. General and administrative expenses are
primarily comprised of personnel costs for our executive and administrative
employees, professional fees and facilities overhead. General and administrative
expenses were $6.3 million in the first half of 2000, compared to $4.3 million
in the same period in 1999. General and administrative expenses as a percentage
of revenues were 4.7% in the first half of 2000 and 5.2% in the first half of
1999. General and administrative expenses increased over this period primarily
due to additional legal costs of approximately $1.0 million and increases in
personnel costs for new and existing employees. Our legal expenses were $1.5
million in the first half of 2000. Although we expect substantial legal expenses
to continue in 2000, we expect general and administrative expenses to increase
at a slower rate than revenues in future quarters.

INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net was
$805,000 in the first half of 2000, compared to $971,000 in the same period in
1999. Interest expense is comprised of interest related to our line of credit
and equipment financing. Interest expense was $806,000 in the first half of
2000, compared to $983,000 in the same period in 1999. The decline in interest
expense in the first half of 2000 resulted from reduced borrowings.

PRO FORMA PROVISION (BENEFIT) FOR INCOME TAXES. Since our formation in
March 1990, we have elected for federal and state income tax purposes to be
treated as an S corporation under Subchapter S of the Internal Revenue Code of
1986 and comparable state tax laws and have filed our federal and state income
tax returns on that basis. An S corporation is generally not subject to
corporate-level income tax. However, California levies an S corporation tax of
approximately 1.5%, which we are required to pay. In addition to the California
S corporation tax that we pay, our shareholders of record as of September 20,
2000 have been taxed directly on our earnings for federal and state income tax
purposes, whether or not the earnings were distributed. We terminated our S
corporation status on September 26, 2000 after which time we are required to pay
federal and state corporate-level income taxes as a C corporation. See "S
Corporation Status and Conversion." The provision (benefit) for income taxes has
been restated on a pro forma basis to reflect C corporation tax treatment. Our
effective tax rate is estimated at 38%, which differs from the combined federal
and state statutory rates primarily due to the utilization of Enterprise Zone
tax credits. We operate in a state designated Enterprise Zone, in which
companies located in economically depressed regions are offered hiring tax
credits for eligible employees as well as tax credits related to the purchase of
qualified production equipment.

PRO FORMA NET INCOME (LOSS). Assuming the termination of our S corporation
status, pro forma net income would have been $7.0 million in the first half of
2000.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NET REVENUES. Our revenues were $192.6 million in 1999, $122.3 million in
1998 and $159.1 million in 1997. Sales of memory products accounted for 89.8% of
our revenues in 1999, 81.9% of our revenues in 1998 and 88.4% of our revenues in
1997. Although unit volume was relatively flat from 1998 to 1999, revenues
increased 57.5% primarily due to an increase in our average sales prices from
$47 in 1998 to $81 in 1999, resulting from a shift in our product mix toward
higher margin, higher capacity DRAM and Flash products and products manufactured
on a turnkey basis rather than consignment basis. Our shift in product mix was
primarily due to our desire to reduce our dependency on DRAM products and the
growth in applications for Flash products.

Other factors that contributed to the increase in our revenues from 1998 to
1999 included the rapid growth of our Flash memory and IC Tower stacking
products, increased sales through our VAR

34
<PAGE>
channel, the release of a 256 megabit Flash IC device by Hitachi in November
1999 which allowed us to ship related backlog, and increased demand for DRAM
memory related to Year 2000 conversions and upgrades. In addition, an earthquake
in Taiwan in September 1999 caused a worldwide short-term supply shortage and
substantial temporary price increase in the cost of DRAM raw materials resulting
in higher overall average sales prices and gross margins for our DRAM memory
products in our inventory before the earthquake. We estimate that our revenues
increased approximately $9.0 million in 1999 as a result of the increased
average sales prices for DRAM memory products related to the Taiwan earthquake,
and approximately $4.0 million in 1999 as a result of Year 2000 conversions and
upgrades. Sales of our Flash memory products were $13.2 million in 1998 and
$24.9 million in 1999, representing an increase of 88.5%. Sales of our IC Tower
stacking products were $2.7 million in 1998 and $15.1 million in 1999,
representing an increase of 459.9%. We expect continued sales growth in our
Flash and IC Tower stacking products due to continued growth in high performance
computing, networking and communications, consumer electronics and industrial
applications.

Revenues decreased 23.1% from 1997 to 1998 primarily due to a decrease in
our average sales prices from $75 in 1997 to $47 in 1998. The decrease in our
average sales prices resulted from an overall decline in the price of IC devices
due to oversupply and an increase in our consignment sales.

In 1999, our OEM Division revenues were $49.6 million and our Aftermarket
Division revenues were $143.0 million. Our combined backlog was $13.2 million as
of December 31, 1999 and $2.0 million as of December 31, 1998. Our OEM Division
backlog was $12.7 million as of December 31, 1999 and $1.5 million as of
December 31, 1998, compared to our Aftermarket Division backlog of $485,000 as
of December 31, 1999 and $480,000 as of December 31, 1998. The increase in OEM
Division backlog was primarily due to increasing OEM orders and the lengthening
of the time between our receipt of an OEM order and the required ship date of
the order. Aftermarket backlog is typically nominal since substantially all
aftermarket orders are filled on a same-day or next-day basis.

COST OF REVENUES. Cost of revenues were $152.7 million in 1999,
$97.9 million in 1998 and $131.1 million in 1997. Cost of revenues as a
percentage of revenues were 79.3% in 1999, 80.1% in 1998 and 82.4% in 1997. The
decrease in cost of revenues as a percentage of revenues from 1998 to 1999 and
from 1997 to 1998 resulted primarily from a shift in product mix to a greater
concentration of higher margin, higher capacity Flash memory and IC Tower
stacking products.

GROSS PROFIT. Our gross profit was $39.9 million in 1999, $24.4 million in
1998 and $28.0 million in 1997. Gross profit as a percentage of revenues was
20.7% in 1999, 19.9% in 1998 and 17.6% in 1997. This expansion of gross profit
as a percentage of revenues from 1998 to 1999 and from 1997 to 1998 primarily
resulted from a shift in product mix to a greater concentration of higher
margin, higher capacity Flash memory and IC Tower stacking products. In
addition, we estimate that our gross profit increased approximately
$4.0 million in the third quarter 1999 as a result of the Taiwan earthquake. In
1999, gross profit as a percentage of revenues was 28.5% for our OEM Division
and 18.0% for our Aftermarket Division. In 1999, gross margins for our OEM
Division were greater than for our Aftermarket Division primarily due to the
fact that our OEM Division sold a higher percentage of higher margin, higher
capacity DRAM, Flash memory and IC Tower stacking products. We expect revenues
from our OEM Division will comprise an increasing percentage of our overall
revenues in the future as outsourcing by OEMs expands.

RESEARCH AND DEVELOPMENT. Research and development expenses were
$1.8 million in 1999, $2.2 million in 1998 and $2.2 million in 1997. Research
and development expenses as a percentage of revenues were 1.0% in 1999, 1.8% in
1998 and 1.4% in 1997. In 1999, research and development expenses decreased as a
result of the internal transfer of several of our engineers to sales and
marketing. Research and development expenses were relatively flat in 1997 and
1998.

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<PAGE>
SALES AND MARKETING. Sales and marketing expenses were $14.2 million in
1999, $13.3 million in 1998 and $16.0 million in 1997. Sales and marketing
expenses as a percentage of revenues were 7.3% in 1999, 10.9% in 1998 and 10.0%
in 1997. Sales and marketing expenses increased from 1998 to 1999 primarily due
to increases in personnel costs related to the addition of internal salespersons
and increased commissions related to higher revenues. As a percentage of
revenues, sales and marketing expenses decreased from 1998 to 1999 as a result
of modifying the commission structure in late 1998 for certain internal
salespersons. Sales and marketing expenses decreased from 1997 to 1998 primarily
due to lower commissions paid on reduced revenues. Sales and marketing expenses
as a percentage of revenues were relatively flat from 1997 to 1998. Although we
have not yet contracted to do so, we plan to implement brand-name print
advertising campaigns in 2000. In the first quarter 2000, we expanded our joint
marketing programs with customers which is expected to increase sales and
marketing expenses as a percentage of revenues. These marketing programs may not
necessarily result in increased sales. We estimate that these expanded marketing
programs will cost approximately $1.5 million for 2000. For further discussion
of our plans for expanding our sales and marketing efforts, see
"Business--Strategy" and "Business--Sales and Marketing."

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$9.8 million in 1999, $9.4 million in 1998 and $8.8 million in 1997. General and
administrative expenses as a percentage of revenues were 5.1% in 1999, 7.7% in
1998 and 5.5% in 1997. From 1998 to 1999, general and administrative expenses
increased primarily due to additional legal costs offset by income related to
the restructuring of our subsidiary in Scotland. In 1998, we accrued $397,000
related to costs associated with the restructuring of our subsidiary in
Scotland. Excluding these restructuring costs, general and administrative
expenses were relatively flat from 1997 to 1998. In 1999, we incurred additional
restructuring costs of $241,000 offset by $603,000 of income related to the
assignment of our office facility lease in Scotland. Since the majority of our
general and administrative expenses are fixed in the short-term, the downturn in
revenues in 1998 caused an increase in general and administrative expenses as a
percentage of revenues. Our legal expenses were $1.2 million in 1999. Although
we expect substantial legal expenses to continue in 2000, we expect general and
administrative expenses to increase at a slower rate than revenues in future
years.

INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net was
$2.1 million in 1999, $1.6 million in 1998 and $1.5 million in 1997. Interest
expense was $1.8 million in 1999, $1.6 million in 1998 and $1.7 million in 1997.
In addition, in 1999 we contributed land with a cost basis of $325,000 to
charity resulting in other expense. The decline in interest expense from 1997 to
1998 resulted from reduced borrowings.

PRO FORMA NET INCOME (LOSS). Assuming the termination of our S corporation
status, pro forma net income would have been $7.4 million in 1999 and pro forma
net losses would have been $1.3 million in 1998 and $387,000 in 1997.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth our unaudited quarterly consolidated
statement of operations data for each of the ten quarters ended June 30, 2000.
In the opinion of management, these data have been prepared on a basis
substantially consistent with our audited consolidated financial statements
appearing elsewhere in this prospectus, and reflect and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the data. The quarterly data should be read together with our consolidated
financial statements and related notes appearing elsewhere in this

36
<PAGE>
prospectus. The operating results for any one quarter are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................. $31,295 $23,402 $28,080 $39,511 $41,951 $41,327 $53,007 $56,308
Cost of revenues............. 23,843 18,690 22,591 32,806 34,760 33,591 39,904 44,488
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 7,452 4,712 5,489 6,705 7,191 7,736 13,103 11,820
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses
Research and development... 555 590 517 518 536 438 373 485
Sales and marketing........ 3,860 3,355 2,852 3,273 3,324 3,710 3,314 3,802
General and
administrative........... 2,403 2,246 2,060 2,672 2,131 2,164 2,105 3,355
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 6,818 6,191 5,429 6,463 5,991 6,311 5,792 7,643
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. $ 634 $(1,479) $ 60 $ 242 $ 1,200 $ 1,425 $ 7,311 $ 4,177
======= ======= ======= ======= ======= ======= ======= =======

AS A PERCENTAGE OF REVENUES:
Net revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 76.2 79.9 80.5 83.0 82.9 81.3 75.3 79.0
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 23.8 20.1 19.5 17.0 17.1 18.7 24.7 21.0
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses
Research and development... 1.8 2.5 1.8 1.3 1.3 1.1 0.7 0.9
Sales and marketing........ 12.3 14.3 10.2 8.3 7.8 9.0 6.3 6.7
General and
administrative........... 7.7 9.6 7.3 6.8 5.1 5.2 3.9 6.0
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 21.8 26.4 19.3 16.4 14.2 15.3 10.9 13.6
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. 2.0% (6.3)% 0.2% 0.6% 2.9% 3.4% 13.8% 7.4%
======= ======= ======= ======= ======= ======= ======= =======

<CAPTION>
THREE MONTHS ENDED
-------------------
MAR. 31, JUN. 30,
2000 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................. $57,667 $74,980
Cost of revenues............. 45,013 58,223
------- -------
Gross profit................. 12,654 16,757
------- -------
Operating expenses
Research and development... 518 995
Sales and marketing........ 4,179 5,283
General and
administrative........... 2,786 3,478
------- -------
Total operating
expenses............... 7,483 9,756
------- -------
Income (loss) from
operations................. $ 5,171 $ 7,001
======= =======
AS A PERCENTAGE OF REVENUES:
Net revenues................. 100.0% 100.0%
Cost of revenues............. 78.1 77.7
------- -------
Gross profit................. 21.9 22.3
------- -------
Operating expenses
Research and development... 0.9 1.3
Sales and marketing........ 7.2 7.0
General and
administrative........... 4.8 4.7
------- -------
Total operating
expenses............... 12.9 13.0
------- -------
Income (loss) from
operations................. 9.0% 9.3%
======= =======
</TABLE>

FLUCTUATIONS IN QUARTERLY RESULTS

Our quarterly operating results have fluctuated in the past and we believe
they will continue to do so in the future. Our future results of operations will
depend on many factors including:

- Fluctuating market demand for and declines in the average sales prices of
our products;

- Overproduction by suppliers of the components used in our products;

- Our ability to procure required components or fluctuations in the cost of
such components;

- The effects of litigation;

- Changes in our product and sales mix as well as seasonal demand for our
products;

- Market acceptance of new and enhanced versions of our products;

- The timing of the introduction of new products or components and
enhancements to existing products or components by us, our competitors or
our suppliers;

- Inventory obsolescence, product returns and price protections;

- Manufacturing inefficiencies associated with the start-up of new products
and volume production; and

- Expenses associated with acquisitions.

Due to the above factors, quarterly revenues and results of operations are
difficult to forecast, and we believe that period-to-period comparisons of our
operating results are neither meaningful nor predictive of future performance.
In one or more future quarters our results of operations may fall

37
<PAGE>
below the expectations of securities analysts and investors. In that event, the
trading price of our common stock would likely decline.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations from contributions of
capital by our shareholders, borrowings on various lines of credit and cash from
ongoing operations. As of June 30, 2000, we had working capital of
$36.2 million including $23,000 of cash and cash equivalents. As of
December 31, 1999, we had working capital of $22.9 million including
$3.8 million of cash and cash equivalents. In addition, we had unused
availability of approximately $4.2 million at June 30, 2000 and approximately
$7.5 million at December 31, 1999 under our line of credit with Comerica Bank.
The outstanding principal balance under our line of credit was $23.3 million at
June 30, 2000 and $12.5 million at December 31, 1999. In order to reduce
borrowings and interest expense, we operate a control disbursement or
zero-balance checking account. Under this account, we maintain a zero-balance
and transfer funds from our line of credit to cover presented checks. As a
result, we usually maintain a negative book cash balance related to outstanding
checks.

Net cash used in operating activities was $4.4 million in the first half of
2000, resulting primarily from increases in inventory and accounts receivable,
offset by increases in operating income and accounts payable. Net cash provided
by operating activities was $7.8 million in 1999, $2.3 million in 1998 and
$2.1 million in 1997. Net cash provided by operating activities in 1999 resulted
primarily from an increase in operating income, offset partially by an increase
in accounts receivable related to increased revenues. Net cash provided by
operating activities in 1998 was attributable primarily to a decline in accounts
receivable related to decreased revenues. In 1997, net cash provided by
operating activities was attributable primarily due to a decline in inventory
related to improved inventory management procedures.

Net cash used in investing activities was $816,000 in the first half of
2000, $724,000 in 1999 and $2.6 million in 1998, attributable primarily to
purchases of furniture, fixtures and equipment. Net cash provided by investing
activities was $2.1 million in 1997, resulting from the repayment of related
party loans of $3.4 million offset by purchases of production and testing
equipment to increase capacity. Although we had no material capital expense
commitments as of June 30, 2000, we expect to spend up to approximately
$3.0 million during the next 12 months, primarily for testing and engineering
equipment. For details of the terms of our related party loans, see "Certain
Transactions."

Net cash provided by financing activities was $1.5 million in the first half
of 2000, resulting from increased borrowings under our line of credit, offset by
distributions to our shareholders during such period related to their personal
tax liabilities. Net cash used in financing activities totaled $4.1 million in
1999, $1.4 million in 1998 and $3.9 million in 1997. In 1999, net cash used in
financing activities resulted primarily from reduced borrowings under our line
of credit and a decrease in capital lease and loan obligations for equipment
resulting from the restructuring of our subsidiary in Scotland. Net cash used in
financing activities in 1998 was attributable primarily to payments on capital
lease obligations. In 1997, net cash used in financing activities resulted
primarily from reduced borrowings under our line of credit.

In August 1999, we entered into a credit agreement with Comerica Bank. Under
this agreement, as amended, we can borrow up to $27.5 million for general
working capital purposes under a revolving line of credit. If we conduct an
initial public offering with net proceeds to us between $35.0 million and
$70.0 million, Comerica Bank will reduce our available line of credit to a range
of $15.0 million to $20.0 million as determined by Comerica Bank in its sole and
absolute discretion. If the net proceeds to us from an initial public offering
are greater than $70.0 million, Comerica Bank will reduce our available line of
credit to a range of $10.0 million to $15.0 million as determined by
Comerica Bank in its sole and absolute discretion. The amount available under
our line of credit is based upon the levels of eligible accounts receivable and
inventory. Borrowings under our line of credit bear interest at the prime
lending rate. The prime lending rate was 9.5% at June 30, 2000 and 8.5% at
December 31, 1999.

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<PAGE>
As a condition to our line of credit, we granted the bank a first priority
security interest in substantially all of our assets. Our line of credit matures
on August 3, 2002. In the event we terminate the credit facility on or before
August 3, 2001, or on or before August 3, 2002, a termination fee of $275,000
and $137,500, respectively, will be assessed against us, unless the termination
is due to the origination of a new credit facility with Comerica Bank. In
addition, our line of credit contains provisions requiring us to:

- Maintain our corporate existence, material rights and property;

- Comply with applicable laws;

- Operate our business substantially as conducted during the prior calendar
year;

- Provide regular financial reports to Comerica Bank;

- Pay all taxes when due;

- Maintain satisfactory insurance; and

- Satisfy tangible net worth and tangible net worth ratio tests.

The line of credit also restricts our ability to engage in certain
transactions without the prior written consent of Comerica Bank, including but
not limited to:

- The purchase, redemption or acquisition of shares of our capital stock;

- The acquisition, investment in or disposition of any significant assets or
entities;

- The making of loans or guarantees to any other person or entity;

- The increase of compensation to officers in excess of 10% per annum; and

- The purchase or lease of fixed assets in excess of $4.0 million during any
fiscal year.

Also, we have agreed not to declare or pay any cash dividends or make any
other cash distribution with respect to shares of our capital stock without the
prior written consent of Comerica Bank, except distributions to our shareholders
of record as of September 20, 2000 to cover their income tax liabilities
resulting from our operations plus up to an additional $750,000 per year in the
aggregate to cover their personal income tax liabilities unrelated to our
operations. In addition, the credit agreement was amended to permit the issuance
and repayment of the undistributed earnings notes and additional paid-in capital
notes to our shareholders of record as of September 20, 2000 upon the completion
of this offering. As of September 28, 2000, we were in compliance with all
covenants under the credit agreement.

We have entered into several capital leases and loans to finance
manufacturing and testing equipment, including leases and loans with companies
affiliated with our executive officers and directors as described under "Certain
Transactions--MDC Land Corporation and MDC Land LLC." Our obligations under
capital leases were $1.8 million on June 30, 2000, $2.3 million on December 31,
1999, $5.1 million on December 31, 1998, and $4.3 million on December 31, 1997,
with interest rates ranging from 8.1% to 9.6% per annum. Our equipment financing
loan balances were $2.2 million on June 30, 2000, $2.5 million on December 31,
1999, $1.4 million on December 31, 1998 and $1.6 million on December 31, 1997,
with interest rates ranging from 7.5% to 9.1% per annum. One of the equipment
note payable agreements contains various nonfinancial covenants that, among
other things, limit distributions and dividends to our shareholders without the
prior written consent of the lender, and require the equipment to remain
unencumbered by other liens. We have received from the lender its consent for
the issuance and repayment of the undistributed earnings notes and additional
paid-in capital notes to our shareholders of record as of September 20, 2000
upon the completion of this offering. As of September 28, 2000, we were in
compliance with all covenants under the equipment note payable agreements.

39
<PAGE>
We have also entered into a license agreement with Micron Electronics, Inc.
for certain memory modules. This license agreement expires on May 15, 2016. We
do not believe that any payment that we may make pursuant to this license
agreement will be material to our business.

We have made cash distributions of a portion of our earnings to our
shareholders of record as of September 20, 2000 for reasons including payment of
their overall personal income tax liabilities as described under "S Corporation
Status and Conversion" and "Certain Transactions--S Corporation Distributions to
Shareholders for Taxes and Other Items." On September 26, 2000, we distributed
to our shareholders of record as of September 20, 2000, in proportion to their
ownership of our shares, notes in an aggregate principal amount equal to our
undistributed earnings from the date of our formation through September 26,
2000. Upon the completion of this offering, we will use a portion of the net
proceeds from this offering to pay off the principal amount of these
undistributed earnings notes as described under "Use of Proceeds." As of
June 30, 2000, the aggregate principal amount of the undistributed earnings
notes would have been approximately $16.6 million. The actual principal amount
of the undistributed earnings notes will be increased by the amount of our
earnings from July 1, 2000 through September 26, 2000, less distributions made
to our shareholders during such period.

We believe that the net proceeds from this offering, together with our
existing assets, anticipated debt and expected cash flow from operations will be
sufficient to fund our operations for the next 12 months. Thereafter, we may
require additional sources of funds to continue to support our business. Such
funds, if needed, may not be available or may not be available on terms
acceptable to us.

LEGAL PROCEEDINGS

On September 23, 1998, we filed a lawsuit against Dense-Pac Microsystems,
Inc. in the United States District Court for the Central District of California
for infringement of our IC Tower stacking patent, U.S. Patent No. 5,514,907. We
are seeking damages, including prejudgment interest, totaling $22.8 million as
of June 30, 2000, an injunction against further infringement of our patent by
Dense-Pac, treble damages and attorneys' fees. We are also seeking a declaratory
judgment declaring Dense-Pac's stacking patent, U.S. Patent No. 4,956,694,
invalid and not infringed by us. Dense-Pac denied our claim of patent
infringement, asserted a defense of patent invalidity against our IC Tower
stacking patent and asserted a counterclaim against us alleging infringement of
its stacking patent. Dense-Pac is seeking injunctive relief and damages equal to
2% of the sales of our IC Tower stacking products found to infringe its patent,
plus interest. As of June 30, 2000, Dense-Pac sought damages, including
interest, totaling approximately $689,000. For the six months ended June 30,
2000 and the year ended December 31, 1999, less than 10.0% of our total revenues
related to products which Dense-Pac alleges infringe on its '694 patent.
Dense-Pac has also requested an award of attorneys' fees and treble damages and
has reserved the right to seek unspecified lost profits as a result of the
alleged infringement. For further details regarding this lawsuit, see
"Business--Legal Proceedings--Dense-Pac Microsystems, Inc.--Patent
Infringement."

On April 10, 2000, Dense-Pac Microsystems, Inc. filed a lawsuit against us
and Mark Moshayedi, our Chief Operating Officer, Chief Technical Officer and
Secretary, in the Superior Court of Orange County, California, seeking
unspecified damages, including punitive damages, injunctive relief, attorneys'
fees and costs arising from our alleged misappropriation of Dense-Pac's
technology based on its U.S. Patent No. 4,956,694 and the sale of our products
incorporating such technology alleged to have been misappropriated. Dense-Pac's
complaint sets forth various causes of action against us and Mark Moshayedi,
including common law misappropriation, intentional and negligent interference
with prospective business advantage, unfair competition, unjust enrichment and
trade secret misappropriation. On May 26, 2000, we filed an answer to
Dense-Pac's complaint denying Dense-Pac's allegations against us and Mark
Moshayedi and asserting a number of defenses, including failure to state a
claim, waiver and estoppel. This lawsuit is in the very early stages. We are
defending and indemnifying Mark Moshayedi in this lawsuit as part of our
obligation under our indemnification

40
<PAGE>
agreement. For further details regarding this lawsuit, see "Business--Legal
Proceedings--Dense-Pac Microsystems, Inc.--Technology Misappropriation."

On June 8, 1998, Interactive Flight Technologies, Inc. filed a lawsuit
against Avnet, Inc. in the Superior Court of Maricopa County, Arizona seeking an
award for direct and consequential damages arising from our sale of allegedly
defective hard disk drives to Avnet for inclusion in an in-flight entertainment
system manufactured by Interactive Flight. Avnet has filed a third-party
complaint against us for indemnification under the terms of a distribution
agreement between Avnet and us. We filed a third party complaint against Bell
Microsystems, Inc., the distributor of the disk drives, seeking indemnification
and contribution. Interactive Flight has filed an amended complaint to add us as
an additional defendant based on the terms of our written one-year warranty
which they contend was assigned to them by Avnet. Interactive Flight is seeking
out-of-pocket damages of approximately $4.1 million from both Avnet and us and
consequential damages from Avnet only arising from the alleged loss of contracts
with several airline carriers totaling an additional $10.0 million. On
August 18, 2000, the court entered a ruling granting Avnet's motion for summary
judgment requiring us to indemnify Avnet for damages and attorney's fees
incurred by Avnet in its defense of Interactive Flight's lawsuit. On
September 1, 2000, the court entered a ruling in favor of Avnet and us by
granting our joint motion for partial summary judgment against Interactive
Flight. The effect of this ruling is to ban Interactive Flight from pursuing
claims for either incidental or consequential damages against Avnet and us. On
September 13, 2000, the court granted a motion for summary judgment in favor of
Bell Microsystems and against us, effectively eliminating our claim aganst Bell
Microsystems for indemnificaton. For further details regarding this lawsuit, see
"Business--Legal Proceedings--Interactive Flight Technologies, Inc."

YEAR 2000 COMPLIANCE

We did not experience any material difficulties in connection with the
changeover to the Year 2000. We conducted a Year 2000 assessment to determine
the impact of the Year 2000 issue on us, and to coordinate remediation
activities. Because none of our products perform date related processing and
none contain real time clock circuitry, these products have been determined to
be Year 2000 ready. However, our storage and connectivity products are used as
components in a variety of host systems. The firmware, operating system and
application software of these host systems are designed and manufactured by
others, and therefore we can make no claim with regard to the Year 2000
readiness of these host systems. In addition, our assessment of Year 2000 risks
related to material suppliers, customers and other third parties is complete.
Based on our inquiries, we found no potential Year 2000 problems with our
material suppliers or customers, however, there can be no assurance that our
material suppliers or customers will not be impacted by any unknown Year 2000
issues. We will continue to monitor our critical computer applications and those
of our material suppliers and customers throughout 2000 so we can promptly
address any Year 2000 matters as they may arise.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have market risk relating to borrowings under our line of credit because
the interest rate under the line of credit is variable. Our line of credit had a
balance of $22.6 million at September 28, 2000. For the first half of 2000 and
1999, over 95.0% of our international sales were denominated in U.S. dollars.
Consequently, if the value of the U.S. dollar increases relative to a particular
foreign currency, our products could become relatively more expensive. In
addition, we purchase substantially all of our IC devices from local
distributors of Japanese, Korean and Taiwanese suppliers. Fluctuations in the
currencies of Japan, Korea or Taiwan could have an adverse impact on the cost of
our raw materials. To date, we have not entered any derivative instruments to
manage risks related to interest rates or foreign currency exchange rates.

41
<PAGE>
BUSINESS

COMPANY OVERVIEW

Simple Technology is an independent provider of standard and custom memory
solutions, with products based on dynamic random access memory, or DRAM, static
random access memory, or SRAM, and Flash memory technologies, such as
CompactFlash. We design, manufacture and market a comprehensive line of over
2,500 memory and storage products, as well as connectivity products that connect
memory cards and hard drive upgrade kits to PCs. These products are used in high
performance computing, networking and communications, consumer electronics and
industrial applications. Examples of these applications include desktop and
notebook computers, servers, routers, switches, digital cameras, digital video
recorders, MP3 digital audio players, personal digital assistants, or PDAs,
embedded controls and medical instruments. Our patented IC Tower stacking
technology allows multiple memory chips to be stacked together to increase the
capabilities of memory modules without increasing the product footprint. This
technology allows our customers to design memory intensive systems on a more
competitive basis. Our CompactFlash cards provide portable digital devices, such
as digital cameras and MP3 digital audio players, with increased storage
capabilities in a smaller size product. We believe our design, manufacturing,
testing and logistics expertise, along with our proprietary technologies, enable
us to respond to our customers' rapidly changing product and service
requirements by providing our customers with timely access to higher speed and
higher density memory products, increasing our customers' ability to bring
products to market quickly, and decreasing our customers' capital requirements
and production and inventory costs.

We offer standard and custom memory solutions to original equipment
manufacturer, or OEM, and aftermarket customers, including value added
resellers, or VARs, mail order customers, commercial and industrial
distributors, and retailers. We believe our comprehensive line of products
allows our customers to efficiently manage their inventory purchases by
consolidating their sources for memory, storage and connectivity products. Our
OEM Division, known as SiliconTech, primarily sells custom memory products for
newly manufactured systems, with most sales based on a coordinated design effort
between us and our OEM Division customers. In the first half of 2000, our
principal direct OEM Division customers included Alcatel, Cisco Systems,
Motorola, Silicon Graphics and Unisys. In 1999, our principal direct OEM
Division customers included Dell Products, Mitsubishi, Motorola, Unisys and
Xerox. Our Aftermarket Division primarily sells standard and custom memory and
storage products which are mainly used as upgrades to existing systems. In the
first half of 2000, our principal Aftermarket Division customers included CDW
Computer Centers, Costco Wholesale, Ingram Micro, PC Connection and Synnex
Information Technologies. In 1999, our principal Aftermarket Division customers
included Avnet Computer, CDW Computer Centers, Costco Wholesale, Ingram Micro
and Micro Warehouse. Other than CDW Computer Centers, no customer accounted for
more than 10.0% of our total revenues in 1999 or in the first half of 2000.

INDUSTRY BACKGROUND

The demand for memory products in digital electronic systems has been
growing rapidly. The development of high performance PCs and servers and the
evolution of Internet infrastructure have increased the demand for greater
capabilities in the storage, manipulation, transfer and management of digital
data. Digital computing and processing have extended beyond traditional computer
systems, such as PCs and servers, to include a wide array of networking and
communications, consumer electronics and industrial applications, including
routers, switches, digital cameras, digital video recorders, MP3 digital audio
players, PDAs, embedded controls and medical instruments. The increased
functionality and decreased size of many of these products have led to a greater
demand for higher density memory products with smaller size, lower power
consumption and higher speeds at a lower cost. As a result, growth in the market
for traditional devices and expansion in the demand for new forms of memory are
expected to continue.

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<PAGE>
The memory market can be divided into several types of integrated circuit,
or IC, devices that are designed to perform specific functions within computer
and other electronic systems. Three significant types of memory IC devices are
DRAM, SRAM and Flash. DRAM and SRAM are considered volatile memory since they
require a constant power supply to retain data. Since Flash is able to retain
data without a power source, it is considered non-volatile memory. Within each
of these categories, manufacturers are offering an increased variety of memory
products that are designed for different applications and performance
requirements. This increased variety has placed greater demands on manufacturers
of computer and other electronic systems to maintain a current knowledge base
and expertise.

DRAM is a high density, low cost per bit, random access memory component
which stores digital information in the form of bits and provides high speed
storage and retrieval of data. According to Dataquest, the worldwide market for
DRAM is expected to grow at a compound annual growth rate of 48.7% from
$23.1 billion in 1999 to $76.0 billion in 2002.

SRAM performs memory functions similar to DRAM, but is much faster and does
not require the memory modules to be electronically refreshed. According to
Dataquest, the worldwide market for SRAM is expected to grow at a compound
annual growth rate of 13.6% from $4.5 billion in 1999 to $6.6 billion in 2002.

Flash memory was developed as a solid-state, non-volatile memory alternative
to rotating disk drives. Flash is noiseless, considerably lighter, more rugged
and consumes substantially less power than a rotating disk drive. According to
Dataquest, the worldwide market for Flash memory is expected to grow at a
compound annual growth rate of 19.7% from $3.9 billion in 1999 to $8.0 billion
in 2003.

MARKET DRIVERS

Growth in the third-party memory market is expected to continue due to the
following four primary market drivers:

INCREASE IN DEMAND FOR MEMORY IN TRADITIONAL APPLICATIONS. The demand for
memory in traditional applications is fueled by, among other things, expanding
unit sales of PCs in business and consumer markets, the increasing use of PCs to
perform memory-intensive graphics and multimedia functions, the increasing
amount of memory required to support faster microprocessors, the widespread use
of increasingly complex operating systems and application software, and the
increasing use of local area network and wide area network routing and switching
equipment that incorporates complex memory and embedded computer subsystems. For
example, the evolution of PCs running Windows 95 and Pentium processors to PCs
running Windows 98 and Pentium II processors has led to increased memory
requirements from 16 megabytes to 32 megabytes. In addition, increased memory
usage in servers and workstations, and networking and communications equipment
has been driven by the growth of Internet infrastructure for applications such
as e-commerce, e-mail and web hosting.

GROWTH IN NEW AND EMERGING MEMORY APPLICATIONS. The evolution of digital
technology has created a demand for memory solutions that offer smaller size,
reduced power requirements, higher density and reliability, and the capability
to withstand high levels of shock and vibration and extreme temperature
fluctuations. These applications include, among others:

- Networking and communications equipment, including mobile communications
systems, network servers, network attached storage, routers, switches and
wireless base stations;

- Consumer electronics, including cellular telephones, digital cameras, MP3
digital audio players, network computers, PDAs and set top boxes; and

- Industrial applications, including hand-held scanning devices and medical
monitors.

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<PAGE>
INCREASE IN OEM OUTSOURCING. As product development times shorten and the
ability of manufacturers to bring products to market quickly becomes more
critical in product adoption and success, OEMs are increasingly outsourcing the
design, development and manufacture of memory products to third-party memory
providers. These OEM outsourcing practices range from contract manufacturing,
where the OEM turns to an outside supplier to procure components and design and
manufacture a specific product on a turnkey basis, to consignment, where the OEM
employs an outside supplier to design and manufacture a product using memory
components supplied by the OEM. By outsourcing, OEMs are able to focus their
resources on activities and technologies in which they add the greatest value,
such as system design, sales, marketing and distribution. With the wide
acceptance of build-to-order and direct sales distribution strategies, OEMs are
increasingly more reliant on the manufacturing, logistics and inventory
management functions of third-party vendors. In addition, as memory products
increase in complexity, the design, manufacturing and test processes become more
automated, requiring a greater level of investment in capital equipment and
skilled engineers and specialists. Outsourcing allows OEMs to gain access to
advanced manufacturing facilities, without increasing their overall capital
equipment requirements. In addition, the proliferation of a wide variety of
memory devices, as well as frequent product design changes, short product life
cycles and component price fluctuations, has created increased difficulties for
OEMs to plan, procure and manage their inventories efficiently. By using a
third-party memory provider's manufacturing, volume procurement capabilities and
inventory management expertise, OEMs can reduce their production and inventory
costs.

GROWTH IN AFTERMARKET DEMAND FOR MEMORY MODULES. The shift to modular PC
and server designs configured with a base level of memory and sockets for
upgrade memory has led to a growing demand for aftermarket memory modules. As an
alternative to purchasing more expensive OEM-provided memory, corporate PC and
server customers are relying on VARs, distributors and retailers as a source of
high volume, cost-effective memory modules. In addition, consumer PC buyers are
increasingly buying their additional memory requirements through retail
channels. The introduction of new consumer electronic applications, such as
digital cameras and MP3 digital audio players, has also led to a growing
aftermarket for Flash memory products.

THE SIMPLE TECHNOLOGY SOLUTION

Simple Technology designs, manufactures and markets a comprehensive line of
memory, storage and connectivity products used in high performance computing,
networking and communications, consumer electronics and industrial applications.
We believe our comprehensive line of products allows our customers to
efficiently manage their inventory purchases by consolidating their sources for
memory, storage and connectivity products.

Our products are designed to offer the following features:

- HIGH DENSITY. Our patented IC Tower stacking technology allows us to
design and manufacture CompactFlash cards and DRAM memory modules in which
multiple memory chips are stacked together to increase the capabilities of
memory modules without increasing the product footprint. This technology
allows our customers to design memory intensive systems on a more
competitive basis. As the component chips increase in capacity, our
ability to increase density in the same footprint also increases.

- SMALL FOOTPRINT. We are able to manufacture high density memory modules
and Flash storage products with some of the smallest footprints on the
market.

- HIGH PERFORMANCE AND RELIABILITY. Our memory products utilize
sophisticated error detection and correction processes to provide high
data reliability and integrity. In addition, our memory products are
designed to withstand high levels of shock and vibration and extreme
temperature fluctuations typically associated with mobile computing and
industrial applications.

44
<PAGE>
- LOW POWER CONSUMPTION. During read and write operations, our Flash memory
products use less power than most rotating disk drives. At all other times
during system operation, our Flash memory products require no power. This
low power consumption translates into longer battery life for many mobile
computing and consumer electronic devices.

We offer our OEM Division customers a comprehensive memory solution from
design of memory devices and creation of prototypes through high volume
production and testing. We believe our quick-turn design capabilities and
automated manufacturing and test processes allow our OEM Division customers to
quickly and cost-effectively bring products to market. This outsourcing also
allows our OEM Division customers to focus their resources on activities and
technologies in which they add the greatest value, such as system design, sales,
marketing and distribution. We believe our technical capabilities and volume
manufacturing strengths allow our OEM Division customers to cost-effectively
design and implement customized, advanced memory chip technology in high volume
product applications.

Our Aftermarket Division customers include VARs, mail order customers,
commercial and industrial distributors, and retailers. We are able to strengthen
our relationships with these aftermarket customers and develop the Simple
Technology brand-name through various marketing programs, such as volume
rebates, joint marketing, account manager incentives and lead generation. We
also provide ongoing customer support, including on-line pricing and navigation
tools, toll-free technical support and account manager training programs. For
further details regarding our various marketing programs, see "--Strategy" and
"--Sales and Marketing."

We believe our design, manufacturing, testing and logistics expertise, along
with our proprietary technologies, enable us to respond to our customers'
rapidly changing product and service requirements by:

- Providing our customers with timely access to higher speed and higher
density memory products;

- Increasing our customers' ability to bring products to market quickly; and

- Decreasing our customers' capital requirements and production and
inventory costs.

STRATEGY

Our goal is to be a worldwide leader in the design, manufacture and
marketing of standard and custom memory solutions. We intend to continue to
focus on growing markets, such as high performance computing, networking and
communications, consumer electronics and industrial applications. In addition,
we plan to expand our presence in new and emerging high growth memory markets
for applications such as digital cameras, MP3 digital audio players, PDAs and
various Internet devices. We plan to increase our market share in new and
emerging markets by leveraging our existing sales channels to serve the OEM and
aftermarket upgrade requirements for DRAM and SRAM memory modules, and Flash
cards.

The following are key elements of our strategy:

EXPAND AND BROADEN OUR PRODUCT LINE. We plan to develop additional high
density products with smaller sizes, lower power consumption and higher speeds
to serve the growing memory needs of traditional applications, such as PCs,
networking equipment and embedded applications, and new and emerging
applications, such as digital cameras, MP3 digital audio players and PDAs. These
products include:

- Accessories for transferring pictures between digital cameras and
computers;

- Starter kits for new digital camera users that include Simple Technology
products and other value-added bundles;

45
<PAGE>
- New interfaces for Flash drives related to applications such as in-flight
entertainment systems and telecommunications systems; and

- High density stacked memory modules for networking applications, routers
and switches.

While we estimate that we will complete prototyping each of these products
by the end of 2000, unforeseen factors may prevent us from developing these
products on time, if at all.

MAINTAIN AND EXTEND OUR TECHNOLOGICAL AND ENGINEERING EXPERTISE. We are
focused on using our technological and engineering expertise to develop
proprietary technologies to efficiently produce high quality, technologically
advanced products that meet the complex and diverse needs of our customer base.
Through this expertise we have developed patented proprietary technologies such
as IC Tower stacking, as well as manufacturing and testing techniques which we
believe allow for higher production yields and lower defect rates. We intend to
continue to leverage and expand our technological and engineering expertise,
including the hiring of additional engineers, to develop new proprietary
technologies and further expand our product and service offerings while
improving our manufacturing and testing capabilities.

INCREASE AND EXPAND OUR SALES AND MARKETING EFFORTS. We intend to increase
our marketing efforts for both our OEM and aftermarket customers during 2000. We
plan to increase our marketing efforts directed at OEM design and supply chain
managers by:

- Expanding our internal sales force with additional corporate and regional
account managers and field application engineers to provide increased
sales support;

- Expanding our use of manufacturers' representatives and industrial
distributors to target international customers;

- Continuing to implement web-based interactive forums on key technology and
product trends directed at existing and potential OEM Division customers;
and

- Continuing to sponsor industry conferences.

We believe the combination of our internal direct sales force with an
external sales force of manufacturers' representatives and industrial
distributors allows us to more effectively market our products to a larger
number of OEM Division customers.

On the aftermarket side, we plan to make a significant investment in
advertising and marketing programs that we believe will enhance our
relationships with these customers and further develop Simple Technology
brand-name recognition. In addition, we believe that, as advanced memory
technologies become widely accepted, many of the custom products developed for
our OEM Division customers will eventually reach the high volume aftermarket
channel. We believe that we are well positioned to capitalize on these product
life cycle synergies between our OEM and Aftermarket Divisions.

For both our OEM and aftermarket customers, we expect to expand our
advertising, public relations, telemarketing, use of direct mail and
participation in trade shows. We also intend to engage the services of an
outside agency for creative development and ad placement. We expect to hire a
vice president of marketing to oversee our marketing plans. While we believe we
can implement our plans to increase and expand our sales and marketing efforts
by the end of 2000, we may ultimately decide to discontinue some or all of these
efforts based upon unforeseen factors.

INCREASE OUR MANUFACTURING EFFICIENCIES. We intend to further improve our
manufacturing efficiencies while maintaining our focus on quality and
responsiveness to customers through our quick-turn design and manufacturing
services. For example, we intend to implement team-based production techniques,
just-in-time purchasing and demand-based production scheduling. We also

46
<PAGE>
intend to develop high volume production techniques for the manufacture of
advanced memory modules using our IC Tower stacking technology. We believe we
benefit from certain economies of scale in procurement and equipment utilization
due to our volume manufacturing of a wide variety of products. In addition, we
believe our experienced manufacturing staff and specialized equipment improve
the efficiency of our manufacturing process. While we estimate that we will
implement our high volume production techniques by the end of 2000, unforeseen
factors may prevent us from meeting our implementation schedule.

FURTHER PENETRATE INTERNATIONAL MARKETS. We intend to expand our existing
relationships and establish new relationships with international customers
through increased sales and marketing activities, including local advertising
campaigns and joint marketing programs. In addition, we plan to increase our
local sales presence through additional sales offices and field application
engineers, as well as expand our relationships with manufacturers'
representatives and industrial distributors overseas.

PURSUE ACQUISITIONS OF COMPLEMENTARY BUSINESSES AND TECHNOLOGIES. We intend
to pursue selective acquisitions to complement our internal growth. We intend to
seek acquisitions which we believe will strengthen our position in our targeted
markets, enhance our technology base, increase our production capacity and
expand our geographic presence. We intend to seek and acquire companies with
synergistic or complementary technologies, manufacturing capabilities and sales
channels. We currently have no commitments or agreements and are not involved in
any negotiations with respect to any such transactions.

DESIGN, MANUFACTURING AND TEST

DESIGN AND PRODUCTION. The typical production cycle consists of a design
stage followed by a prototype stage and ends with full production of the final
product. The length of the design stage has been reduced in recent years due to
rapid improvements in technology and the increased demand for smaller memory
products with greater capabilities. In response, we have developed quick-turn
design and manufacturing services. By working with our OEM Division customers
early in the design and prototype stages, we are able to resolve critical design
considerations effectively and efficiently, thus shortening the time from
prototype design to volume manufacturing. In addition, working closely with our
OEM Division customers throughout the design and production stages allows us to
gain important insights into their future product requirements. We believe our
quick-turn design and manufacturing services also allow us to introduce upgrade
products to the aftermarket on a timely basis to coincide with new product
releases by these customers.

MANUFACTURING. Our manufacturing processes are highly automated and involve
the use of specialized equipment for the production of memory products. Our
manufacturing lines have been optimized to support the placement of a large
number of IC devices on each memory board. We believe we are able to achieve a
high manufacturing yield and minimize direct labor costs as a result of our
design efficiencies, high level of automation and general manufacturing
expertise. Because our manufacturing lines can be easily configured for
different memory products, we have the ability to offer our customers short
manufacturing and test cycles on small and large projects. We also have
developed an automated method of manufacturing our IC Tower stacking products
which we believe results in further manufacturing efficiencies. Our OEM Division
manufacturing is ISO 9001 certified.

TEST. An important aspect of our manufacturing operations is our focus on
product testing. We test 100% of our memory products upon completion of
manufacturing, which results in lower returns due to product defects. We believe
that our test expertise will continue to grow in importance as the speed and
complexity of memory products increase. Our test engineering group develops
proprietary testing processes which, together with our continued investment in
advanced testing equipment, enables us to diagnose problems in system design and
memory components.

47
<PAGE>
RESEARCH AND DEVELOPMENT/TECHNOLOGY

Our research and development efforts are focused on developing reliable,
high performance and cost-effective memory products to address the needs of
traditional and emerging memory applications. We believe that the timely
development of new products is essential to maintaining our competitive
position. Our engineering staff works closely with our OEM Division customers
and provides services throughout the production cycle, including component
selection, schematic design, layout, manufacturing and test development. We
design our products to be compatible with existing industry standards and, where
appropriate, develop and promote new standards. An important aspect of our
engineering operations is to understand the challenges presented by our OEM
Division customers' custom design requirements and satisfy them by utilizing our
proprietary technologies and our technical expertise. In the course of meeting
our customers' challenges, we are often required to develop new technologies and
processes which are later added to our design library for use by our other
customers. Our design library consists of over 1,000 designs that are available
for all standard and custom configurations. We focus primarily on new high speed
memory modules, improvements in test routines and related software, and
improvements in manufacturing processes and technologies. We plan to continue to
direct our research and development efforts toward the design of new memory
products which address the requirements of our OEM and aftermarket customers.

In the Flash market, our research and development is directed toward the
design and introduction of new Flash products that provide improved storage
capacities, higher speed read and write capabilities, smaller sizes and new
interfaces. These products are intended for networking and communications,
consumer electronics and industrial applications.

Our IC Tower stacking technology enables us to produce high density DRAM and
Flash products by manufacturing products in a three-dimensional form. These
products offer higher speed capabilities than the traditional two-dimensional
designs in the same footprint. We stack DRAM modules and Flash cards using
standard memory chips which do not require modification. This capability enables
us to shorten our customers' design cycles for high density modules to standard
lead times normally associated with non-stacked modules.

48
<PAGE>
PRODUCTS

We design, manufacture and market a comprehensive line of over 2,500 memory,
storage and connectivity products using our proprietary design and manufacturing
technologies. Substantially all of our DRAM and Flash memory products comply
with industry standards and are based on a variety of industry architectures. We
offer DRAM, Flash, stacking, SRAM and other products, which include hard drive
upgrade kits and connectivity products. Sales of memory products accounted for
90.2% of our revenues in the first half of 2000 and 89.8% of our revenues in
1999.

DRAM PRODUCTS

We offer DRAM products including a wide range of single in-line memory
modules, or SIMMs, dual in-line memory modules, or DIMMs, and small outline dual
in-line memory modules, or SO DIMMs. Our standard DRAM products are available in
various configurations of up to 184-pins and densities of up to 512 megabytes.
Many of these products are also offered in 3.3 volt or 5.0 volt configurations
utilizing different DRAM architectures such as DDR, EDO, FPM, RDRAM and SDRAM.

The following table describes certain of our non-stacking DRAM products as
of September 28, 2000:

<TABLE>
DRAM SPEED
PRODUCT FAMILY DENSITY ARCHITECTURE (MHZ) APPLICATIONS
<S> <C> <C> <C> <C>
184-pin DIMM 64-512MB DDR 200-266 Servers and workstations
Rambus DIMM 64-256MB RDRAM 600-800 Desktop PCs, embedded controls and
workstations
168-pin Registered DIMM 64-512MB SDRAM 66-133 Desktop PCs, embedded controls,
networking and communications
equipment, printers, routers, servers
and workstations
168-pin DIMM 16-512MB EDO, FPM, 10-133 Desktop PCs, embedded controls,
SDRAM networking and communications
equipment, printers, routers, servers
and workstations
144-pin SO DIMM 16-256MB EDO, FPM, 10-133 Embedded controls, networking and
SDRAM communications equipment, notebook PCs,
printers and routers
100-pin DIMM 16-64MB EDO, FPM, 33-133 Networking and communications
SDRAM equipment, printers and Windows
terminals
72-pin SO DIMM 16-64MB EDO, FPM 10-33 Networking and communications
equipment, and notebook PCs
72-pin SIMM 16-128MB EDO, FPM 10-33 Desktop PCs, embedded controls,
networking and communications
equipment, printers, routers and
servers
</TABLE>

49
<PAGE>
FLASH PRODUCTS

We manufacture three types of Flash products: Flash modules, Linear Flash PC
Cards and data storage Flash products. Flash modules and Linear Flash PC Cards
are commonly used in program and code storage applications such as networking
and communications and embedded applications. Data storage Flash products are
commonly used where data storage is the primary function such as in digital
cameras, MP3 digital audio players, certain networking and communications and
embedded applications, and ruggedized computers built to withstand shock and
vibration.

FLASH MODULES. We offer standard, custom and application-specific Flash
modules, including 168-pin Asynchronous DIMMs, 80-pin Asynchronous SIMMs and
72-pin DRAM/Flash combination SIMMs. Our Flash modules are available in
densities of up to 64 megabytes. We also offer additional options such as
on-board active reset control and system reset. Many of these products are also
available in 3.3 volt or 5.0 volt configurations.

The following table describes certain of our Flash modules as of
September 28, 2000:

<TABLE>
FLASH MODULE
PRODUCT FAMILY DENSITY ARCHITECTURE APPLICATIONS
<S> <C> <C> <C>
168-pin DIMM 4-16MB 3.3 volt or 5.0 volt Networking and communications
equipment, printers and switches
80-pin SIMM 2-64MB 12.0 volt/5.0 volt programming, Networking and communications
5.0 volt only, 3.3 volt only, equipment, printers and switches
reset options
72-pin DRAM/Flash 8MB Flash Plugs into the DRAM socket; Networking and communications
SIMM 56MB DRAM reads and writes like DRAM equipment
</TABLE>

LINEAR FLASH PC CARDS. We offer standard, custom and application-specific
Linear Flash PC Cards, with densities ranging from 512 kilobytes to 64
megabytes.

The following table describes certain of our Linear Flash PC Cards as of
September 28, 2000:

<TABLE>
LINEAR FLASH PC CARD
PRODUCT FAMILY DENSITY FEATURES APPLICATIONS
<S> <C> <C> <C>
68-pin PC Card 512KB-64MB Plug and play, compatible to Medical equipment, networking and
Intel based series 1, 2, 2+ and communications equipment, notebook
Value Series 100 and 200 PC PCs, PDAs and test equipment
Cards
68-pin PC Card 1MB-64MB Plug and play, compatible to Medical equipment, networking and
series C and D AMD cards communications equipment, PDAs and
test equipment
</TABLE>

50
<PAGE>
DATA STORAGE FLASH PRODUCTS. We offer a broad line of data storage Flash
products in various capacities, sizes and operating voltages and temperatures.
Our current product families include CompactFlash, ATA Flash PC Cards and
solid-state Flash storage. Our data storage Flash products are compatible with a
majority of today's industry-standard computing and communications systems.

COMPACTFLASH. Our CompactFlash products provide full PC Card ATA
functionality but are only one-fourth the size of a standard PC Card.
CompactFlash's small size, durability, low power consumption and ability to
operate at either 3.3 volts or 5.0 volts make it well-suited for a range of
current and next-generation, small size consumer applications such as audio
recorders, digital cameras, MP3 digital audio players and PDAs. CompactFlash
products provide interoperability with systems based on the PC Card ATA
standard by using a low cost passive adapter.

ATA FLASH PC CARDS. Our ATA Flash PC Cards are used in storage, data
backup and data logging applications. Our products are available in PC Card
Type I, II and III form factors.

SOLID-STATE FLASH STORAGE. Our solid-state Flash storage products are
available in 2.5 inch and 3.5 inch hard disk sizes and are targeted at
applications that require embedded data storage devices. Our solid-state
Flash storage products offer rugged, portable, low power data storage and
are compatible replacements for rotating hard drives, making them ideal for
notebook computers, communication devices, and networking and communications
applications requiring embedded storage.

The following table describes certain of our data storage Flash products as
of September 28, 2000:

<TABLE>
DATA STORAGE FLASH
PRODUCT FAMILY DENSITY SIZE
<S> <C> <C>
CompactFlash 8-128MB Type I (36.4mm X 42.8mm X 3.3mm)
ATA Flash PC Card 8MB-1GB Type I (54.0mm X 85.6mm X 3.3mm)
Type II (54.0mm X 85.6mm X 5.0mm)
Type III (54.0mm X 85.6mm X 10.0mm)
Solid-state Flash storage 8MB-1GB 2.5 inch and 3.5 inch
</TABLE>

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<PAGE>
STACKING DRAM AND FLASH CARD PRODUCTS

DRAM MODULES AND FLASH CARD PRODUCTS. We offer custom and
application-specific stacking DRAM modules including a wide range of DIMMs and
SO DIMMs. Our stacking DRAM modules are available in various configurations of
up to 200-pins and densities of up to 1 gigabyte. Many of these modules are also
offered in both 3.3 volt and 5.0 volt configurations utilizing different DRAM
architectures such as EDO, FPM and SDRAM. Our IC Tower stacking technology has
enabled us to offer a 320 megabyte Type II CompactFlash card, which is one of
the highest capacity CompactFlash cards currently available.

The following tables describe certain of our stacking DRAM and Flash card
products as of September 28, 2000:

<TABLE>
STACKING DRAM SPEED
PRODUCT FAMILY DENSITY ARCHITECTURE (MHZ) APPLICATIONS
<S> <C> <C> <C> <C>
200-pin Registered DIMM 256-512MB SDRAM 66-133 Servers
168-pin Registered DIMM 256MB-1GB SDRAM 66-133 Desktop PCs,
embedded controls,
networking and
communications
equipment, printers,
routers, servers and
workstations
168-pin DIMM 256MB-1GB EDO, FPM, SDRAM 10-133 Desktop PCs,
embedded controls,
networking and
communications
equipment, printers,
routers, servers and
workstations
144-pin SO DIMM 128MB-1GB SDRAM 66-133 Embedded controls,
networking and
communications
equipment, notebook
PCs and routers
</TABLE>

<TABLE>
STACKING FLASH CARD
PRODUCT FAMILY DENSITY SIZE
<S> <C> <C>
CompactFlash 320MB Type II (36.4mm X 42.8mm X 5.0mm)
</TABLE>

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<PAGE>
IC TOWER STACKING COMPONENTS. Our patented IC Tower stacking technology is
a high density memory design architecture that uses standard DRAM IC devices to
create high capacity components. We offer a wide selection of stacked components
to be used on memory modules and on our customers' specific applications. This
technology is used in complex, high capacity module designs and systems and
offers chip density that is less expensive than non-stacked components on a per
megabit basis.

The following table describes certain of our IC Tower stacking components as
of September 28, 2000:

<TABLE>
IC TOWER STACKING PRODUCT FAMILY DENSITY ARCHITECTURE SPEED (MHZ) APPLICATIONS
<S> <C> <C> <C> <C>
DDR 128-512MB 2 High 200-266 Standard and application-
(64-256MB) specific memory modules and
systems
SDRAM 128-512MB 2 High 66-133 Standard and application-
(64-256MB) specific memory modules and
systems
EDO/FPM 128MB 2 High 10-33 Standard and application-
(64MB) specific memory modules and
systems
</TABLE>

SRAM PRODUCTS

We offer a comprehensive line of standard, custom and application-specific
SRAM modules and PC Cards, including synchronous, asynchronous and battery
backup low power SRAM devices. Our SRAM products are available in densities of
up to 8 megabytes. Many of these products are also available in 3.3 volt or 5.0
volt configurations.

The following table describes certain of our SRAM products as of
September 28, 2000:

<TABLE>
SPEED
SRAM PRODUCT FAMILY DENSITY (MHZ) APPLICATIONS
<S> <C> <C> <C>
Custom ZBT 4-8MB 133-200 Networking and communications
equipment
PC Card 512KB-6MB 6.6-10 Embedded systems, industrial
control test equipment and
networking and communications
equipment
72-pin SIMM 2-8MB 66-100 Networking and communications
equipment
64-pin SIMM 1MB 66-83 Networking and communications
equipment
</TABLE>

OTHER PRODUCTS

HARD DRIVE UPGRADE KITS. We offer hard drive upgrade kits for many major
brands of notebook PCs. Our products range from 6 to 30 gigabytes. The primary
use of these products is to enhance the storage capacity of notebook PCs. We
also offer USB data transfer/backup kits for desktop and notebook PCs.

53
<PAGE>
CONNECTIVITY PRODUCTS. We offer connectivity products that connect PC
Cards, CompactFlash cards and hard drive upgrade kits to a PC's parallel port or
USB port. These products allow the user to move information from their PC Card,
CompactFlash card or hard drive to their desktop or notebook PC.

CUSTOMERS

OEM DIVISION

In 1999 our OEM Division sold to over 200 direct customers and industrial
distributors. No OEM Division customer accounted for more than 10.0% of our
total revenues in the first half of 2000 or 1999. Our largest OEM Division
customer accounted for 17.0% of our OEM Division revenues or 6.1% of our total
revenues in the first half of 2000 and 24.0% of our OEM Division revenues or
6.2% of our total revenues in 1999. The following table lists our top ten OEM
Division customers in 1999 comprising an aggregate of 75.4% of our OEM Division
revenues or 19.4% of our total revenues in 1999. We have no long-term contracts
with these customers.

<TABLE>
<CAPTION>
CUSTOMER MARKET SEGMENT/DISTRIBUTION CHANNEL
-------- -----------------------------------
<S> <C>
Alcatel Internetworking, Inc......................... Networking equipment
Bell Microproducts, Inc.............................. Industrial distribution
Dell Products L.P.................................... Desktop PCs, enterprise servers and notebook PCs
EMC Corporation...................................... Network attached storage
Fujitsu Microelectronics, Inc./ Desktop PCs, enterprise servers, notebook PCs
Fujitsu Personal Systems, Inc...................... and workstations
Mitsubishi Electronics America, Inc.................. Desktop PCs, enterprise servers and notebook PCs
Motorola, Inc........................................ Single board computers
Pioneer-Standard Electronics, Inc.................... Industrial distribution
Unisys Corporation................................... Mainframes and servers
Xerox Corporation.................................... Office equipment
</TABLE>

AFTERMARKET DIVISION

In 1999 our Aftermarket Division sold to over 1,500 customers through a
variety of distribution channels including VAR, mail order, commercial and
industrial distribution, and retail. Our largest Aftermarket Division customer,
CDW Computer Centers, Inc., accounted for 30.0% of our Aftermarket Division
revenues or 19.2% of our total revenues in the first half of 2000 and 26.1% of
our Aftermarket Division revenues or 19.4% of our total revenues in 1999. No
other Aftermarket Division customer accounted for more than 10.0% of our total
revenues in the first half of 2000 or 1999. The following table lists our top
ten Aftermarket Division customers in 1999 comprising an

54
<PAGE>
aggregate of 47.6% of our Aftermarket Division revenues or 35.3% of our total
revenues in 1999. We have no long-term contracts with these customers.

<TABLE>
<CAPTION>
CUSTOMER DISTRIBUTION CHANNEL
-------- --------------------
<S> <C>
Avnet Computer....................................... Industrial distribution
Best Buy Co., Inc.................................... Retail
CDW Computer Centers, Inc............................ Mail order
Costco Wholesale Corporation......................... Retail
Ingram Micro Inc..................................... Commercial distribution
Micro Warehouse, Inc................................. Mail order
PC Connection, Inc................................... Mail order
PC Service Source.................................... VAR
WestGroup International Pty Ltd...................... VAR
Wyle Electronics..................................... Industrial distribution
</TABLE>

In addition, through our commercial distribution arrangements, we supply
certain of our products to e-commerce companies, including Buy.com and
Egghead.com, for their sale of these products on the Internet.

We expect that sales of our products to a small number of customers will
continue to contribute materially to our revenues for the foreseeable future and
believe that our financial results will depend in significant part upon the
success of our customers' products. We have also experienced changes in the
composition of our major customer base from quarter to quarter as the market
demand for our customers' products changes and we expect this variability will
continue in the future.

SALES AND MARKETING

OEM DIVISION

Our OEM Division uses an internal direct sales force complemented by an
external sales force of manufacturers' representatives and industrial
distributors for sales to OEM Division customers in the United States and
internationally. We pursue our customer base on both a geographic and account
specific basis. We believe these combined sales forces have the local presence,
market knowledge and strategic insight to allow us to more effectively market
our products to a larger number of OEM Division customers. In addition, as part
of our sales and marketing efforts, our experienced applications engineers work
closely with our OEM Division customers in designing our products into OEMs'
systems.

AFTERMARKET DIVISION

We ship Simple Technology brand-name products directly to VARs, mail order
customers, commercial and industrial distributors, and retailers. As of
June 30, 2000 our products were available in more than 800 stores. In addition
to in-house sales representatives, our sales efforts in the aftermarket channel
are supported by manufacturers' representatives. For the mail order and retail
channels, we implement direct advertising in magazines and newspapers as a way
of bringing end-users to our customers' locations. Some of our aftermarket
customers also feature our products in their advertisements in exchange for a
fee. We offer certain VARs volume rebates and work with their customers to
qualify our products for their information system departments. Volume rebates
are used to incentivize resellers, rewarding them with a rebate for our products
sold. Total volume rebates issued to our VARs were approximately $76,000 in the
first half of 2000, $321,000 in 1999, $161,000 in 1998 and $153,000 in 1997. For
commercial distributors, we purchase corporate image advertising, offer volume
rebates and joint marketing programs, and generate leads at electronics trade
shows and refer those potential customers to our distributors. Through joint
marketing programs, we work together with resellers to incorporate the Simple
Technology brand in the resellers' existing marketing plans, such as catalogs
and web banner ads. Expenses relating to joint marketing programs were
approximately

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<PAGE>
$1.8 million in the first half of 2000, $2.8 million in 1999, $2.3 million in
1998 and $2.6 million in 1997. Lead generation comes from end users who visit
our website, fill out our product registration cards, visit our booths at trade
shows, and call us in response to advertisements and direct mail. Expenses
relating to lead generation were approximately $21,000 in the first half of
2000, $114,000 in 1999, $94,000 in 1998 and $197,000 in 1997. In addition, we
have developed direct advertising programs with certain of our commercial
distributors' e-commerce customers in which we market our products on their
websites. We also offer account manager incentives which include sales contests
and reward programs designed to sustain reseller loyalty while also creating
excitement for increased sales activity. Total account manager incentives were
approximately $691,000 in the first half of 2000, $524,000 in 1999, $310,000 in
1998 and $316,000 in 1997.

CUSTOMER SERVICE AND SUPPORT

We provide our customers with comprehensive product service and support. We
work closely with our OEM Division customers to monitor the performance of their
product designs and to provide application design and support. This also
provides us with insight into defining their subsequent generations of products.
Our standard OEM support package is generally offered with all product sales and
includes full technical documentation and application design assistance. During
our OEM Division customers' production phase, we provide failure analysis and
replacement of defective components. In some cases, we also offer more extensive
support which includes training, system-level design, implementation and
integration support. We believe that tailoring our technical support to our OEM
Division customers' needs is essential for the success of our product
introductions and customer satisfaction. Our aftermarket customers receive
technical support on an unlimited, toll-free basis and are assigned a dedicated
technician familiar with their account. We also train the account managers of
certain aftermarket customers to keep them informed about changes in our product
lines. In addition, we offer aftermarket customers on-line pricing and
navigation tools, and a personalized web page available through our extranet
which features personalized information such as promotions, new products and
contact information.

COMPETITION

Our primary competitors include:

<TABLE>
<CAPTION>
COMPONENT MANUFACTURERS MODULE/PC CARD ASSEMBLERS STACKING MEMORY MANUFACTURERS
----------------------- ------------------------- -----------------------------
<S> <C> <C>
- Advanced Micro Devices, Inc. - Celestica Inc. - Dense-Pac Microsystems, Inc.
- Hitachi Semiconductor - Centennial Technologies - StakTek Corporation
(America) Inc. - Kingston Technology
- Intel Corporation Company
- Micron Semiconductor - SanDisk Corporation
Electronics, Inc. - Silicon Storage Technology, Inc.
- NEC Electronics, Inc. - Solectron Corporation
- Samsung Electronics - Viking Components, Inc.
Company Ltd.
- Toshiba America Electronic
Components, Inc.
</TABLE>

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<PAGE>
Micro Devices, Inc., Hitachi Semiconductor (America) Inc., NEC Electronics, Inc.
and Toshiba America Electronic Components, Inc., are also our competitors. These
suppliers may have the ability to manufacture competitive products at lower
costs as a result of their higher levels of integration. We also face
competition from current and prospective customers that evaluate our
capabilities against the merits of manufacturing products internally.
Competition also may arise due to the development of cooperative relationships
among our current and potential competitors or third parties to increase the
ability of their products to address the needs of our prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share.

We compete in our target markets based primarily on quality and price,
design and manufacturing technology, and responsiveness to our customers' needs.
We expect our competitors will continue to improve the performance of their
current products, reduce their current product sales prices and introduce new
products that may offer greater performance and improved pricing, any of which
could cause a decline in sales or loss of market acceptance of our products.

To remain competitive, we must, among other things:

- Compete favorably on the basis of price;

- Maintain quality levels;

- Provide technologically advanced products;

- Offer flexible delivery schedules;

- Deliver finished products on a timely basis in sufficient volume to
satisfy our customers' requirements;

- Successfully protect our intellectual property rights;

- Provide efficient and high volume manufacturing and testing services; and

- Accurately anticipate and prepare for new technological trends and
standards in the industry.

The Flash memory market is in the early stage of development. There is
currently an absence of a single Flash memory standard. It is possible that
Flash memory standards other than those to which our products conform will
emerge as the industry standard. If we are unable to anticipate and adequately
allocate our resources in a timely and efficient manner toward the production
and development of industry-standard Flash memory products, we may experience
significant delays in releasing new and commercially viable products. In
addition, if a competing technology replaces or takes significant market share
from the Flash memory market, we would not be able to sell our Flash products.

SUPPLIERS

IC devices represent approximately 95% of our component costs. We purchase
these IC devices from a small number of suppliers. In 1999 our significant
suppliers of IC devices included:

<TABLE>
<CAPTION>
DRAM IC DEVICE SUPPLIERS FLASH IC DEVICE SUPPLIERS
------------------------ -------------------------
<S> <C>
- Fujitsu Microelectronics, Inc. - Advanced Micro Devices, Inc.
- Hyundai Electronics America, Inc. - Hitachi Semiconductor (America) Inc.
- NEC Electronics, Inc. - Sharp Microelectronics of the Americas
- Toshiba America Electronic Components, Inc. - Toshiba America Electronic Components, Inc.
- Vanguard International Semiconductor Corporation
</TABLE>

Hitachi Semiconductor (America) Inc. supplies substantially all of the IC
devices used in our Flash memory products. In addition, Hitachi Semiconductor
(America) Inc., Hyundai Electronics America, Inc., NEC Electronics, Inc. and
Samsung Semiconductor, Inc. currently supply a majority of the DRAM IC devices
used in our DRAM memory products. We have no long-term supply contracts. A
disruption in or termination of our supply relationship with any of these
significant suppliers would,

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<PAGE>
among other things, cause delays, disruptions or reductions in product shipments
or increase costs and/or prices and would harm our business. In particular, if
our supply relationship with Hitachi Semiconductor (America) Inc. is disrupted
or terminated, our ability to manufacture and sell our Flash products would be
limited.

We are continuing to identify and establish additional sources of supply
where we have supplier concentrations, although there can be no assurance that
these efforts will be successful. In the future, if the demand for our products
exceeds our suppliers' ability to deliver needed components, we may be placed on
supplier allocation and we may be unable to meet customer demand.

BACKLOG

Sales of our memory products are made under short-term cancelable purchase
orders. We include in our backlog only those customer orders for which we have
accepted purchase orders and to which we have assigned shipment dates within the
upcoming six months. Since orders constituting our backlog are subject to change
due to, among other things, customer cancellations and reschedulings, and our
ability to procure necessary components, backlog is not necessarily an
indication of future revenues. In addition, there can be no assurance that
current backlog will necessarily lead to revenues in any future period. Our
combined backlog was $20.5 million as of June 30, 2000, $13.2 million as of
December 31, 1999 and $2.0 million as of December 31, 1998. Our OEM Division
backlog was $18.1 million as of June 30, 2000, $12.7 million as of December 31,
1999 and $1.5 million as of December 31, 1998, compared to our Aftermarket
Division backlog of $2.4 million as of June 30, 2000, $485,000 as of
December 31, 1999 and $480,000 as of December 31, 1998. The increase in OEM
Division backlog from December 31, 1999 to June 30, 2000 was primarily due to
increasing OEM orders and the lengthening of the time between our receipt of an
OEM order and the required ship date of the order. Aftermarket backlog is
typically nominal since substantially all aftermarket orders are filled on a
same-day or next-day basis. Our ability to predict future sales is limited
because a majority of our quarterly product revenues come from orders that are
received and fulfilled in the same quarter.

INTELLECTUAL PROPERTY RIGHTS

We regard our patents, trademarks, trade secrets and other intellectual
property as critical to our success. We rely on a combination of patents,
trademarks, copyrights and trade secret laws, confidentiality procedures, and
employee disclosure and invention assignment agreements to protect our
intellectual property rights.

As of September 28, 2000, we owned eight U.S. patents, including U.S. Patent
No. 5,514,907 related to our IC Tower stacking products, and three additional
patent applications were pending. We have one agreement to license our
technology to a third party. Although the term of this license is perpetual, we
believe that the licensee is currently not using this technology. We have
recently entered into a license agreement with Micron Electronics, Inc. for the
use, sale and importation into the United States of certain memory modules
incorporating Micron's proprietary technology. The license agreement was entered
into in connection with our August 22, 2000 settlement of a lawsuit originally
filed by Micron on April 6, 2000 against 18 computer memory manufacturers,
including us, for our alleged infringement of certain of Micron's patents. A
Notice of Entry of Order was approved on

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August 28, 2000 by the court which dismissed the Micron lawsuit with prejudice.
The impact of the license for all periods presented in the financial statements
would have been immaterial.

The following table describes our patents and their expiration dates.

<TABLE>
U.S. PATENT NO. EXPIRATION DATE DESCRIPTION
<S> <C> <C>
5,514,907 May 6, 2013 Apparatus for stacking semiconductor chips
5,555,209 September 9, 2013 Circuit for latching data signals from DRAM memory
5,562,504 October 7, 2013 Communications card with integral transmission media
line adaptor
5,596,757 January 20, 2014 System and method for selectively providing
termination power to a SCSI bus terminator from a
host device
5,660,568 August 25, 2014 Communications card with integral transmission media
line adaptor
5,673,419 September 29, 2014 Parity bit emulator with write parity bit checking
5,826,174 January 22, 2016 Method and apparatus for improving data transmission
over a wireless system by optical spectrum
positioning
D405,764 April 21, 2018 Adaptor for a media line connector
</TABLE>

Although we consider the patents currently held by us to be critical to our
success, there can be no assurance that any patents currently held by us or any
patents which may be granted to us in the future will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
meaningful protection or other commercial advantage to us. There can be no
assurance that third parties will not develop similar products, duplicate our
products or design around the patents currently owned by us or which may be
granted to us in the future. Because we view intellectual property rights as
critical to our success, we intend to pursue future patents and other
intellectual property rights in the U.S. There can be no assurance that we will
be successful in these endeavors. In addition there can be no assurance that our
trade secrets and know-how may not become known to third parties, or become part
of the public domain, which in either case would harm our financial performance
and business operations.

The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. We believe that it may be necessary,
from time to time, to initiate litigation against one or more third parties to
preserve our intellectual property rights. In addition, from time to time, third
parties may bring suits against us. For details regarding our pending
intellectual property lawsuits, see "--Legal Proceedings" and "Risk Factors--We
are involved from time to time in litigation over intellectual property rights,
which may adversely affect our ability to manufacture and sell our products."

In the event of an adverse result in any such litigation, we could be
required to pay substantial damages, cease the manufacture, use and sale of
certain products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to use
the infringed technology. Any litigation, whether as plaintiff or as defendant,
would likely result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not such litigation is ultimately
determined in our favor. In addition, the results of any litigation are

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<PAGE>
inherently uncertain. For a discussion of our expected legal expenses for 2000,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

In the event we desire to incorporate third-party technology into our
products or our products are found to infringe on others' patents or
intellectual property rights, we may be required to license such patents or
intellectual property rights. If we obtain licenses from third parties, we may
be required to pay license fees or make royalty payments, which could reduce our
gross margins. If we are unable to obtain a license from a third party for
technology, we could incur substantial liabilities or be required to expend
substantial resources redesigning our products to eliminate the infringement.
There can be no assurance that we would be successful in redesigning our
products or that we could obtain licenses on commercially reasonable terms, if
at all. In addition, any development or license negotiations could require
substantial expenditures of time and other resources by us.

As is common in the industry, we currently have in effect a number of
agreements in which we have agreed to defend, indemnify and hold harmless
certain of our suppliers and customers from damages and costs which may arise
from the infringement by our products of third-party patents, trademarks or
other proprietary rights. The scope of such indemnity varies, but may, in some
instances, include indemnification for damages and expenses, including
attorneys' fees. We may from time to time be engaged in litigation as a result
of such indemnification obligations. In addition, our insurance does not cover
intellectual property infringement.

In our efforts to maintain the confidentiality and ownership of trade
secrets and other confidential information, all of our employees are required to
sign employee non-disclosure and invention assignment agreements. This agreement
requires our employees to disclose, document and assign their interest in all
inventions, patents and copyrights developed while employed with us. Our
employees further agree to preserve all of our confidential information
including trade secrets, customer information, know-how and other business
information. There can be no assurance that these agreements will provide
meaningful protection of our trade secrets or other confidential information in
the event of unauthorized use or disclosure of such information. See "Risk
Factors--Our proprietary technology and intellectual property may not be
adequately protected, which could harm our competitive position."

LEGAL PROCEEDINGS

DENSE-PAC MICROSYSTEMS, INC.--PATENT INFRINGEMENT

On September 23, 1998, we filed a lawsuit against Dense-Pac
Microsystems, Inc. in the United States District Court for the Central District
of California for infringement of our IC Tower stacking patent, U.S. Patent
No. 5,514,907. We are seeking damages, including prejudgment interest, totaling
$22.8 million as of June 30, 2000, an injunction against further infringement of
our patent by Dense-Pac, treble damages and attorneys' fees. We are also seeking
a declaratory judgment declaring Dense-Pac's stacking patent, U.S. Patent
No. 4,956,694, invalid and not infringed by us. On October 15, 1998, Dense-Pac
filed an answer to our complaint denying our claim of infringement, asserted a
defense of patent invalidity against our IC Tower stacking patent and asserted a
counterclaim against us alleging infringement of its stacking patent. On
November 12, 1998, we filed an answer to Dense-Pac's counterclaim denying
Dense-Pac's claim of infringement against us and asserting a defense of patent
invalidity. Dense-Pac is seeking injunctive relief and damages equal to 2% of
the sales of our IC Tower stacking products found to infringe its patent, plus
interest. As of June 30, 2000, Dense-Pac sought damages, including interest,
totaling approximately $689,000. For the six months ended June 30, 2000 and the
year ended December 31, 1999, less than 10.0% of our total revenues related to
products which Dense-Pac alleges infringe on its '694 patent. Dense-Pac has also
requested an award of attorneys' fees and treble damages and has reserved the
right to seek unspecified lost profits as a result of the alleged infringement.
Trial is set for February 2001.

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<PAGE>
DENSE-PAC MICROSYSTEMS, INC.--TECHNOLOGY MISAPPROPRIATION

On April 10, 2000, Dense-Pac Microsystems, Inc. filed a lawsuit against us
and Mark Moshayedi, our Chief Operating Officer, Chief Technical Officer and
Secretary, in the Superior Court of Orange County, California, seeking
unspecified damages, including punitive damages, injunctive relief, attorneys'
fees and costs arising from our alleged misappropriation of Dense-Pac's
technology based on its U.S. Patent No. 4,956,694 and the sale of our products
incorporating such technology alleged to have been misappropriated. Dense-Pac's
complaint sets forth various causes of action against us and Mark Moshayedi,
including common law misappropriation, intentional and negligent interference
with prospective business advantage, unfair competition, unjust enrichment and
trade secret misappropriation. On May 26, 2000, we filed an answer to
Dense-Pac's complaint denying Dense-Pac's allegations against us and Mark
Moshayedi and asserting a number of defenses, including failure to state a
claim, waiver and estoppel. We are defending and indemnifying Mark Moshayedi in
this lawsuit as part of our obligation under our indemnification agreement. This
lawsuit is in the very early stages.

INTERACTIVE FLIGHT TECHNOLOGIES, INC.

On June 8, 1998, Interactive Flight Technologies, Inc. filed a lawsuit
against Avnet, Inc. in the Superior Court of Maricopa County, Arizona seeking an
award for direct and consequential damages arising from our sale of allegedly
defective hard disk drives to Avnet for inclusion in an in-flight entertainment
system manufactured by Interactive Flight. We purchased the hard disk drives
from Integral Peripherals, Inc., the manufacturer, through its distributor, Bell
Microsystems, Inc. Integral has since declared bankruptcy and is not a party to
this lawsuit. On July 16, 1998, Avnet filed a third-party complaint against us
for indemnification under the terms of a distribution agreement between Avnet
and us. On September 18, 1998, we filed an answer denying the third-party
complaint and filed a third-party complaint against, among others, Bell
Microsystems seeking indemnification and contribution. On May 24, 1999,
Interactive Flight filed a first amended complaint to add us as an additional
defendant based on the terms of our written one-year warranty which they contend
was assigned to them by Avnet. On June 8, 1999, Avnet filed a cross claim
against us seeking indemnification. On June 18, 1999, we answered the first
amended complaint and Avnet's cross claim. Interactive Flight is seeking
out-of-pocket damages of approximately $4.1 million from both Avnet and us and
consequential damages from Avnet only arising from the alleged loss of contracts
with several airline carriers totaling an additional $10.0 million.

On August 18, 2000, the court entered a ruling granting Avnet's motion for
summary judgment requiring us to indemnify Avnet for damages and attorneys' fees
incurred in its defense of Interactive Flight's lawsuit. We are planning to file
with the court a motion to reconsider this order and appeal from this order if
necessary. On September 1, 2000, the court entered a ruling in favor of Avnet
and us by granting our joint motion for partial summary judgment against
Interactive Flight. The effect of this ruling is to ban Interactive Flight from
pursuing claims for either incidental or consequential damages against Avnet and
us. It is possible that this ruling may be reversed if Interactive Flight
decides to file a motion for reconsideration or appeal. On September 13, 2000,
the court granted a motion for summary judgment in favor of Bell Microsystems
and against us, effectively eliminating our claim against Bell Microsystems for
indemnification. There are other summary judgment motions pending. There can be
no assurance that these motions will be determined in our favor. Trial began on
September 26, 2000.

We are the beneficiary of a potential insurance claim against the Chubb
Group based on a $2.0 million policy of insurance originally issued to Integral
and assigned to us as part of a settlement reached in Integral's bankruptcy
proceedings. Such policy applies only to property damage. To date, Chubb has
denied our claims under the policy.

We are currently not a party to any other material legal proceedings.
However, we are involved in several other suits and claims in the ordinary
course of business, and we may from time to time become a party to other legal
proceedings arising in the ordinary course of business.

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<PAGE>
EMPLOYEES

As of June 30, 2000, we had 354 full-time employees, consisting of 173 in
manufacturing (including test, quality assurance and material management), 96 in
sales and marketing, 46 in finance and administration and 39 in design and
product development. Our employees are not represented by any collective
bargaining agreements and we have never experienced a work stoppage. Management
believes that relations with our employees are good.

FACILITIES

We occupy two leased facilities of approximately 24,500 and 48,600 square
feet in Santa Ana, California, in which our executive offices, manufacturing,
engineering, research and development and testing operations are located. We
lease the 24,500 square foot facility from MDC Land LLC, a limited liability
company owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of
whom is an executive officer and director of Simple Technology. This lease
expires in March 2005 and the base rent is approximately $17,000 per month. We
also lease the 48,600 square foot facility from MDC Land LLC. This lease expires
in May 2005, and the base rent is approximately $33,000 per month. In addition,
we lease various small facilities for our sales offices. We believe that our
existing leased space is adequate for our current operations and that suitable
replacement and additional spaces will be available in the future on
commercially reasonable terms. See "Certain Transactions--MDC Land Corporation
and MDC Land LLC."

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES

Set forth below is certain information concerning our executive officers,
current and proposed directors and other key employees as of September 28, 2000.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Manouch Moshayedi.................... 41 Chief Executive Officer and Chairman of the Board of
Directors
Mike Moshayedi....................... 45 President and Director
Mark Moshayedi....................... 38 Chief Operating Officer, Chief Technical Officer,
Secretary and Director
Dan Moses............................ 33 Chief Financial Officer and Director
Michael Hajeck....................... 40 Vice President of OEM Sales
Carl Swartz.......................... 60 Vice President of Strategic Planning and General
Counsel
Shane Mortazavi...................... 47 Vice President of Operations
Jeanclaude Toma...................... 37 Vice President of Marketing & Business Development
Mark R. Hollinger(1)................. 42 Director
F. Michael Ball(1)................... 45 Director
Thomas A. Beaver(1).................. 57 Director
</TABLE>

--------------------------

(1) Has agreed to be appointed a director and member of our audit and
compensation committees upon the completion of this offering.

MANOUCH MOSHAYEDI, a co-founder of Simple Technology, has served as our
President or Chief Executive Officer and Chairman of the Board of Directors
since our inception in March 1990. From our inception in March 1990 to September
1994, Mr. Moshayedi also served as our Chief Financial Officer. Mr. Moshayedi
graduated with a B.S. in engineering from California State University, Fullerton
and an M.B.A. from Long Island University in New York. Mr. Moshayedi is the
brother of Mike Moshayedi and Mark Moshayedi, both of whom are our executive
officers and directors.

MIKE MOSHAYEDI, a co-founder of Simple Technology, has served as our
director since our inception in March 1990 and our President since January 1995.
From our inception in March 1990 to December 1994, Mr. Moshayedi served as our
Senior Vice President or President of Sales and Marketing and Secretary.
Mr. Moshayedi graduated with a B.S. in engineering from California State
University, Long Beach. Mr. Moshayedi is the brother of Manouch Moshayedi and
Mark Moshayedi, both of whom are our executive officers and directors.

MARK MOSHAYEDI has served as our director since April 1992 and our Chief
Operating Officer, Chief Technical Officer and Secretary since January 1995.
From June 1994 to December 1994, Mr. Moshayedi served as our President of
Research and Development. From our inception in March 1990 to June 1994,
Mr. Moshayedi served as our Senior Vice President. Mr. Moshayedi graduated with
a B.S. in engineering from the University of California, Irvine and an M.B.A.
from Pepperdine University. Mr. Moshayedi is the brother of Manouch Moshayedi
and Mike Moshayedi, both of whom are our executive officers and directors.

DAN MOSES has served as our Chief Financial Officer since September 1994 and
our director since March 2000. From October 1992 to August 1994, Mr. Moses
served as our Controller. Before joining Simple Technology, Mr. Moses was a
Senior Auditor with PricewaterhouseCoopers LLP from May 1990 to October 1992.
Mr. Moses graduated with a B.S. in business administration from the University
of California, Riverside and a Master's of Accounting from the University of
Southern California. Mr. Moses is a Certified Public Accountant.

MICHAEL HAJECK joined Simple Technology as our Vice President of OEM Sales
in January 1998. From October 1997 to January 1998, Mr. Hajeck was an
independent consultant. From October 1996 to October 1997, Mr. Hajeck was Vice
President of Sales, Americas at SanDisk Corporation, a manufacturer of Flash
memory storage products. From January 1993 to October 1996, Mr. Hajeck was

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Director of Sales at SanDisk Corporation. Mr. Hajeck graduated with a B.S. and
Master's in Engineering from Rensselaer Polytechnic Institute.

CARL SWARTZ joined Simple Technology as our Vice President of Strategic
Planning and General Counsel in January 2000. From October 1999 to
January 2000, Mr. Swartz was Chief Operating Officer with American
BioScience, Inc., a biotechnology research and technology company. From
January 1995 to October 1999, Mr. Swartz was our Vice President of Strategic
Planning and General Counsel. Mr. Swartz graduated with a B.S. in engineering
from the United States Naval Academy, an M.S. in engineering from the University
of California, Los Angeles and a J.D. from Georgetown University.

SHANE MORTAZAVI joined Simple Technology as our Vice President of Operations
in March 2000. From June 1992 to February 2000, Mr. Mortazavi was Manufacturing
Operations Manager at General Monitors, Inc., a manufacturer of combustible and
toxic gas monitoring and flame detection products. Mr. Mortazavi graduated with
a B.S. in industrial engineering and an M.S. in operations research from the
University of California, Berkeley.

JEANCLAUDE TOMA joined Simple Technology as our Vice President of
Marketing & Business Development in September 2000. From August 1996 to
August 2000, Mr. Toma was the President and Chief Operating Officer of NKK Micro
Devices Inc., an electronics company. From June 1991 to August 1996, Mr. Toma
was the Director of Marketing for Toshiba America Electronic Company, an
electronics company. Mr. Toma graduated with a B.S. in electrical engineering
from the University of California, Irvine and an M.S. in electrical engineering
and M.B.A. from California Polytechnic University, Pomona.

MARK R. HOLLINGER will join Simple Technology as our director and member of
our audit and compensation committees upon the completion of this offering.
Since September 1999, Mr. Hollinger has been President and Chief Executive
Officer of Merix Corporation, a manufacturer of printed circuit boards.
Mr. Hollinger has been a director of Merix Corporation since May 1999. From May
1999 to September 1999, Mr. Hollinger was President and Chief Operating Officer
of Merix Corporation. From August 1998 to May 1999, Mr. Hollinger was Senior
Vice President of Operations and Chief Operating Officer of Merix Corporation.
From September 1997 to August 1998, Mr. Hollinger was Senior Vice President of
Merix Corporation. From October 1994 to September 1997, Mr. Hollinger was Vice
President Operations of Continental Circuits Corp., a manufacturer of printed
circuit boards. Mr. Hollinger graduated with a B.A. in marketing from Capital
University and an M.B.A. from Ohio State University.

F. MICHAEL BALL will join Simple Technology as our director and member of
our audit and compensation committees upon the completion of this offering.
Since April 1996, Mr. Ball has been Corporate Vice President and President,
North America Region of Allergan, Inc., a pharmaceutical company. From April
1995 to April 1996, Mr. Ball was Senior Vice President of Allergan, Inc.
Mr. Ball graduated with a B.S. in science and an M.B.A. from Queen's University,
Canada.

THOMAS A. BEAVER will join Simple Technology as our director and member of
our audit and compensation committees upon the completion of this offering.
Since February 2000, Mr. Beaver has been the Chief Executive Officer of Wyle
Electronics, Inc., a distributor of semiconductor products. From October 1999 to
February 2000, Mr. Beaver was Executive Vice President of Worldwide Sales and
Marketing of Astec Power, Inc., a supplier of power conversion products. Prior
to Astec, Mr. Beaver spent more than 30 years with Motorola Corp., a provider of
communications and semiconductor products, where he held a succession of
increasingly responsible sales, marketing and senior management positions of
which the most recent was Corporate Vice President and Director of Marketing and
Sales of the Company's Networking and Computing Systems Group. Mr. Beaver
graduated with B.S. in electrical engineering from Marquette University and an
M.B.A. from the University of Minnesota.

BOARD OF DIRECTORS

Upon the completion of this offering, our board of directors will be
composed of seven members, including three directors who are not employees and
who are otherwise independent. Each director

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currently serves until the next annual meeting of shareholders or until his or
her successor is duly elected and qualified. At each annual meeting of
shareholders, the successors to directors whose term will then expire will be
elected to serve until the next annual meeting of shareholders. In addition, our
amended and restated bylaws provide that the authorized number of directors will
be between four and seven, with the exact number to be determined by a majority
of our board of directors or shareholders.

COMMITTEES OF THE BOARD OF DIRECTORS

Following the completion of this offering, our board of directors intends to
establish an audit committee to be composed of three independent directors,
including Messrs. Hollinger, Ball and Beaver. The audit committee will generally
meet with and consider suggestions from members of management and our internal
accounting personnel, as well as our independent accountants, concerning our
financial operations.

The audit committee also has the responsibility to:

- Review the audit committee charter at least annually and recommend any
changes to our board of directors;

- Review our annual financial statements and any other relevant reports or
other financial information;

- Review the regular internal financial reports prepared by management and
any internal auditing department;

- Recommend to the board of directors the selection of the independent
accountants and approve the fees and other compensation to be paid to the
independent accountants;

- Review and discuss with the accountants all significant relationships the
accountants have with us to determine the accountants' independence;

- Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant; and

- Following completion of the annual audit, review separately with the
independent accountants, the internal auditing department, if any, and
management any significant difficulties encountered during the course of
the audit.

Following the completion of this offering, our board of directors intends to
establish a compensation committee to be composed of three independent
directors, including Messrs. Hollinger, Ball and Beaver. The compensation
committee will be responsible for the design, review, recommendation and
approval of compensation arrangements for our directors, executive officers and
key employees, and for the administration of our 2000 Stock Incentive Plan,
including the approval of grants under such plan to our employees, consultants
and directors, and our 2000 Employee Stock Purchase Plan.

Our board of directors may establish, from time to time, other committees to
facilitate the management of our business.

BOARD COMPENSATION

We do not provide cash compensation to employee directors for serving on our
board of directors or for attendance of meetings of committees of the board of
directors. Each non-employee member of our board of directors receives $3,000
for attendance at each meeting of the board of directors, however, they do not
receive compensation for attendance at meetings of committees of the board of
directors. In addition, non-employee directors are reimbursed for reasonable
travel and other out-of-pocket expenses incurred in connection with attendance
at meetings of the board of directors and committees of the board of directors.
Employee directors are eligible to receive options and be issued shares of
common stock directly under our 2000 Stock Incentive Plan. Non-employee
directors will, upon their initial election or appointment to the board, receive
an automatic option grant to purchase 30,000 shares of common stock that will
vest in equal annual installments over the five-year period from the grant date.
See "--Stock Plans/Employee Compensation Programs."

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

We did not have a compensation committee or other board committee performing
equivalent functions in 1999. Manouch Moshayedi, Mike Moshayedi and Mark
Moshayedi participated in deliberations of our board of directors concerning
executive officer compensation. MDC Land Corporation, MDC Land LLC, XYZ, Inc.
and QualCenter, Inc. are companies owned by Manouch Moshayedi, Mike Moshayedi
and Mark Moshayedi. In addition to being the owners of these companies, Manouch
Moshayedi, Mike Moshayedi and Mark Moshayedi are each also a director and/or
executive officer of each of these companies. Following the completion of this
offering, our board of directors will establish a compensation committee
composed of three independent directors, including Messrs. Hollinger, Ball and
Beaver that will result in none of our executive officers being a member of our
compensation committee.

EMPLOYMENT AGREEMENTS

We renewed our employment agreement with Manouch Moshayedi, our Chief
Executive Officer and Chairman of the Board of Directors, in March 2000. Under
this agreement, Mr. Moshayedi is entitled to an annual base salary of $440,000
and is required to devote all of his working time and attention to our business.
In addition, this agreement contains non-competition restrictions and covenants,
including provisions prohibiting Mr. Moshayedi from competing with us during his
employment and for a one-year period after his employment with us.
Mr. Moshayedi's employment is at-will and may be terminated by either party at
any time, with or without notice, and with or without cause. In addition,
Mr. Moshayedi has entered into a non-disclosure agreement relating to our
intellectual property and proprietary information under which he has agreed to
assign all intellectual property rights developed during the course of his
employment to us.

We renewed our employment agreement with Mike Moshayedi, our President, in
March 2000. Under this agreement, Mr. Moshayedi is entitled to an annual base
salary of $440,000 and is required to devote all of his working time and
attention to our business. In addition, this agreement contains non-competition
restrictions and covenants, including provisions prohibiting Mr. Moshayedi from
competing with us during his employment and for a one-year period after his
employment with us. Mr. Moshayedi's employment is at-will and may be terminated
by either party at any time, with or without notice, and with or without cause.
In addition, Mr. Moshayedi has entered into a non-disclosure agreement relating
to our intellectual property and proprietary information under which he has
agreed to assign all intellectual property rights developed during the course of
his employment to us.

We renewed our employment agreement with Mark Moshayedi, our Chief Operating
Officer, Chief Technical Officer and Secretary, in March 2000. Under this
agreement, Mr. Moshayedi is entitled to an annual base salary of $440,000 and is
required to devote all of his working time and attention to our business. In
addition, this agreement contains non-competition restrictions and covenants,
including provisions prohibiting Mr. Moshayedi from competing with us during his
employment and for a one-year period after his employment with us.
Mr. Moshayedi's employment is at-will and may be terminated by either party at
any time, with or without notice, and with or without cause. In addition,
Mr. Moshayedi has entered into a non-disclosure agreement relating to our
intellectual property and proprietary information under which he has agreed to
assign all intellectual property rights developed during the course of his
employment to us.

We renewed our employment agreement with Dan Moses, our Chief Financial
Officer, in March 2000. Under this agreement, Mr. Moses is entitled to an annual
base salary of $150,000 and is required to devote all of his working time and
attention to our business. In addition, this agreement contains non-competition
restrictions and covenants, including provisions prohibiting Mr. Moses from
competing with us during his employment and for a one-year period after his
employment with us. Mr. Moses' employment is at-will and may be terminated by
either party at any time, with or without notice, and with or without cause. In
addition, Mr. Moses has entered into a non-disclosure agreement

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<PAGE>
relating to our intellectual property and proprietary information under which he
has agreed to assign all intellectual property rights developed during the
course of his employment to us.

We renewed our employment agreement with Michael Hajeck, our Vice President
of OEM Sales, in March 2000. Under this agreement and his employment offer
letter, Mr. Hajeck is entitled to an annual base salary of $250,000 and a
monthly commission based on the dollar value of net sales of products sold by
the OEM Division for that particular month. Under his employment agreement,
Mr. Hajeck is required to devote all of his working time and attention to our
business. In addition, his employment agreement contains non-competition
restrictions and covenants, including provisions prohibiting Mr. Hajeck from
competing with us during his employment and for a one-year period after his
employment with us. Mr. Hajeck's employment is at-will and may be terminated by
either party at any time, with or without notice, and with or without cause. In
addition, Mr. Hajeck has entered into a non-disclosure agreement relating to our
intellectual property and proprietary information under which he has agreed to
assign all intellectual property rights developed during the course of his
employment to us.

We renewed our employment agreement with Carl Swartz, our Vice President of
Strategic Planning and General Counsel, in March 2000. Under this agreement,
Mr. Swartz is entitled to an annual base salary of $200,000 and is required to
devote all of his working time and attention to our business. In addition, this
agreement contains non-competition restrictions and covenants, including
provisions prohibiting Mr. Swartz from competing with us during his employment
and for a one-year period after his employment with us. Mr. Swartz's employment
is at-will and may be terminated by either party at any time, with or without
notice, and with or without cause. In addition, Mr. Swartz has entered into a
non-disclosure agreement relating to our intellectual property and proprietary
information under which he has agreed to assign all intellectual property rights
developed during the course of his employment to us.

We entered into an employment agreement with Shane Mortazavi, our Vice
President of Operations, in March 2000. Under this agreement and his employment
offer letter, Mr. Mortazavi is entitled to an annual base salary of $160,000 and
incentive compensation of up to $40,000 annually if Mr. Mortazavi achieves
certain performance goals, and is required to devote all of his working time and
attention to our business. In addition, this agreement contains non-competition
restrictions and covenants, including provisions prohibiting Mr. Mortazavi from
competing with us during his employment and for a one-year period after his
employment with us. Mr. Mortazavi's employment is at-will and may be terminated
by either party at any time, with or without notice, and with or without cause.
In addition, Mr. Mortazavi has entered into a non-disclosure agreement relating
to our intellectual property and proprietary information under which he has
agreed to assign all intellectual property rights developed during the course of
his employment to us.

We entered into an employment agreement with Jeanclaude Toma, our Vice
President of Marketing & Business Development in September 2000. Under this
agreement and his employment offer letter, Mr. Toma is entitled to an annual
base salary of $180,000 and incentive compensation of up to $60,000 annually if
Mr. Toma achieves certain performance goals, and is required to devote all of
his working time and attention to our business. In addition, this agreement
contains non-competition restrictions and covenants, including provisions
prohibiting Mr. Toma from competing with us. Mr. Toma's employment is at-will
and may be terminated by either party at any time, with or without notice, and
with or without cause. In addition, Mr. Toma has entered into a non-disclosure
agreement relating to our intellectual property and proprietary information
under which he has agreed to assign all intellectual property rights developed
during the course of his employment to us.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by or
paid to our Chief Executive Officer and each of our other five highest paid
executive officers whose annual salary and bonus exceeded $100,000 during 1999
for services rendered in all capacities to us during the year ended
December 31, 1999. These officers are referred to in this prospectus as the
"Named Executive Officers." All option grants were made under our 1996 Stock
Option Plan, which will be succeeded by our 2000 Stock Incentive Plan upon the
completion of this offering. See "--Stock Plans/Employee Compensation Programs."

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<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
--------------------------- ------------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Manouch Moshayedi(1)............ 440,000 -- 104,100(4) -- 18,600(5)
Chief Executive Officer and
Chairman of the Board of
Directors

Mike Moshayedi(2)............... 440,000 -- 79,900(6) -- 18,600(7)
President and Director

Mark Moshayedi(3)............... 428,000 -- 66,800(8) -- 18,600(9)
Chief Operating Officer, Chief
Technical Officer, Secretary
and Director

Dan Moses....................... 138,200(10) -- -- -- 5,000(11)
Chief Financial Officer and
Director

Michael Hajeck.................. 236,500 150,100 -- 339,989 5,000(12)
Vice President of OEM Sales

Carl Swartz..................... 192,300(13) -- -- -- 5,000(14)
Vice President of Strategic
Planning and General Counsel
</TABLE>

------------------------------

(1) In 1999, as our beneficial shareholder, Manouch Moshayedi received S
corporation distributions for personal income taxes and other purposes of
approximately $556,000 as described under "S Corporation Status and
Conversion."

(2) In 1999, as our beneficial shareholder, Mike Moshayedi received S
corporation distributions for personal income taxes and other purposes of
approximately $578,000 as described under "S Corporation Status and
Conversion."

(3) In 1999, as our beneficial shareholder, Mark Moshayedi received S
corporation distributions for personal income taxes and other purposes of
approximately $503,000 as described under "S Corporation Status and
Conversion."

(4) Includes (a) $55,700 for personal travel and entertainment expenses,
(b) $11,700 for personal use of our company automobiles, (c) $1,700 for
personal use of company services and equipment, (d) $8,000 for professional
services paid by us, (e) $500 for auto insurance premiums paid on Manouch
Moshayedi's behalf and (f) interest income of $26,500 in connection with
below-market interest rate loans by us to affiliates owned by Manouch
Moshayedi.

(5) Includes (a) $13,600 for life insurance premiums paid on Manouch
Moshayedi's behalf and (b) $5,000 in 401(k) matching contributions paid by
us.

(6) Includes (a) $28,500 for personal travel and entertainment expenses,
(b) $13,600 for personal use of our company automobiles, (c) $1,700 for
personal use of company services and equipment, (d) $8,000 for professional
services paid by us, (e) $1,600 for auto insurance premiums paid on Mike
Moshayedi's behalf and (f) interest income of $26,500 in connection with
below-market interest rate loans by us to affiliates owned by Mike
Moshayedi.

(7) Includes (a) $13,600 for life insurance premiums paid on Mike Moshayedi's
behalf and (b) $5,000 in 401(k) matching contributions paid by us.

(8) Includes (a) $16,700 for personal travel and entertainment expenses,
(b) $12,700 for personal use of our company automobiles, (c) $1,700 for
personal use of company services and equipment, (d) $8,000 for professional
services paid by us, (e) $1,200 for auto insurance premiums on Mark
Moshayedi's behalf and (f) interest income of $26,500 in connection with
below-market interest rate loans by us to affiliates owned by Mark
Moshayedi.

(9) Includes (a) $13,600 for life insurance premiums paid on Mark Moshayedi's
behalf and (b) $5,000 in 401(k) matching contributions paid by us.

(10) Includes an automobile allowance of $6,300.

(11) Represents 401(k) matching contributions paid by us.

(12) Represents 401(k) matching contributions paid by us.

(13) Represents salary earned for the period from January 1, 1999 through
October 5, 1999.

(14) Represents 401(k) matching contributions paid by us.

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<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding options granted to our
Named Executive Officers during the year ended December 31, 1999. We did not
grant any stock appreciation rights during the year ended December 31, 1999. In
determining the fair market value of the common stock, the board of directors
considered various factors, including our financial condition and business
prospects, operating results, the absence of a market for the common stock and
risks normally associated with investments in companies engaged in similar
businesses.

During the year ended December 31, 1999, we granted options to purchase
518,960 shares of common stock. All options were granted under our 1996 Stock
Option Plan, which will be succeeded by our 2000 Stock Incentive Plan upon the
completion of this offering. The exercise price may be paid in cash, check,
promissory note, shares of our common stock valued at fair market value on the
exercise date or a cashless exercise procedure involving a same-day sale of the
purchased shares.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SHARES OF ANNUAL RATES OF
COMMON % OF TOTAL STOCK PRICE
STOCK OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE PER OPTION TERM
OPTIONS EMPLOYEES IN SHARE EXPIRATION ---------------------
NAME GRANTED(#) 1999 ($/SHARE) DATE 5%($) 10%($)
---- ---------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Manouch Moshayedi.................... -- -- -- -- -- --
Mike Moshayedi....................... -- -- -- -- -- --
Mark Moshayedi....................... -- -- -- -- -- --
Dan Moses............................ -- -- -- -- -- --
Michael Hajeck....................... 79,416(1) 15.3 1.18 01/25/09 152,645 243,061
260,573(2) 50.2 1.18 01/25/09 500,844 797,510
Carl Swartz.......................... -- -- -- -- -- --
</TABLE>

------------------------------

(1) Non-statutory stock options

(2) Incentive stock options

The term of each option granted is generally ten years from the date of the
grant. Options may terminate before their expiration date if the optionee's
status as an employee is terminated or upon the optionee's death or disability.
Each option listed in the table was granted under our 1996 Stock Option Plan,
which will be succeeded by our 2000 Stock Incentive Plan upon the completion of
this offering.

Mr. Hajeck's non-statutory stock options for 79,416 shares are subject to
the following vesting schedule:

- 502 shares shall vest upon the completion of one year of employment
measured from January 16, 1998;

- 77,910 shares shall vest in equal monthly installments of approximately
7,082 shares each over the 11 month period following the one year
anniversary of employment;

- 502 shares shall vest upon completion of employment through December 16,
2000; and

- 502 shares shall vest upon completion of employment through December 16,
2001.

Mr. Hajeck's incentive stock options for 260,573 shares are subject to the
following vesting schedule:

- 84,496 shares shall vest upon the completion of one year of employment
measured from January 16, 1998; and

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<PAGE>
- the balance of 176,076 shares shall vest in equal monthly installments of
approximately 7,083 shares each over the 25 month period measured from
December 16, 1999, except that on December 16, 2000 and 2001, 6,585 shares
shall vest. See "--Stock Plans/Employee Compensation Programs."

Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of the
option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission and
do not represent our estimate or projection of our future common stock prices.
These amounts represent assumed rates of appreciation in the value of the common
stock from the fair market value on the date of grant. Actual gains, if any, on
stock option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the table
may not necessarily be achieved.

AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES

The following table sets forth the number and value of unexercised options
held by our Named Executive Officers at December 31, 1999. There was no public
trading market for the common stock as of December 31, 1999. Accordingly, the
value of unexercised options has been calculated by subtracting the exercise
price from the fair market value of $3.94 per share of common stock on
December 31, 1999, as determined by the board of directors, multiplied by the
number of shares underlying the option. None of our Named Executive Officers
exercised options in 1999.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Manouch Moshayedi.............................. -- -- -- --
Mike Moshayedi................................. -- -- -- --
Mark Moshayedi................................. -- -- -- --
Dan Moses...................................... 339,989 -- $979,168 --
Michael Hajeck................................. 162,908 177,081 449,626 $488,744
Carl Swartz.................................... 339,989 -- 979,168 --
</TABLE>

STOCK PLANS/EMPLOYEE COMPENSATION PROGRAMS

2000 STOCK INCENTIVE PLAN

INTRODUCTION. Our 2000 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1996 Stock Option Plan. For details
regarding our 1996 Stock Option Plan, see note 10 of the notes to our
consolidated financial statements. Our 2000 Stock Incentive Plan was adopted by
our board of directors in June 2000 and approved by our shareholders in June
2000. Our 2000 Stock Incentive Plan will become effective on the date the
underwriting agreement for this offering is signed. At that time, all
outstanding options under the 1996 Stock Option Plan will be transferred to our
2000 Stock Incentive Plan, and no further option grants will be made under that
predecessor plan. The transferred options will continue to be governed by their
existing terms, unless our compensation committee elects to extend one or more
features of our 2000 Stock Incentive Plan to those options. Except as otherwise
noted below, the transferred options have substantially the same terms as will
be in effect for grants made under the discretionary option grant program of our
2000 Stock Incentive Plan.

SHARE RESERVE. 6,425,365 shares of common stock have been reserved for
issuance under our 2000 Stock Incentive Plan. Such share reserve consists of the
number of shares we estimate will be carried

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<PAGE>
over from our 1996 Stock Option Plan, including 2,777,421 shares subject to
outstanding options thereunder as of September 28, 2000 and options outstanding
to purchase a total of 3,454,000 shares to our employees and consultants, other
than our Chief Executive Officer, President and Chief Operating Officer, granted
on September 28, 2000 at an exercise price per share equal to the initial public
offering price per share of $11.00. The initial reserve cannot exceed
7,033,005 shares. The number of shares of common stock reserved for issuance
under our 2000 Stock Incentive Plan will automatically increase on the first
trading day in January of each calendar year, beginning in calendar year 2001,
by an amount equal to 4% of the total number of shares of common stock
outstanding on the last trading day in December of the prior calendar year, but
in no event will any such annual increase exceed 2,500,000 shares. In addition,
no participant in our 2000 Stock Incentive Plan may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of common stock per calendar year.

EQUITY INCENTIVE PROGRAMS. Our 2000 Stock Incentive Plan is divided into
five separate components:

- The discretionary option grant program, under which eligible individuals
in our employ or service may be granted options to purchase shares of
common stock at an exercise price not less than 100% of the fair market
value of those shares on the grant date.

- The stock issuance program, under which eligible individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the attainment of performance milestones or
the completion of a specified period of service.

- The salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants.

- The automatic option grant program, under which option grants will
automatically be made to new non-employee board members to purchase shares
of common stock at an exercise price equal to 100% of the fair market
value of those shares on the date those individuals are first elected or
appointed to the board.

- The director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of the annual
retainer fee, if any, otherwise payable to them in cash each year to the
acquisition of special below-market option grants.

ELIGIBILITY. The individuals eligible to participate in our 2000 Stock
Incentive Plan include our officers and other employees, our non-employee board
members and any consultants we hire.

ADMINISTRATION. The discretionary option grant program and the stock
issuance program will be administered by the compensation committee. This
committee will determine which eligible individuals are to receive option grants
or stock issuances under those programs, the time or times when such option
grants or stock issuances are to be made, the number of shares subject to each
such grant or issuance, the status of any granted option as either an incentive
stock option or a non-statutory stock option under the federal tax laws, the
vesting schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. The
compensation committee will also have the exclusive authority to select the
executive officers and other highly compensated employees who may participate in
the salary investment option grant program in the event that program is
activated for one or more calendar years.

PLAN FEATURES. Our 2000 Stock Incentive Plan will include the following
features:

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<PAGE>
- The exercise price for the shares of common stock subject to option grants
made under our 2000 Stock Incentive Plan may be paid in cash or in shares
of common stock valued at fair market value on the exercise date. The
option may also be exercised through a same-day sale program without any
cash outlay by the optionee. In addition, the plan administrator may
provide financial assistance to one or more optionees in the exercise of
their outstanding options or the purchase of their unvested shares by
allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in payment of the exercise price and any associated
withholding taxes incurred in connection with such exercise or purchase.

- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including options
transferred from the 1996 Stock Option Plan, in return for the grant of
new options for the same or a different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.

- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
us equal to the fair market value of the vested shares of common stock
subject to the surrendered option, less the aggregate exercise price
payable for those shares. Such appreciation distribution may be made in
cash or in shares of common stock. None of the outstanding options under
our 1996 Stock Option Plan contain any stock appreciation rights.

CHANGE IN CONTROL. The 2000 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:

- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the discretionary option grant and
stock issuance programs will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to the
successor corporation.

- The compensation committee will have complete discretion to structure one
or more options under the discretionary option grant program so those
options will vest as to all the option shares in the event those options
are assumed in the acquisition but the optionee's service with us or the
acquiring entity is subsequently terminated. The vesting of outstanding
shares under the stock issuance program may be accelerated upon similar
terms and conditions.

- The compensation committee will also have the authority to grant options
which will immediately vest in the event we are acquired, whether or not
those options are assumed by the successor corporation.

- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections for board membership.
Such accelerated vesting may occur either at the time of such transaction
or upon the subsequent termination of the individual's service.

- The options currently outstanding under our 1996 Stock Option Plan will
immediately vest in the event we are acquired by merger or sale of
substantially all of our assets, unless those options are assumed by the
acquiring entity or our repurchase rights with respect to any unvested
shares subject to those options are assigned to such entity.

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<PAGE>
SALARY INVESTMENT OPTION GRANT PROGRAM. In the event the compensation
committee elects to activate the salary investment option grant program for one
or more calendar years, each of our executive officers and other highly
compensated employees selected for participation may elect, before the start of
the calendar year, to reduce his or her base salary for that calendar year by a
specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files such a timely election will automatically be
granted, on the first trading day in January of the calendar year for which his
or her salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of our common stock on the grant
date. The option will be exercisable at a price per share equal to one-third of
the fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal to
the amount by which the optionee's salary is reduced under the program. The
option will become exercisable in a series of 12 equal monthly installments over
the calendar year for which the salary reduction is to be in effect.

AUTOMATIC OPTION GRANT PROGRAM. Under the automatic option grant program,
each individual who first becomes a non-employee board member at any time after
the completion of this offering will automatically receive an option grant for
30,000 shares on the date such individual joins the board, provided such
individual has not been in our prior employ.

Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of ten years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. The shares subject to each automatic
option grant will vest in a series of five successive annual installments upon
the optionee's completion of each year of board service over the five-year
period measured from the grant date. However, the shares will immediately vest
in full upon certain changes in control or ownership of Simple Technology or
upon the optionee's death or disability while serving as a board member.

DIRECTOR FEE OPTION GRANT PROGRAM. Should the director fee option grant
program be activated in the future, each non-employee board member will have the
opportunity to apply all or a portion of any cash retainer fee for the year to
the acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for which
the retainer fee would otherwise be payable in cash. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of our common stock on
the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the portion of the retainer fee
applied to that option. The option will become exercisable in a series of 12
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable for all
the option shares upon the optionee's death or disability while serving as a
board member.

Our 2000 Stock Incentive Plan will also have the following features:

- Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.

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<PAGE>
- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights may
also be granted to one or more officers as part of their option grants
under the discretionary option grant program. Options with this feature
may be surrendered to us upon the successful completion of a hostile
tender offer for more than 50% of our outstanding voting stock. In return
for the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based upon
the highest price per share of our common stock paid in that tender offer.

- The board will be able to amend or modify the 2000 Stock Incentive Plan at
any time, subject to any required shareholder approval. The 2000 Stock
Incentive Plan will terminate no later than February 2010.

2000 EMPLOYEE STOCK PURCHASE PLAN

INTRODUCTION. Our 2000 Employee Stock Purchase Plan was adopted by the
board of directors and approved by our shareholders in June 2000. The plan will
become effective immediately upon the signing of the underwriting agreement for
this offering. The plan is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of our
common stock, at semi-annual intervals, with their accumulated payroll
deductions.

SHARE RESERVE. 360,000 shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January of each calendar year, beginning in calendar year 2001,
by an amount equal to 1% of the total number of outstanding shares of our common
stock on the last trading day in December of the prior calendar year. In no
event will any such annual increase exceed 400,000 shares.

OFFERING PERIODS. The plan will have a series of successive overlapping
offering periods, with a new offering period beginning on the first business day
of February and August each year. Each offering period will have a duration of
24 months, unless otherwise determined by the compensation committee. However,
the initial offering period may have a duration in excess of 24 months and will
start on the date the underwriting agreement for this offering is signed and
will end on the last business day in July 2002. The next offering period will
start on the first business day in February 2001.

ELIGIBLE EMPLOYEES. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date of that period. However, employees may participate in only one
offering period at a time.

PAYROLL DEDUCTIONS. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated payroll deductions
will be applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date. The purchase price per share will be equal to 85% of
the fair market value per share on the start date of the offering period in
which the participant is enrolled or, if lower, 85% of the fair market value per
share on the semi-annual purchase date. Semi-annual purchase dates will occur on
the last business day of January and July each year. However, a participant may
not purchase more than 500 shares on any purchase date, and not more than 50,000
shares may be purchased in total by all participants on any purchase date. Our
compensation committee will have the authority to change these limitations for
any subsequent offering period.

RESET FEATURE. If the fair market value per share of our common stock on
any purchase date within a two year offering period is less than the fair market
value per share on the start date of that offering period, then the offering
period will automatically terminate, and a new two-year offering period will
begin on the next business day. All participants in the terminated offering will
be transferred to the new offering period.

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CHANGE IN CONTROL. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately before
the effective date of the acquisition. The purchase price will be equal to 85%
of the fair market value per share on the start date of the offering period in
which the participant is enrolled at the time of the acquisition, or, if lower,
85% of the fair market value per share immediately before the acquisition.

PLAN PROVISIONS. The following provisions will also be in effect under our
2000 Employee Stock Purchase Plan:

- The plan will terminate no later than the last business day of July 2010.

- The board may at any time amend, suspend or discontinue the plan. However,
certain amendments may require shareholder approval.

401(K) PROFIT SHARING PLAN

We adopted a 401(k) profit sharing plan on January 1, 1991. The plan covers
all full-time employees on our U.S. payroll who are at least 21 years of age.
Employees become eligible to participate in the plan after they have worked at
least six months, commencing on the date of hire. The plan provides for
voluntary employee contributions of up to 20% of their annual pre-tax
compensation, subject to the maximum limit allowed by the Internal Revenue
Service guidelines, which is currently $10,500 annually. We make matching
contributions to each participating employee based on his or her voluntary
contributions to the plan. We currently match one-half of an employee's
matchable contributions to the plan which cannot exceed 10% of their salary. Our
matching contributions to the plan are subject to vesting at the rate of 20% per
year beginning after the employee's second year of employment with us. The plan
is intended to qualify under Section 401 of the Internal Revenue Code so that
contributions by employees or by us to the plan, and income earned on the plan
contributions, are not taxable to employees until withdrawn from the plan, and
so that contributions by us, if any, will be deductible by us when made. The
trustee under the plan, at the discretion of each participant, invests the
employee contributions to the plan in selected investment options. For the year
ended December 31, 1999, we made matching contributions of approximately
$339,000 to the plan.

We may also make, in our discretion, annual profit sharing contributions on
behalf of eligible employees. Each employee who is a plan participant on the
last day of the plan year and who has completed at least 1,000 hours of service
during the year is entitled to a share of any profit sharing contribution we
make for the plan year. Our profit sharing contributions are subject to vesting
at the rate of 20% per year beginning after the employee's second year of
employment with us. We did not make any profit sharing contributions to the plan
for the year ended December 31, 1999.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Our amended and restated articles of incorporation limit the personal
liability of our directors for monetary damages to the fullest extent permitted
by the California General Corporation Law. Under California law, a director's
liability to a company or its shareholders may not be limited:

- For acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;

- For acts or omissions that a director believes to be contrary to the best
interests of the company or its shareholders or that involve the absence
of good faith on the part of the director;

- For any transaction from which a director derived an improper personal
benefit;

- For acts or omissions that show a reckless disregard for the director's
duty to the company or its shareholders in circumstances in which the
director was aware, or should have been aware, in

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the ordinary course of performing the director's duties, of a risk of
serious injury to the company or its shareholders;

- For acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the company or its
shareholders;

- Under Section 310 of the California General Corporation Law concerning
contracts or transactions between the company and a director; or

- Under Section 316 of the California General Corporation Law concerning
directors' liability for improper dividends, loans and guarantees.

The limitation of liability does not affect the availability of injunctions
and other equitable remedies available to our shareholders for any violation by
a director of the director's fiduciary duty to us or our shareholders.

Our amended and restated articles of incorporation also include an
authorization for us to indemnify our "agents," as defined in Section 317 of the
California General Corporation Law, through bylaw provisions, by agreement with
the agents, vote of our shareholders or disinterested directors, or otherwise,
to the fullest extent permitted by law. Under this provision, our amended and
restated bylaws provide for indemnification of our directors, officers and
employees. In addition, we may, at our discretion, provide indemnification to
persons whom we are not obligated to indemnify. The amended and restated bylaws
also allow us to enter into indemnification agreements with individual
directors, officers, employees and other agents.

We have entered into indemnification agreements with each of our officers
and directors. These agreements contain provisions that may require us, among
other things, to indemnify these officers and directors against liabilities that
may arise because of their status or service as officers or directors, except
for liabilities arising from willful misconduct of a culpable nature, advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and obtain officers' and directors' liability
insurance if it is maintained for other officers and directors. These agreements
do not require us to indemnify our directors and officers in situations where:

- The remuneration rendered against our officer or director is determined by
final judgment or other final adjudication that such remuneration was in
violation of law;

- A judgment is rendered against the director or officer for an accounting
of profits made from the purchase or sale of our securities under the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or similar provisions of any federal, state or local statutory
laws;

- The officer's or director's conduct is adjudged to have been knowingly
fraudulent or deliberately dishonest, or constitutes willful misconduct;
or

- A court determines that indemnification under the circumstances is not
lawful.

Before the completion of this offering, we intend to obtain directors' and
officers' liability insurance. At present, we are not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent in which indemnification would be required or permitted, except for the
Dense-Pac technology misappropration litigation, in which we have agreed to
defend and indemnify Mark Moshayedi, our Chief Operating Officer, Chief
Technical Officer and Secretary, who was sued individually. We believe that our
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.

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CERTAIN TRANSACTIONS

THE TRANSACTIONS SET FORTH BELOW WERE MADE WHILE WE WERE A PRIVATELY HELD
CORPORATION AND CERTAIN OF THE TRANSACTIONS AS INDICATED BELOW HAVE BEEN ON
TERMS MORE FAVORABLE TO OUR OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS AND
THEIR AFFILIATES THAN THEY COULD OBTAIN IN A TRANSACTION WITH AN UNAFFILIATED
THIRD PARTY. ALL FUTURE TRANSACTIONS, INCLUDING LOANS, IF ANY, BETWEEN US AND
OUR OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS AND THEIR AFFILIATES, AND ANY
TRANSACTIONS BETWEEN US AND ANY ENTITY WITH WHICH OUR OFFICERS, DIRECTORS OR
PRINCIPAL SHAREHOLDERS OR THEIR AFFILIATES ARE AFFILIATED, WILL BE APPROVED BY A
MAJORITY OF OUR BOARD OF DIRECTORS, INCLUDING A MAJORITY OF THE INDEPENDENT AND
DISINTERESTED OUTSIDE DIRECTORS OF OUR BOARD OF DIRECTORS, AND WILL BE ON TERMS
NO LESS FAVORABLE TO US THAN COULD BE OBTAINED FROM UNAFFILIATED THIRD PARTIES.

S CORPORATION DISTRIBUTIONS TO SHAREHOLDERS FOR TAXES AND OTHER ITEMS

We have made cash distributions of a portion of our earnings to certain of
our shareholders for reasons including payment of our shareholders' overall
personal income tax liabilities as described under "S Corporation Status and
Conversion." All of these amounts have been treated as distributed to our
shareholders for financial statement purposes. However, to comply with
applicable tax laws regarding distribution rights on S corporation stock, some
of our shareholders have transferred a portion of the amount which was in excess
of their pro rata share of the distributions to some of our other shareholders
so as to make the distributions proportional to all shareholders. The remaining
portion of the excess distributions, to the extent not transferred as provided
in the preceding sentence, have been treated as loans to the shareholders from
us for income tax purposes. In addition to the distributions, during certain
periods our shareholders have received income tax refunds which have been
remitted to us as contributions to capital for financial statement purposes and
as repayment of shareholder loans for tax purposes.

We distributed to our shareholders of record as of September 20, 2000, in
proportion to their ownership of our shares, notes in an aggregate principal
amount equal to our undistributed earnings from the date of our formation
through September 26, 2000. Upon the completion of this offering, we will use a
portion of the net proceeds from this offering to pay off the principal amount
of these undistributed earnings notes as described under "Use of Proceeds." As
of June 30, 2000, the aggregate principal amount of the undistributed earnings
notes would have been approximately $16.6 million. The actual principal amount
of the undistributed earnings notes will be increased by the amount of our
earnings from July 1, 2000 through September 26, 2000, less distributions made
to our shareholders during such period. Our issuance and payment of the
undistributed earnings notes through June 30, 2000 are reflected in the pro
forma financial data contained in this prospectus. See "S Corporation Status and
Conversion."

MDC LAND CORPORATION AND MDC LAND LLC

We occupy two leased facilities of approximately 24,500 and 48,600 square
feet in Santa Ana, California, in which our executive offices, manufacturing,
engineering, research and development, and testing operations are located. At
various times, we have leased these facilities from MDC Land Corporation, MDC
Land LLC and a third party. MDC Land LLC and MDC Land Corporation are
wholly-owned by Manouch Moshayedi, Mark Moshayedi, and Mike Moshayedi, each of
whom is an executive officer and director of Simple Technology, and have no
operations other than their transactions with us. We also lease some of the
equipment used in our manufacturing and testing operations from MDC Land
Corporation. Our relationships with MDC Land Corporation and MDC Land LLC
involve various obligations that have been offset and are reflected in our
consolidated financial statements as described below.

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24,500 SQUARE FOOT FACILITY. The 24,500 square foot facility was originally
owned by MDC Land Corporation. MDC Land Corporation purchased this building in
February 1994 financed with a $1,053,000 mortgage loan from First Security Bank.
The loan was guaranteed by us, Manouch Moshayedi, Mike Moshayedi, Mark Moshayedi
and the U.S. Small Business Administration. In February 1994, we made a
non-interest bearing advance of approximately $500,000 to MDC Land Corporation
to enable it to make leasehold improvements, including the build-out of our
office and manufacturing space, which was completed in 1994.

MDC Land Corporation sold the facility in February 1999 and transferred the
mortgage note in April 1999 to MDC Land LLC. However, MDC Land Corporation
remained obligated on the leasehold improvement advance. As of March 31, 2000
the entire balance of this advance had been repaid to us. Our guarantee was
released, as of April 1, 2000, concurrent with the refinancing of the mortgage
loan by MDC Land LLC. As a tenant, our guarantee and non-interest bearing
advance were made on terms less favorable to us than would be generally
available. Our lease for this facility expires in March 2005 and the base rent
is approximately $17,000 per month. Our lease of the 24,500 square foot facility
with MDC Land LLC is on terms no less favorable to us than could be obtained
from an unaffiliated third party.

Historically, we have made the mortgage, property tax, leasehold improvement
and other miscellaneous payments on behalf of MDC Land Corporation and MDC Land
LLC related to the mortgage loan during their respective periods as lessors.
These payments totaled approximately $270,000 in 1999, $132,000 in 1998 and
$165,000 in 1997. The outstanding balance on the mortgage loan was approximately
$995,000 on December 31, 1999, $1,010,000 on December 31, 1998 and $1,023,000 on
December 31, 1997.

48,600 SQUARE FOOT FACILITY. We lease the 48,600 square foot facility from
MDC Land LLC for a base rent of approximately $33,000 per month. This lease
expires in May 2005. Under the terms of our previous lease, a third-party lessor
granted us an option to purchase this facility for approximately $2.7 million,
as adjusted by the increase in the cost of living index between April 1997 and
the date the option is exercised. In November 1998, we transferred this option
to MDC Land LLC at its nominal historic value, since we are under common
ownership with MDC Land LLC. At the time of the transfer, the fair market value
of the facility may have exceeded the option exercise price. Therefore, our
transfer of the option may have been on terms less favorable to us than would be
generally available. In March 2000, MDC Land LLC exercised the option and
subsequently purchased the facility. Our lease of the 48,600 square foot
facility with MDC Land LLC is on terms no less favorable to us than could be
obtained from an unaffiliated third party.

LEASE OF EQUIPMENT. We lease some of the equipment used in our manufacturing
and testing operations from MDC Land Corporation. We have entered into six
equipment leases, each for a period of 60 months, at interest rates ranging from
8.4% to 9.6%. The expiration dates of the leases range from May 2001 to March
2002. Our aggregate annual lease payments to MDC Land Corporation were
approximately $574,000 in each of 1999 and 1998, and $568,000 in 1997. In order
to secure financing for the equipment, MDC Land Corporation entered into a loan
and security agreement with United Capital, formerly known as Lyon Credit
Corporation, in March 1996. We guaranteed MDC Land Corporation's obligations and
indebtedness under this agreement. As a lessee, our guarantee was made on terms
less favorable to us than would be generally available. However, the Moshayedis,
who control MDC Land Corporation, have agreed to cause MDC Land Corporation to
repay the balance owed to United Capital upon the completion of this offering,
resulting in the release of our guarantee.

Historically, we have paid the monthly debt service, sales tax, loan
payments and down payments on behalf of MDC Land Corporation related to the
equipment we have leased from MDC Land Corporation. These payments totaled
approximately $460,000 in each of 1999 and 1998, and $418,000 in 1997. The
outstanding balance on the equipment loan from United Capital to MDC Land
Corporation

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was approximately $752,000 on December 31, 1999, $1.1 million on December 31,
1998 and $1.5 million on December 31, 1997. Our remaining capital lease
obligation due to MDC Land Corporation was approximately $900,000 on December
31, 1999, $1.4 million on December 31, 1998 and $1.8 million on December 31,
1997.

MDC LAND CORPORATION RECEIVABLE ACCOUNT AND MDC LAND LLC PAYABLE
ACCOUNT. We have created a receivable account, with rights of offset, to
reflect the payments by Simple Technology on behalf of MDC Land Corporation.
This account includes mortgage, property tax, leasehold improvement and other
miscellaneous payments related to the 24,500 square foot facility, and the
monthly debt service, sales tax, loan payments and down payments related to the
equipment we have leased from MDC Land Corporation. Rather than making lease
payments to MDC Land Corporation, we reduced the receivable account by the
amount of the rental payments equal to approximately $605,000 in 1999, $802,000
in 1998 and $774,000 in 1997. As a result, the outstanding balance on the
receivable account was approximately $73,000 on December 31, 1999, $112,000 on
December 31, 1998 and $339,000 on December 31, 1997. In March 2000, MDC Land
Corporation paid the entire receivable balance to us. We will remit all future
equipment rental payments directly to MDC Land Corporation, and MDC Land
Corporation will remit all future debt service payments directly to United
Capital under the equipment loan agreement.

We have created a payable account, with rights of offset, to reflect the
rental payments owed by Simple Technology to MDC Land LLC related to the 24,500
square foot facility. Rather than making these payments, equal to approximately
$197,000 in 1999, we reduced the payable account by the mortgage, property tax,
leasehold improvement and other miscellaneous payments we made on behalf of MDC
Land LLC of $164,000 in 1999. As a result, the outstanding balance on the
payable account was approximately $33,000 on December 31, 1999. In March 2000,
we paid the entire payable balance to MDC Land LLC. We will remit all future
rental payments directly to MDC Land LLC, and MDC Land LLC will remit all future
mortgage, property tax and other miscellaneous payments.

Our consolidated financial statements, as of December 31, 1999, reflect a
related party receivable balance of $40,000, which is the net of the $73,000
receivable balance with MDC Land Corporation and the $33,000 payable balance
with MDC Land LLC.

SIMPLE TECHNOLOGY SUBSIDIARY OWNERSHIP

In February 1995, we formed Simple Technology Canada Ltd., a Canadian
corporation with headquarters in Mississauga, Canada, with Manouch Moshayedi,
Mike Moshayedi and Mark Moshayedi, each of whom is an executive officer and
director of Simple Technology. We initially owned 79% of the membership
interests in Simple Technology Canada and the Moshayedis initially owned the
remaining 21%. Simple Technology Canada was formed for the purpose of
manufacturing, selling and marketing our products in Canada. Under U.S. law at
the time of formation of Simple Technology Canada, we could not wholly own a
subsidiary since we are an S corporation. Accordingly, we formed Simple
Technology Canada with the Moshayedis to meet this ownership requirement. Simple
Technology Canada has been inactive since April 1998 when we discontinued our
Canadian operations, and we are presently in the process of dissolving the
company. In June 2000, Simple Technology Canada distributed all of its assets
totaling approximately $92,000 to its shareholders through the establishment of
an escrow account. Subsequently, we made filings with the Canadian tax
authorities to dissolve Simple Technology Canada and we are currently awaiting
their approval. In June 2000, the Moshayedis sold their 21% interest to us for
approximately $2.00, the then current fair market value. Upon dissolution, the
amount held in escrow will be distributed to the Moshayedis and us in proportion
to our previous ownership interests.

In May 1996 we formed S.T.I., LLC, a California limited liability company,
with Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director

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of Simple Technology. We own 97% of the membership interests in S.T.I., LLC and
the Moshayedis own the remaining 3%. S.T.I., LLC was formed to limit our
potential liability from our European manufacturing, sales and marketing
operations. Under California law at the time of formation of S.T.I., LLC,
limited liability companies were required to have more than one member.
Accordingly, we formed S.T.I., LLC with the Moshayedis to meet this ownership
requirement. To date, there has been no withdrawal from, or distribution of any
kind by, S.T.I., LLC in favor of any owner. Upon completion of this offering, we
will acquire the Moshayedis' interest in S.T.I., LLC for approximately $100 and
we intend to dissolve S.T.I., LLC in 2000 or as soon as possible thereafter.

In June 1996, S.T.I., LLC and MDC Land Corporation formed Simple Technology
Europe, a privately-held unlimited company registered in Scotland. Simple
Technology Europe was set up to serve as the sales and marketing entity for our
European operations and currently employs our sales and marketing team located
in Scotland and England. S.T.I., LLC owns 99% and MDC Land Corporation owns 1%
of the outstanding shares of capital stock of Simple Technology Europe. Other
than the 1% ownership interest in Simple Technology Europe held by MDC Land
Corporation, MDC Land Corporation does not have any other relationship, either
business, financial or otherwise, with Simple Technology Europe. To date, there
has been no withdrawal from, or distribution of any kind by, Simple Technology
Europe in favor of any owner. Upon completion of this offering, we will acquire
MDC Land Corporation's interest in Simple Technology Europe for $100 and we
intend to dissolve Simple Technology Europe in 2000 or as soon as possible
thereafter. Upon the dissolution of Simple Technology Europe, our sales and
marketing activities in Europe will be transitioned to us.

In January 1996, we launched Simple Technology Limited, a privately-held
limited company registered in Scotland, to serve as the manufacturing entity for
our European headquarters to take advantage of local U.K. tax laws. Simple
Technology Limited is a wholly-owned subsidiary of Simple Technology Europe.
Simple Technology Limited concluded its manufacturing operations in April 1999
and is currently inactive. To date, there has been no withdrawal from, or
distribution of any kind by, Simple Technology Limited in favor of any owner. We
intend to dissolve Simple Technology Limited in 2000 or as soon as possible
thereafter.

ADVANCES TO LEXAR MEDIA, INC.

During 1996, we made non-interest bearing advances totaling $3.0 million to
Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director of Simple Technology. Because these advances did
not bear interest, they were on terms less favorable to us than would be
generally available. The purpose of these advances was to facilitate the
Moshayedis' purchase of a controlling interest in a business unit of Cirrus
Logic, Inc., now named Lexar Media, Inc. In addition, during 1996 and 1997, we
made related non-interest bearing advances to Lexar totaling $2.3 million for
its working capital needs. Because these advances did not bear interest, they
were made on terms less favorable to us than would be generally available. In
1997, the Moshayedis sold their interest in Lexar and approximately
$5.3 million of such advances were repaid to us. The remaining amount of these
advances, approximately $57,200, represented inventory purchases by us that were
otherwise payable to Lexar but were ultimately offset against the remaining
portion of the advances. Currently, neither we nor the Moshayedis have any type
of relationship, either business, financial or otherwise, with Lexar.

ADVANCES TO QUALCENTER, INC.

During 1998 and 1999, we made non-interest bearing advances totaling
approximately $511,000 and $20,000, respectively, to QualCenter, Inc., a company
wholly-owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of
whom is an executive officer and director of Simple Technology. Because these
advances did not bear interest they were made on terms less favorable to us than
would be generally available. QualCenter is located in Houston, Texas and tests
memory modules

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on an exclusive basis for Compaq Corporation under an arrangement whereby Compaq
defines and specifies all test and evaluation procedures and methodologies. The
advances were used for start-up costs and working capital requirements. The
largest aggregate amount of indebtedness outstanding under these advances was
approximately $499,000. QualCenter repaid approximately $343,000 through
December 27, 1999. The remaining amount of these advances, approximately
$188,000, was repaid in December 1999 in conjunction with shareholder
distributions of approximately $188,000.

ADVANCES TO XYZ, INC.

During 1999, we made non-interest bearing advances totaling approximately
$898,000 to XYZ, Inc., a company wholly-owned by Manouch Moshayedi, Mike
Moshayedi and Mark Moshayedi, each of whom is an executive officer and director
of Simple Technology. Because these advances did not bear interest, they were
made on terms less favorable to us than would be generally available. XYZ sells
DVD movies over the Internet and is located in Irvine, California. The advances
were used for start-up costs and working capital requirements. The largest
aggregate amount of indebtedness outstanding under these advances was
approximately $898,000. These advances were repaid in full in December 1999 in
conjunction with shareholder distributions of approximately $898,000.

TRANSACTIONS WITH WYLE ELECTRONICS, INC.

Thomas A. Beaver has agreed to be appointed as a director and member of our
audit and compensation committees upon the completion of this offering. Mr.
Beaver is and has been the Chief Executive Officer of Wyle Electronics, Inc., a
distributor of semiconductor products, since February 2000. Wyle Electronics is
a customer of our memory and storage products as well as a supplier of raw
material components for our products. In the first half of 2000 and for the
years ended 1999, 1998 and 1997, sales of our memory and storage products to
Wyle Electronics were approximately $1.1 million, $2.0 million, $2.3 million and
$1.5 million, respectively. In the first half of 2000 and for the years ended
1999, 1998 and 1997, purchases of raw material components from Wyle Electronics
were approximately $1.2 million, $600,000, $600,000 and $17,000, respectively.
We believe our purchases from and sales to Wyle Electronics were on terms that
were no less favorable than comparable purchases from and sales to unrelated
third parties.

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PRINCIPAL SHAREHOLDERS

The following table sets forth information regarding the beneficial
ownership of the shares of our common stock as of September 28, 2000, and as
adjusted to reflect the sale of the 6,364,000 shares of common stock in this
offering assuming (a) 31,208,667 shares of common stock outstanding as of
September 28, 2000 and 37,572,667 shares outstanding immediately following the
completion of this offering and (b) no exercise of the underwriters'
over-allotment option, by:

- Each person who we know to be the beneficial owner of 5% or more of our
outstanding common stock;

- Each Named Executive Officer;

- Each of our current and proposed directors;

- Each of our other key employees; and

- All of our executive officers and current and proposed directors as a
group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or become exercisable within 60 days of September 28, 2000, are
deemed outstanding even if they have not actually been exercised. Those shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise indicated in the table, the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite the shareholder's name,
subject to community property laws where applicable. The address of each
individual listed below is c/o 3001 Daimler Street, Santa Ana, California
92705-5812.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Named executive officers, directors and other key
employees:
Manouch Moshayedi(1)..................................... 10,094,496 32.3% 26.9%
Mike Moshayedi(2)........................................ 9,019,996 28.9 24.0
Mark Moshayedi(3)........................................ 11,486,535 36.8 30.6
Dan Moses(4)............................................. 339,989 1.1 *
Michael Hajeck(5)........................................ 240,821 * *
Carl Swartz(6)........................................... 339,989 1.1 *
Shane Mortazavi.......................................... 0 -- --
Jeanclaude Toma.......................................... 0 -- --
Mark R. Hollinger........................................ 0 -- --
F. Michael Ball.......................................... 0 -- --
Thomas A. Beaver......................................... 0 -- --
All directors, executive officers and other key employees
as a group (11 persons)(7)............................... 31,521,826 100.0% 82.8%
</TABLE>

------------------------

*Less than one percent

(1) Consists of 1,098,496 shares held by Manouch Moshayedi & Ali Dariushnia, as
Trustees for the D. and N. Moshayedi Investment Trust, dated 9/25/98 for the
benefit of Mark Moshayedi's children and 5,996,000 shares held by Manouch
and Sophie Moshayedi, as Trustees for the M. and S. Moshayedi Revocable
Trust, dated 11/16/95 for the benefit of Manouch Moshayedi's family,
1,500,000 shares held by Manouch Moshayedi, as Trustee for the Manouch
Moshayedi Grantor Retained Annuity Trust for the benefit of Manouch
Moshayedi and his family and 1,500,000 shares held by Manouch Moshayedi, as

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<PAGE>
Trustee for the Sophie Moshayedi Grantor Retained Annuity Trust for the
benefit of Manouch Moshayedi and his family. Manouch Moshayedi and Ali
Dariushnia disclaim beneficial ownership of the shares held in the D. and
N. Moshayedi Investment Trust, dated 9/25/98.

(2) Consists of 7,019,996 shares held by Mike & Parto Moshayedi, as Trustees for
the M. and P. Moshayedi Revocable Trust, dated 12/30/96 for the benefit of
Mike Moshayedi's family, 1,000,000 shares held by Mike Moshayedi, as Trustee
for the Masoud Moshayedi Grantor Retained Annuity Trust for the benefit of
Mike Moshayedi and his family and 1,000,000 shares held by Mike Moshayedi,
as Trustee for the Parto Moshayedi Grantor Retained Annuity Trust for the
benefit of Mike Moshayedi and his family.

(3) Consists of 1,204,343 shares held by Mark Moshayedi, as Trustee for the M.
and S. Moshayedi Investment Trust, dated 11/16/95 for the benefit of Manouch
Moshayedi's children, 1,180,346 shares held by Mark Moshayedi and Kamran
Ghadimi, as Trustees for the M. and P. Moshayedi Investment Trust, dated
12/30/96 for the benefit of Mike Moshayedi's children, 7,101,846 shares held
by Mark and Semira Moshayedi, as Trustees for the M. and S. Moshayedi
Revocable Trust, dated 9/25/98 for the benefit of Mark Moshayedi's family,
1,000,000 shares held by Mark Moshayedi, as trustee for the Mehrdad
Moshayedi Grantor Retained Annuity Trust for the benefit of Mark Moshayedi
and his family and 1,000,000 shares held by Mark Moshayedi, as Trustee for
the Semira Moshayedi Grantor Retained Annuity Trust for the benefit of Mark
Moshayedi and his family. Mark Moshayedi disclaims beneficial ownership of
the shares held in the M. and S. Moshayedi Investment Trust, dated 11/16/95.
Mark Moshayedi and Kamran Ghadimi disclaim beneficial ownership of the
shares held in the M. and P. Moshayedi Investment Trust, dated 12/30/96.

(4) Consists of 339,989 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from September 28,
2000.

(5) Consists of 14,166 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from September 28,
2000.

(6) Consists of 125,173 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from September 28,
2000.

(7) Includes 479,328 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from September 28,
2000.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

The following is a summary of our capital stock and certain provisions of
our amended and restated articles of incorporation and amended and restated
bylaws. It is qualified in its entirety by the provisions of the amended and
restated articles of incorporation and amended and restated bylaws which have
been filed as exhibits to the registration statement of which this prospectus is
a part. Our amended and restated articles of incorporation authorize us to issue
100,000,000 shares of common stock, $0.001 par value, and 20,000,000 shares of
preferred stock, $0.001 par value. As of September 28, 2000, there were
31,208,667 shares of common stock outstanding held by 15 shareholders of record
and no shares of preferred stock outstanding. Options to purchase an aggregate
of 6,231,421 shares of common stock were also outstanding at a weighted average
exercise price of $6.58 per share. There will be 37,572,667 shares of common
stock outstanding (assuming no exercise of the underwriters' over-allotment
option or exercise of outstanding options as of September 28, 2000) after giving
effect to the sale of the shares offered in this offering.

COMMON STOCK

The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available for that
purpose. In the event of liquidation, dissolution or winding up of Simple
Technology, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to the prior distribution
rights of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.

PREFERRED STOCK

The board of directors will have the authority, without further action by
the shareholders, to issue up to 20,000,000 shares of preferred stock in one or
more series. The board of directors will also have the authority to designate
the price, rights, preferences, privileges and restrictions of each such series,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series, any or all of which may be greater than the
rights of the common stock.

The issuance of preferred stock might have the effect of delaying, deferring
or preventing a change in control of Simple Technology without further action by
the shareholders. The issuance of preferred stock with voting and conversion
rights might also adversely affect the voting power of the holders of common
stock. In some circumstances, an issuance of preferred stock could have the
effect of decreasing the market price of the common stock. There are no shares
of preferred stock currently outstanding and as of the completion of this
offering, no shares of preferred stock will be outstanding. We currently have no
plans to issue any shares of preferred stock.

AUTHORIZED BUT UNISSUED CAPITAL STOCK

Following the completion of this offering we will have 62,427,333 shares of
authorized but unissued common stock, including an aggregate of 6,425,365 shares
reserved for issuance upon the exercise of options under our 2000 Stock
Incentive Plan, which amount includes 2,777,421 shares of common stock issuable
upon exercise of stock options outstanding as of September 28, 2000 under our
1996 Stock Option Plan and options outstanding to purchase a total of 3,454,000
shares granted on September 28, 2000 to our employees and consultants, other
than our Chief Executive Officer, President and Chief Operating Officer, at an
exercise price per share equal to the initial public offering price per share of

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<PAGE>
$11.00, 360,000 shares reserved for issuance under our 2000 Employee Stock
Purchase Plan, and 20,000,000 shares of authorized preferred stock, none of
which will be issued and outstanding. If the underwriters' over-allotment option
is exercised in full, we will have approximately 61,472,733 shares of authorized
but unissued common stock. However, the listing requirements of The Nasdaq Stock
Market, Inc., which apply so long as the common stock remains included in that
inter-dealer quotation system, require prior shareholder approval of specified
issuances, including issuances of shares bearing voting power equal to or
exceeding 20% of the pre-issuance outstanding voting power or pre-issuance
outstanding number of shares of common stock. These additional shares could be
used for a variety of corporate purposes, including, but not limited to,
facilitating corporate acquisitions. We currently do not have any plans to issue
additional shares of common stock or preferred stock, other than in connection
with employee compensation plans. See "Management--Stock Plans/Employee
Compensation Programs." One of the effects of the existence of unissued and
unreserved common stock and preferred stock may be to enable the board of
directors to issue shares to persons who may agree or be inclined to vote in
concert with current management on issues put to consideration of shareholders,
which issuance could render more difficult or discourage an attempt to obtain
control of us by means of a merger, tender offer, proxy contest or otherwise,
and protect the continuity of our management and possibly deprive the
shareholders of the opportunity to sell their shares of common stock at prices
higher than prevailing market prices.

ANTI-TAKEOVER PROVISIONS

Our amended and restated articles of incorporation and amended and restated
bylaws contain provisions that could have the effect of discouraging potential
acquisition proposals or making a tender offer or delaying or preventing a
change in control of Simple Technology, including changes a shareholder might
consider favorable. In particular, our amended and restated articles of
incorporation and amended and restated bylaws, as applicable, among other
things, will:

- Provide that special meetings of shareholders can be called by the
chairman of the board of directors, the president, the board of directors
or by a majority of the shareholders. In addition, the business permitted
to be conducted at any special meeting of shareholders is limited to the
business brought before the meeting by the board of directors, the
chairman of the board of directors, the president or any such shareholder;

- Provide for an advance notice procedure with regard to the nomination,
other than by or at the direction of the board of directors, of candidates
for election as directors and with regard to business to be brought before
a meeting of shareholders;

- Eliminate cumulative voting in the election of directors. Under cumulative
voting, a minority of shareholders holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence
of cumulative voting may have the effect of limiting the ability of
minority shareholders to effect changes in the board of directors and, as
a result, may have the effect of deterring a hostile takeover or delaying
or preventing changes in control or management of Simple Technology;

- Provide that vacancies on our board of directors may be filled by a
majority of directors in office, although less than a quorum; and

- Allow us to issue up to 20,000,000 shares of preferred stock with rights
senior to those of the common stock and that otherwise could adversely
affect the rights and powers, including voting rights, of the holders of
common stock. In certain circumstances, this issuance could have the
effect of decreasing the market price of the common stock, as well as
having the anti-takeover effects discussed above.

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<PAGE>
In addition, provisions of our 2000 Stock Incentive Plan allow for the
automatic vesting of all outstanding options granted under the plan upon a
change in control under certain circumstances. Such provisions may have the
effect of discouraging a third party from acquiring us, even if doing so would
be beneficial to our shareholders.

These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the policies
formulated by them, and to discourage certain types of transactions that may
involve an actual or threatened change in control of Simple Technology. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal and to discourage certain tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure Simple Technology outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in our
management.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.

LISTING

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "STEC."

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Before this offering, there has been no public market for our common stock.
Future sales of substantial amounts of common stock, including shares issued
upon exercise of outstanding options, in the public market could adversely
affect prevailing market prices from time to time. Since only a limited number
of shares will be available for sale shortly after this offering because of
certain contractual and legal restrictions on resale, as described below, sales
of substantial amount of common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.

Upon completion of this offering, we will have 37,572,667 shares of common
stock outstanding assuming the issuance of 6,364,000 shares of common stock in
this offering, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding stock options after September 28, 2000. Of the
total outstanding shares of common stock, the 6,364,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act of 1933, except that any shares purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act of
1933, may generally only be sold in accordance with an effective registration
statement under the Securities Act of 1933 or in compliance with the limitations
of Rule 144 as described below.

All of the remaining shares of common stock are "restricted securities" as
that term is defined in Rule 144. 31,208,667 of these restricted securities will
be available for sale in the public market under Rule 144 following the
expiration of the 180 day lock-up agreement further described below. If Lehman
Brothers Inc. elects to waive the lock-up period for any reason, these shares
will be available for sale under Rule 144 before that time.

Simple Technology, our officers, directors, existing shareholders and
optionholders holding substantially all of the option shares have entered into
contractual "lock-up" agreements generally providing that, subject to certain
limited exceptions, they will not (1) offer for sale, sell, pledge or otherwise
dispose of, directly or indirectly, any shares of common stock or securities
convertible into or exchangeable for common stock owned by them on the date of
the execution of the lock-up agreement or on the date of the completion of this
offering, or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of common stock whether any such transaction
described in (1) or (2) is to be settled by delivery of common stock or other
securities, in cash or otherwise, for a period of 180 days after the date of the
final prospectus, without the prior written consent of Lehman Brothers Inc.
Lehman Brothers Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
Lehman Brothers Inc. currently has no understandings, tacit or explicit, to
release the securities subject to lock-up agreements prior to the expiration of
the lock-up period. When determining whether or not to release shares from the
lock-up agreements, Lehman Brothers Inc. will consider, among other factors, the
shareholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 180-day lock-up period, the restricted securities will be
available for sale in the public market subject to compliance with Rule 144 or
Rule 701.

In general, under Rule 144 as currently in effect, any affiliate of ours or
a person, or persons whose shares are aggregated, who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner other than a person who may be deemed an affiliate of ours, is
entitled to sell within any three-month period a number of shares of common
stock that does not exceed the greater of:

- One percent of the then-outstanding shares of common stock (approximately
375,726 shares after giving effect to this offering assuming no exercise
of the underwriters' over-allotment option); and

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<PAGE>
- The average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks prior to the filing of a
Form 144 notice with respect to such sale.

Sales under Rule 144 of the Securities Act of 1933 are subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about us. Under Rule 144(k), a person who is not an affiliate
of ours at any time during the 90 days prior to a sale, and who has beneficially
owned shares for at least two years, including the holding period of any prior
owner other than a person who may be deemed an affiliate of ours, would be
entitled to sell these shares immediately following this offering without regard
to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act of 1933. However, the transfer
agent may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 of the Securities Act of 1933 before effecting a
transfer of these shares.

We are unable to estimate the number of shares that will be sold under
Rule 144, as this will depend on the market price of our common stock, the
personal circumstances of the sellers and other factors. Before this offering,
there has been no public market for our common stock, and there can be no
assurance that a significant public market for our common stock will develop or
be sustained after this offering. Any future sale of substantial amounts of
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.

We have filed on the date of this prospectus, a Form S-8 registration
statement under the Securities Act of 1933 to register all shares of common
stock issuable under the 2000 Stock Incentive Plan and the 2000 Employee Stock
Purchase Plan. Such registration statements will become effective immediately
upon filing, and shares covered by those registration statements will thereupon
be eligible for sale in the public markets, subject to any lock-up agreements
applicable thereto and Rule 144 limitations applicable to affiliates. See
"Management--Stock Plans/Employee Compensation Programs."

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UNDERWRITING

Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., Banc of America Securities LLC and
Fidelity Capital Markets, a division of National Financial Services LLC, are
acting as representatives, has agreed to purchase from us the respective number
of shares of common stock shown opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc......................................... 3,155,580
Banc of America Securities LLC.............................. 2,577,420
Fidelity Capital Markets, a division of National Financial
Services LLC.............................................. 68,250
CIBC World Markets Corp..................................... 68,250
Chase Securities Inc........................................ 68,250
A.G. Edwards & Sons, Inc.................................... 68,250
ING Barings LLC............................................. 68,250
J.P. Morgan Securities Inc.................................. 68,250
SG Cowen Securities Corporation............................. 68,250
Thomas Weisel Partners LLC.................................. 68,250
Edward D. Jones & Co., L.P.................................. 21,250
C.L. King & Associates, Inc................................. 21,250
Needham & Company, Inc...................................... 21,250
Raymond James & Associates, Inc............................. 21,250
---------
Total..................................................... 6,364,000
=========
</TABLE>

The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement, must be purchased. The conditions
contained in the underwriting agreement include the requirement that:

- the representations and warranties made by us to the underwriters are
true;

- that there is no material change in the financial markets; and

- we deliver to the underwriters customary closing documents.

The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at the public offering price less a selling concession not in
excess of $0.45 per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $0.10 per share to brokers and dealers.
After completion of the offering, the underwriters may change the offering price
and other selling terms.

We have granted the underwriters an option to purchase up to 954,600
additional shares of common stock, exercisable solely to cover over-allotments,
if any, at the public offering price less the underwriting discount shown on the
cover page of this prospectus. The underwriters may exercise this option at any
time until 30 days after the date of the underwriting agreement. If this option
is exercised, each underwriter will be committed, so long as the conditions of
the underwriting agreement are satisfied, to purchase a number of additional
shares of common stock proportionate to the underwriter's initial commitment as
indicated in the table above, and we will be obligated, under the over-allotment
option, to sell the shares of common stock to the underwriters.

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<PAGE>
The underwriting discount is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting discount is 7.0% of the public offering price. We have
agreed to pay the underwriters the following total amount, assuming either no
exercise or full exercise by the underwriters of their over-allotment option:

<TABLE>
<CAPTION>
TOTAL
--------------------------------------
FEE WITHOUT EXERCISE WITH FULL EXERCISE
PER OF OVER-ALLOTMENT OF OVER-ALLOTMENT
SHARE OPTION OPTION
-------- ----------------- ------------------
<S> <C> <C> <C>
Underwriting discounts paid by Simple Technology...... $0.77 $4,900,280 $5,635,322
</TABLE>

In addition, we estimate that our share of the total expenses of this
offering, excluding the underwriting discount, will be $2.25 million.

The underwriters have informed us that they do not expect to confirm sales
to discretionary accounts.

We, our officers and directors, existing shareholders and optionholders
holding substantially all of the option shares have agreed that without the
prior written consent of Lehman Brothers Inc., they will not (1) offer for sale,
sell, pledge or otherwise dispose of, directly or indirectly, any shares of
common stock or securities convertible into or exchangeable for common stock
owned by them on the date of the execution of the lock-up letter agreement or on
the date of the completion of this offering, or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any of
the economic benefits or risks of ownership of such shares of common stock
whether any such transaction described in (1) or (2) is to be settled by
delivery of common stock or other securities, in cash or otherwise, for a period
of 180 days after the date of the final prospectus. Lehman Brothers Inc. may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements.

Fidelity Capital Markets, a division of National Financial Services LLC, is
acting as an underwriter of this offering and will be facilitating electronic
distribution through the Internet.

We have agreed to indemnify the underwriters against liabilities relating to
the offering, including liabilities under the Securities Act, liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement and liabilities incurred in connection with the directed
share program referred to below, and to contribute to payments that the
underwriters may be required to make for these liabilities.

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "STEC."

Before this offering, there has been no public market for the shares of
common stock. The initial public offering price was negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives considered the following material factors in
addition to prevailing market conditions:

- the history and prospects for the industry in which we compete;

- our historical results of operations and capital structure;

- estimates of our business potential and earning prospects;

- an overall assessment of our management; and

- the consideration of the above factors in relation to market valuations of
companies in related businesses.

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Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of common stock. These transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.

The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.

Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters make any representation that the representatives will engage
in these stabilizing transactions or that any transaction, once commenced, will
not be discontinued without notice.

Any offers in Canada will be made only under exemption from the requirements
to file a prospectus in the relevant province of Canada in which the sale is
made.

Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.

At our request, the underwriters have reserved up to 320,000 shares of the
common stock offered by this prospectus for sale to certain employees and other
persons associated with the Company at the initial public offering price set
forth on the cover page of this prospectus. These persons must commit to
purchase no later than the close of business on the day following the date of
this prospectus. The number of shares available for sale to the general public
will be reduced to the extent these persons purchase the reserved shares.

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LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Los Angeles, California. Latham & Watkins,
Los Angeles, California, is acting as counsel for the underwriters in connection
with selected legal matters relating to the shares of common stock offered by
this prospectus.

EXPERTS

Our consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

Simple Technology has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act of 1933 with respect
to the common stock offered hereby. This prospectus, which is part of the
registration statement, does not contain all of the information set forth in the
registration statement and the exhibits thereto which has been omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to Simple Technology and the common stock offered hereby, reference
is made to the registration statement and to our material contracts and other
documents included as exhibits thereto. Each statement about those contracts and
documents is qualified in its entirety by that reference. You should be aware
that when we discuss these contracts or documents in this prospectus we are
assuming that you will read the exhibits to the registration statement for a
more complete understanding of the contract or document.

Following the offering we will become subject to the reporting requirements
of the Securities Exchange Act of 1934. In accordance with that law, we will be
required to file reports and other information with the SEC. The registration
statement and exhibits, as well as those reports and other information when so
filed, may be inspected without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the SEC located at Seven World Trade Center, 13th Floor,
New York, New York 10048, and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Copies of all or any part of the registration statement may be
obtained from the SEC's offices upon payment of fees prescribed by the SEC. The
SEC maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the site is http://www.sec.gov.

We will provide our shareholders with annual reports and unaudited quarterly
reports for the first three quarters of each fiscal year. Annual reports will
include audited consolidated financial statements prepared in accordance with
generally accepted accounting principles. The consolidated financial statements
included in the annual reports will be examined and reported upon, with an
opinion expressed by, our independent auditors.

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<PAGE>
SIMPLE TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2

Consolidated Balance Sheets as of December 31, 1998, 1999
and June 30, 2000 (unaudited)............................. F-3

Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and the six months ended
June 30, 1999 (unaudited) and June 30, 2000 (unaudited)... F-4

Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000 (unaudited).................... F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and the six months ended
June 30, 1999 (unaudited) and June 30, 2000 (unaudited)... F-6

Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

The Shareholders and Board of Directors
Simple Technology, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Simple
Technology, Inc. and its subsidiaries (the "Company") at December 31, 1998 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

Costa Mesa, California
February 25, 2000

F-2
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -------------------------
PRO FORMA
1998 1999 2000 2000
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 816,525 $ 3,778,612 $ 22,969 $ 22,969
Accounts receivable, net of allowances of $725,803,
$771,806 and $1,340,931 as of December 31, 1998
and 1999 and June 30, 2000, respectively......... 12,421,309 23,704,448 24,577,255 24,577,255
Related party receivable........................... 594,434 40,396 -- --
Inventory, net..................................... 13,877,625 18,276,441 41,123,243 41,123,243
Deferred income taxes.............................. 307,617 180,552 250,785 1,395,000
Other current assets............................... 452,314 544,608 552,443 552,443
----------- ----------- ----------- -----------
Total current assets........................... 28,469,824 46,525,057 66,526,695 67,670,910
Furniture, fixtures and equipment, net............. 11,092,013 7,968,259 7,421,908 7,421,908
Deferred income taxes.............................. -- 637,417 395,748 --
Other noncurrent assets............................ 525,000 -- 937,739 937,739
----------- ----------- ----------- -----------
Total assets................................... $40,086,837 $55,130,733 $75,282,090 $76,030,557
=========== =========== =========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY:

CURRENT LIABILITIES:
Accounts payable................................... $13,077,805 $20,033,184 $24,845,884 $24,845,884
Distribution payable to shareholders............... -- -- -- 19,587,018
Current maturities of long-term debt............... 351,581 697,079 728,677 728,677
Current maturities of capital lease obligations.... 1,263,079 938,278 940,949 940,949
Accrued and other liabilities...................... 2,493,975 2,001,799 3,765,870 3,765,870
----------- ----------- ----------- -----------
Total current liabilities...................... 17,186,440 23,670,340 30,281,380 49,868,398
Line of credit..................................... 13,176,095 12,478,675 23,274,981 23,274,981
Long-term debt..................................... 1,094,133 1,844,033 1,471,704 1,471,704
Capital lease obligations.......................... 3,861,464 1,357,878 899,249 899,249
Deferred income taxes.............................. 8,399 -- -- 418,000
----------- ----------- ----------- -----------
Total liabilities.............................. 35,326,531 39,350,926 55,927,314 75,932,332
----------- ----------- ----------- -----------
Commitments and contingencies (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $0.001, no shares
authorized as of December 31, 1998 and 1999,
20,000,000 shares authorized as of June 30, 2000,
no shares outstanding............................ -- -- -- --
Common stock, no par value, 50,700,000 shares
authorized, 30,601,027 shares issued and
outstanding as of December 31, 1998 and 1999; par
value $0.001, 100,000,000 shares authorized,
30,601,027 shares issued and outstanding as of
June 30, 2000.................................... 30,000 30,000 30,601 30,601
Additional paid-in capital......................... 3,033,663 3,283,262 3,282,661 282,661
Unearned stock based compensation.................. (25,247) (141,475) (118,485) (118,485)
Retained earnings.................................. 1,838,327 12,704,572 16,256,551 --
Accumulated other comprehensive loss............... (116,437) (96,552) (96,552) (96,552)
----------- ----------- ----------- -----------
Total shareholders' equity..................... 4,760,306 15,779,807 19,354,776 98,225
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity..... $40,086,837 $55,130,733 $75,282,090 $76,030,557
=========== =========== =========== ===========
</TABLE>

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

F-3
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $159,087,716 $122,287,737 $192,593,273 $83,277,739 $132,647,145
Cost of revenues........................... 131,093,468 97,929,551 152,743,479 68,350,367 103,236,807
------------ ------------ ------------ ----------- ------------
Gross profit........................... 27,994,248 24,358,186 39,849,794 14,927,372 29,410,338
------------ ------------ ------------ ----------- ------------
Sales and marketing........................ 15,972,337 13,340,207 14,149,974 7,033,734 9,461,353
General and administrative (Note 11)....... 8,779,535 9,380,713 9,755,476 4,295,978 6,264,613
Research and development................... 2,153,619 2,180,440 1,831,539 973,996 1,512,519
------------ ------------ ------------ ----------- ------------
Total operating expenses............... 26,905,491 24,901,360 25,736,989 12,303,708 17,238,485
------------ ------------ ------------ ----------- ------------
Income (loss) from operations.......... 1,088,757 (543,174) 14,112,805 2,623,664 12,171,853
Interest income............................ (28,084) (20,939) (23,904) (11,367) (1,040)
Interest expense........................... 1,741,067 1,618,178 1,826,873 982,950 805,501
Other expense.............................. -- -- 325,000 -- --
------------ ------------ ------------ ----------- ------------
Income (loss) before provision
(benefit) for income taxes........... (624,226) (2,140,413) 11,984,836 1,652,081 11,367,392
Provision (benefit) for income taxes....... 1,672 22,482 (517,968) (71,401) 175,413
------------ ------------ ------------ ----------- ------------
Net income (loss)...................... $ (625,898) $ (2,162,895) $ 12,502,804 $ 1,723,482 $ 11,191,979
============ ============ ============ =========== ============
Unaudited pro forma data (Notes 2 and 13):
Income (loss) before provision (benefit)
for income taxes....................... $ (624,226) $ (2,140,413) $ 11,984,836 $ 1,652,081 $ 11,367,392
Provision (benefit) for income taxes..... (237,206) (813,357) 4,554,238 627,791 4,319,609
------------ ------------ ------------ ----------- ------------
Pro forma net income (loss).............. $ (387,020) $ (1,327,056) $ 7,430,598 $ 1,024,290 $ 7,047,783
============ ============ ============ =========== ============
Pro forma net income (loss) per share:
Basic.................................. $ (0.01) $ (0.04) $ 0.24 $ 0.03 $ 0.23
============ ============ ============ =========== ============
Diluted................................ $ (0.01) $ (0.04) $ 0.23 $ 0.03 $ 0.21
============ ============ ============ =========== ============
Weighted average shares outstanding:
Basic.................................. 30,601,027 30,601,027 30,601,027 30,601,027 30,601,027
============ ============ ============ =========== ============
Diluted................................ 30,601,027 30,601,027 32,657,993 31,924,155 33,360,582
============ ============ ============ =========== ============
Unaudited pro forma as adjusted data (Note
2):
Pro forma as adjusted net income per
share:
Diluted................................ $ 0.22 $ 0.21
============ ============
Pro forma as adjusted weighted average
shares outstanding:
Diluted................................ 33,122,415 33,825,004
============ ============
</TABLE>

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

F-4
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL UNEARNED OTHER TOTAL
--------------------- PAID-IN STOCK BASED RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS LOSS EQUITY
---------- -------- ---------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996... 30,601,027 $30,000 $3,000,000 $ -- $ 4,902,659 $ (46,708) $ 7,885,951
Comprehensive loss:
Net loss.................... (625,898) (625,898)
Foreign currency translation
adjustment................ (18,055) (18,055)
-----------
Total comprehensive
loss.................... (643,953)
Distributions to shareholders,
net......................... (380,374) (380,374)
---------- ------- ---------- --------- ----------- --------- -----------

Balances, December 31, 1997... 30,601,027 30,000 3,000,000 -- 3,896,387 (64,763) 6,861,624
Comprehensive loss:
Net loss.................... (2,162,895) (2,162,895)
Foreign currency translation
adjustment................ (51,674) (51,674)
-----------
Total comprehensive
loss.................... (2,214,569)
Unearned compensation related
to stock options granted for
services to be rendered..... 33,663 (33,663) --
Compensation related to stock
options vesting............. 8,416 8,416
Contributions from
shareholders................ 104,835 104,835
---------- ------- ---------- --------- ----------- --------- -----------

Balances, December 31, 1998... 30,601,027 30,000 3,033,663 (25,247) 1,838,327 (116,437) 4,760,306
Comprehensive income:
Net income.................. 12,502,804 12,502,804
Foreign currency translation
adjustment................ 19,885 19,885
-----------
Total comprehensive
income.................. 12,522,689
Reduction in unearned
compensation due to
termination of services..... (12,319) 12,319 --
Unearned compensation related
to stock options granted to
employees................... 261,918 (261,918) --
Compensation related to stock
options vesting............. 133,371 133,371
Distributions to
shareholders................ (1,636,559) (1,636,559)
---------- ------- ---------- --------- ----------- --------- -----------

Balances, December 31, 1999... 30,601,027 30,000 3,283,262 (141,475) 12,704,572 (96,552) 15,779,807
Comprehensive income:
Net income (unaudited)...... 11,191,979 11,191,979
-----------
Total comprehensive
income.................. 11,191,979
Compensation related to stock
options vesting
(unaudited)................. 22,990 22,990
Change in par value of common
stock (unaudited)........... 601 (601) --
Distributions to shareholders
(unaudited)................. (7,640,000) (7,640,000)
---------- ------- ---------- --------- ----------- --------- -----------
Balances, June 30, 2000
(unaudited)................. 30,601,027 $30,601 $3,282,661 $(118,485) $16,256,551 $ (96,552) $19,354,776
========== ======= ========== ========= =========== ========= ===========
</TABLE>

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

F-5
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (625,898) $(2,162,895) $ 12,502,804 $ 1,723,482 $ 11,191,979
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 1,913,000 3,418,578 3,580,963 1,856,499 1,361,271
Loss (gain) on sale of furniture, fixtures
and equipment.............................. (4,202) 17,844 6,511 -- 688
Charitable contribution of land held for
investment................................. -- -- 325,000 -- --
Accounts receivable allowances............... 1,363,341 565,432 485,561 32,982 1,249,152
Inventory excess and obsolescence expense.... 474,107 364,296 1,213,904 470,043 365,420
Deferred income taxes........................ (124,849) -- (518,751) -- 171,436
Compensation related to stock options
vesting.................................... -- 8,416 133,371 111,928 22,990
Foreign currency translation adjustment...... (18,055) (51,674) 19,885 12,071 --
Change in operating assets and liabilities:
Accounts receivable........................ (545,813) 2,181,283 (11,768,700) (3,639,693) (2,121,959)
Inventory.................................. 2,257,474 (2,963,506) (5,612,720) 3,011,943 (23,212,221)
Other assets............................... (11,928) 755,335 360,706 359,776 (7,835)
Accounts payable........................... (1,879,542) (190,524) 6,955,379 (2,724,580) 4,812,700
Accrued and other liabilities.............. (706,755) 360,267 110,824 320,643 1,764,071
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in) operating
activities............................. 2,090,880 2,302,852 7,794,737 1,535,094 (4,402,309)
----------- ----------- ------------ ----------- ------------
Cash flows from investing activities:
Advances to shareholders....................... (1,864,698) (511,152) (918,075) (506,095) --
Repayment of advances to shareholders.......... 5,280,086 29,000 1,400,227 154,200 --
Purchase of furniture, fixtures and
equipment.................................... (1,592,407) (2,160,392) (1,240,663) (291,579) (1,043,603)
Proceeds from sale of furniture, fixtures and
equipment.................................... 299,640 31,659 34,758 22,198 227,995
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in) investing
activities............................. 2,122,621 (2,610,885) (723,753) (621,276) (815,608)
----------- ----------- ------------ ----------- ------------
Cash flows from financing activities:
Deferred offering costs........................ -- -- -- -- (937,739)
Borrowings under (repayments of) line of
credit, net.................................. (2,757,969) (337,925) (697,420) (352,669) 10,796,306
Repayment of long-term debt.................... (215,572) (330,019) (467,263) (189,450) (340,731)
Payment on capital lease obligations........... (757,603) (1,110,804) (1,379,541) (717,559) (455,958)
Repayment of loans to related parties, net..... 204,531 226,598 71,886 32,198 40,396
Distributions to shareholders.................. (510,644) -- (1,636,559) (221,540) (7,640,000)
Contributions from shareholders................ 130,270 104,835 -- -- --
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in) financing
activities............................. (3,906,987) (1,447,315) (4,108,897) (1,449,020) 1,462,274
----------- ----------- ------------ ----------- ------------
Net increase (decrease) in cash.......... 306,514 (1,755,348) 2,962,087 (535,202) (3,755,643)
Cash and cash equivalents at beginning of
period......................................... 2,265,359 2,571,873 816,525 816,525 3,778,612
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents at end of period....... $ 2,571,873 $ 816,525 $ 3,778,612 $ 281,323 $ 22,969
=========== =========== ============ =========== ============
</TABLE>

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

F-6
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

<TABLE>
<CAPTION>
SIX MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ -------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the year:
Income taxes $ 6,100 $ 6,862 $ 6,100 $ 6,100 $ 6,790
Interest $1,668,526 $1,650,593 $1,605,487 $978,176 $722,167

Noncash activities:
Purchase of furniture, fixtures and
equipment with:
Long-term debt $1,734,933 $ -- $ 113,815 $113,815 $ --
Capital lease obligations $2,074,947 $1,923,723 $ -- $ -- $ --

Refinance of furniture, fixtures and
equipment under capital lease
obligations with long-term debt $ -- $ -- $1,448,846 $ -- $ --

Sale of equipment with a note
receivable $ -- $ -- $ 672,000 $672,000 $ --

Default on note receivable and
return of equipment $ -- $ -- $ 419,000 $ -- $ --

Reduction in unearned compensation
due to termination of services $ -- $ -- $ 12,319 $ 12,319 $ --

Advances to shareholders offset
against
accrued liabilities $ 57,247 $ -- $ -- $ -- $ --

Change in par value of
common stock $ -- $ -- $ -- $ -- $ 601
</TABLE>

Refer to Note 3 for noncash activities with related parties.

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

F-7
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. COMPANY ORGANIZATION:

Simple Technology, Inc., incorporated in the state of California on
March 13, 1990, designs, manufactures and markets a comprehensive line of
memory, storage and connectivity products used in high performance computing,
networking and communications, consumer electronics and industrial applications
throughout the United States and internationally. During 1995 and 1996, Simple
Technology, Inc. formed subsidiaries in California, Canada and Scotland.

Such subsidiaries consist of the following entities: Simple Technology
Canada Ltd., S.T.I., LLC, Simple Technology Europe and Simple Technology
Limited.

Simple Technology Canada Ltd. ("STC") was incorporated in Canada on
February 21, 1995. The Company owns a 79% interest in STC and 21% is owned by
Manouch Moshayedi, Mike Moshayedi, and Mark Moshayedi, each of whom is an
executive officer and director of the Company. STC's operations were
discontinued in April 1998 and management intends to dissolve this company in
2000 or as soon as possible thereafter. (Refer to Note 14 regarding subsequent
events.)

S.T.I., LLC ("STI") is a California limited liability company organized on
May 24, 1996. The Company owns a 97% interest in STI and 3% is owned by
Manouch Moshayedi, Mike Moshayedi, and Mark Moshayedi, each of whom is an
executive officer and director of the Company. STI is a holding company for the
Company's European subsidiaries. Management intends to dissolve this company in
2000 or as soon as possible thereafter.

Simple Technology Europe ("STE"), a privately-held unlimited company
registered in Scotland, was formed on June 27, 1996. STI owns a 99% interest in
STE and MDC Land Corporation owns 1% (See Note 3). STE was set up to serve as
the sales and marketing entity for the Company's European operations and
currently employs the Company's sales and marketing team located in Scotland and
England. Management intends to dissolve this company in 2000 or as soon as
possible thereafter.

The Company launched Simple Technology Limited ("STL"), a privately-held
limited company registered in Scotland, on January 22, 1996. STL is a
wholly-owned subsidiary of STE. This subsidiary was formed to serve as the
manufacturing entity for the Company's European headquarters to take advantage
of local U.K. tax laws. STL concluded its manufacturing operations in April 1999
and is currently inactive. Management intends to dissolve this company in 2000
or as soon as possible thereafter.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION:

The accompanying consolidated financial statements include the accounts of
Simple Technology, Inc. and its subsidiaries in California, Canada and Scotland
(collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.

INTERIM FINANCIAL INFORMATION:

The financial information for the six month periods ended June 30, 1999 and
June 30, 2000 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Results of the June 30, 2000 period are not
necessarily indicative of the results for the entire year.

F-8
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS:

Cash and cash equivalents consist primarily of cash in banks and money
market funds. All highly liquid investments with a maturity date of three months
or less when acquired are considered to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates market.

INVENTORY:

Inventory is stated at the lower of cost or market, with cost being
determined on the first-in, first-out ("FIFO") method of accounting.

FURNITURE, FIXTURES AND EQUIPMENT:

Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method. The Company's estimated useful lives of the assets,
other than leasehold improvements, range from four to five years for equipment
to seven years for furniture and fixtures. Leasehold improvements and assets
under capital leases are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the assets.

Expenditures for major renewals and betterments are capitalized, while minor
replacements, maintenance and repairs, which do not extend the asset lives, are
charged to operations as incurred. Upon sale or disposition, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is included in operations.

The Company continually monitors events and changes in circumstances that
could indicate that the carrying balances of its furniture, fixtures and
equipment may not be recoverable in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
When such events or changes in circumstances are present, the Company assesses
the recoverability of long-lived assets by determining whether the carrying
value of such assets will be recovered through undiscounted expected future cash
flows. If the total of the future cash flows is less than the carrying amount of
those assets, the Company recognizes an impairment loss based on the excess of
the carrying amount over the fair value of the assets.

LAND HELD FOR INVESTMENT:

Land held for investment, included in other noncurrent assets at December
31, 1998, is recorded at the shareholders' contributed historical cost, which is
less than or approximates fair market value. Such land, with a cost of $325,000,
was contributed to charity in 1999 and is reflected in other expense.

LONG-TERM DEBT:

The fair values of the Company's long-term debt have been estimated based on
current rates offered to the Company for debt of the same remaining maturities.
The carrying amounts of the Company's loans approximate their fair values.

REVENUE RECOGNITION:

Revenue is generally recognized upon shipment of products to the customer if
collectibility is probable. A substantial portion of the Company's sales through
aftermarket channels includes limited rights to return unsold inventory. In
addition, some customers have limited price protection rights for inventories of
the Company's products held by them. If the Company reduces the list price of
their products, these customers may be entitled to receive credits from the
Company. The Company provides

F-9
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
for estimated future returns of inventory, limited price protection arrangements
and the estimated costs of warranty at the time of sale based on historical
experience. Actual results have been within management's expectations.

ADVERTISING COSTS:

Advertising costs, which relate primarily to various print media
expenditures, are expensed as incurred. For the years ended December 31, 1997,
1998 and 1999, advertising costs were approximately $2,650,000, $2,412,000 and
$2,858,000, respectively.

FOREIGN CURRENCY TRANSLATION:

The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency. Assets
and liabilities of these subsidiaries are translated at the rates of exchange at
the balance sheet date. The resultant translation adjustments are recorded as a
separate component of shareholders' equity. Income and expense items are
translated at average monthly rates of exchange. Included in operations are
foreign currency transaction gains of $20,000 and $93,000 for the years ended
December 31, 1997 and 1999, respectively, and foreign currency transaction
losses of approximately $58,000 for the year ended December 31, 1998.

INCOME TAXES:

Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred income tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the year and the
change during the year in deferred income tax assets and liabilities.

STOCK-BASED COMPENSATION:

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the estimated market price
of the Company's underlying stock at the date of grant over the exercise price
of the option, amortized over the vesting period. The Company has adopted the
disclosure-only provisions of SFAS No. 123.

PER SHARE INFORMATION:

In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share," which established standards for the computation,
presentation and disclosure requirements for basic and diluted earnings per
share for entities with publicly held common shares and potential common shares.
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding. In computing diluted earnings per share,
the weighted average number of shares outstanding is adjusted to additionally
reflect the effect of potentially dilutive securities.

No potential common shares were included in the diluted per share amounts
for the years ended December 31, 1997 and 1998 as the effect would have been
anti-dilutive. For the year ended

F-10
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
December 31, 1999 and the six month periods ended June 30, 1999 and June 30,
2000, potentially dilutive securities consisted solely of options and resulted
in potential common shares of 2,056,966, 1,323,128 (unaudited) and 2,759,555
(unaudited), respectively.

All share and per share amounts have been adjusted to give retroactive
effect to the 5.07 for 1.0 stock split (see Note 14) for all periods presented.

PRO FORMA NET INCOME:

Pro forma net income is computed using an effective tax rate of 38% to
reflect the estimated income tax expense of the Company as if it had been
subject to C corporation federal and state income taxes for the period, instead
of S corporation income taxes.

PRO FORMA AS ADJUSTED DATA:

Pro forma as adjusted weighted average shares outstanding-diluted reflects a
computational increase of 464,422 shares of common stock outstanding for each of
the year ended December 31, 1999 and the six months ended June 30, 2000,
representing the excess of the $19,587,018 pro forma aggregate distributions to
existing shareholders as of June 30, 2000 (see Note 13) reduced by the Company's
pro forma net income from January 1, 1999 through June 30, 2000, aggregating
$14,478,381. Such excess of $5,108,637, divided by the assumed mid-range initial
public offering price of $11.00 per share of common stock, represents the pro
forma calculation of such 464,422 shares as of January 1, 1999 necessary to
equal such excess.

COMPREHENSIVE INCOME:

In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for the reporting and display of comprehensive
income. The Company adopted SFAS No. 130 effective January 1, 1998.
Comprehensive income includes such items as foreign currency translation
adjustments. These amounts are presented as a component of shareholders' equity,
consistent with the Company's previous practice. SFAS No. 130 does not affect
current principles of measurement of revenues and expenses and, accordingly, the
adoption of SFAS No. 130 had no effect on the Company's results of operations or
financial position.

The balance of accumulated other comprehensive loss at December 31, 1998 and
1999 consists of accumulated foreign currency translation adjustments. None of
the components of accumulated other comprehensive loss have been recorded net of
any tax benefit as the Company does not expect to realize any significant tax
benefit from these items.

SEGMENT REPORTING

In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supercedes substantially all the
reporting requirements previously required under SFAS No. 14, "Financial
Reporting for Business Segments of an Enterprise," and establishes standards for
the way the Company reports information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS No. 131, the determination of
segments to be reported in the financial statements is to be consistent with the
manner in which management organizes and evaluates the internal organization to
make operating decisions and assess performance. The adoption of this statement
did not have an impact upon the Company's operating results or financial
position as this statement's provisions affect only the disclosure of certain
segment information in the notes to the consolidated financial statements.

F-11
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

RISKS AND UNCERTAINTIES:

Financial instruments, which potentially subject the Company to a
concentration of credit risk, principally consist of cash and cash equivalents
and accounts receivable. As of December 31, 1998 and 1999, approximately 28% and
35%, respectively, of accounts receivable were concentrated with three
customers. With respect to one of these customers, the Company recorded sales
totaling 16% and 19% of the Company's revenues for the years ended December 31,
1998 and 1999, respectively. No other single customer accounted for more than
10% of accounts receivable or revenues at December 31, 1999 or for each of the
three years in the period ended December 31, 1999. The Company generally does
not require collateral on accounts receivable as the majority of the Company's
customers are large, well-established companies. Historically, bad debt
allowances have been consistent with management's expectations.

At December 31, 1998 and 1999, the Company had amounts on deposit with
financial institutions that were in excess of the federally insured limit of
$100,000.

The manufacturing operations of the Company are concentrated in a facility
located in Santa Ana, California. As a result of this geographic concentration,
a disruption in the manufacturing process resulting from a natural disaster or
other unforeseen event could have a material adverse effect on the Company's
financial position and results of operations.

Certain of the Company's products utilize components that are purchased from
a small number of sources with whom the Company has no long-term contracts. An
inability to obtain such components in the amounts needed on a timely basis or
at commercially reasonable prices could result in delays in product
introductions, interruptions in product shipments or increases in product costs,
which could have a material adverse effect on the Company's financial position
and results of operations.

MANAGEMENT ESTIMATES:

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

RECLASSIFICATIONS:

Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the current year presentation.

3. RELATED PARTY TRANSACTIONS:

During 1994, the Company commenced leasing a building from MDC Land
Corporation, which is wholly-owned by Manouch Moshayedi, Mike Moshayedi and
Mark Moshayedi, each of whom is an executive officer and director of the
Company, and MDC Land Corporation has no operations other than leasing
transactions with the Company. During 1999, this building and the underlying
mortgage were transferred from MDC Land Corporation to MDC Land LLC
(collectively known as "MDC"), which is also wholly-owned by Manouch Moshayedi,
Mike Moshayedi, and Mark Moshayedi, each of whom is an executive officer and
director of the Company, and MDC Land LLC has no operations other than leasing
transactions with the Company. The term of the lease is 26 years, through 2020,
with

F-12
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. RELATED PARTY TRANSACTIONS: (CONTINUED)
scheduled rental payments of $19,000 per month. See Note 14 regarding the
Company's new building lease. Building rent expense for the years ended
December 31, 1997, 1998 and 1999 amounted to $205,500, $228,000 and $228,000,
respectively. During 1996, the Company began leasing equipment from MDC. Each
lease has a term of five years and is accounted for as a capital lease.
Equipment rental payments for the years ended December 31, 1997, 1998 and 1999
amounted to $568,000, $574,000 and $574,000, respectively. The Company has made
the mortgage, property tax, leasehold improvement and other miscellaneous
payments on behalf of MDC related to the building under lease. Such payments
totaled approximately $165,000, $132,000 and $270,000 in 1997, 1998 and 1999,
respectively. Additionally, the Company paid the monthly debt service, sales
tax, loan payments and down payments related to this equipment on behalf of MDC
totaling approximately $418,000 in 1997 and $460,000 in each of 1998 and 1999.
These payments on behalf of MDC, net of the monthly rental payments due MDC,
resulted in a net related party receivable due to the Company. All such mortgage
and equipment payments made by the Company on behalf of MDC are legally offset
against amounts otherwise due to MDC by the Company.

For the six month period ended June 30, 2000, building and equipment rental
payments under the leases with MDC amounted to approximately $148,000
(unaudited) and $287,000 (unaudited), respectively. For the first two months of
2000, the Company continued to make the mortgage, property tax and other
miscellaneous payments on behalf of MDC related to the building under lease.
Additionally, for the first two months of 2000, the Company continued to make
the monthly debt service and loan payments related to the equipment under lease
with MDC. Such payments totaled approximately $16,600 (unaudited) and $76,600
(unaudited), respectively. As a result of the payments made to and on the behalf
of MDC, net of monthly rental payments due MDC, the related party receivable due
the Company was paid in full at March 31, 2000. Commencing in March 2000 through
June 2000, the Company paid amounts due under the MDC building and equipment
leases totaling approximately $76,700 (unaudited) and $191,200 (unaudited),
respectively.

In connection with the purchase of the building by MDC, the Company
guaranteed, for no consideration, a mortgage note payable by MDC ($1,010,047 and
$995,301 at December 31, 1998 and 1999, respectively). As of December 31, 1999,
the note was 71% guaranteed by the U.S. Small Business Administration and 100%
guaranteed by the Company. In June 2000, such guarantee was eliminated with the
subsequent refinancing of the note payable (see Note 14). In connection with the
financing of the equipment by MDC, the Company guaranteed, for no consideration,
notes payable by MDC of $1,127,179, $751,839 and $551,021 (unaudited) at
December 31, 1998, 1999 and June 30, 2000, respectively.

In 1995, the Company entered into a separate 5 year lease agreement with a
third party to lease a second building located adjacent to the building leased
from MDC. One of the provisions of this agreement was an option to buy this
building for an initial purchase price of $2,723,560, thereafter increased by a
cost of living index. In November 1998, the Company transferred this option to
MDC at its nominal historical value, since both entities are under common
ownership. In March 2000, MDC exercised the option and subsequently purchased
the facility and leased it back to the Company in June 2000 (see Note 14).

During 1996, the Company made non-interest bearing advances to
Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director of the Company, totaling $3,000,000 to provide
acquisition funds in a development stage company in Fremont, California, in
which the Moshayedis acquired a controlling interest. During 1996 and 1997, the
Company made non-interest bearing advances to this development stage company
totaling $472,635 and

F-13
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. RELATED PARTY TRANSACTIONS: (CONTINUED)
$1,864,698, respectively, for its working capital needs. In 1997, the Moshayedis
sold their interest in this development stage company and $5,280,086 of such
advances were repaid to the Company. The remaining amount of these advances,
$57,247, represented inventory purchases by the Company that were otherwise
payable to the development stage company but were ultimately offset against the
remaining portion of the advances.

During 1998 and 1999, the Company made non-interest bearing advances to a
development stage company in Houston, Texas owned by Manouch Moshayedi,
Mike Moshayedi and Mark Moshayedi, each of whom is an executive officer and
director of the Company, totaling $511,152 and $20,176, respectively, to finance
the development and fund the working capital needs of this development stage
company. At December 31, 1998, this receivable balance amounted to $482,152,
which was included in the related party receivable. During 1998 and 1999,
$29,000 and $314,200, respectively, were repaid by this development stage
company. The remaining amount of these advances, $188,128, was repaid in
conjunction with shareholder distributions in December 1999.

During 1999, the Company made non-interest bearing advances totaling
$897,899 to a development stage company in Irvine, California owned by
Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director of the Company, to finance the development and
fund the working capital needs of this development stage company. In
December 1999, these advances were repaid in full in conjunction with
shareholder distributions.

4. INVENTORY:

Inventory consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................... $ 7,579,228 $11,283,408 $24,202,108
Work-in-progress...................... 622,438 1,261,703 3,075,472
Finished goods........................ 7,165,916 7,811,551 15,486,702
----------- ----------- -----------
15,367,582 20,356,662 42,764,282
Valuation allowance................... (1,489,957) (2,080,221) (1,641,039)
----------- ----------- -----------
$13,877,625 $18,276,441 $41,123,243
=========== =========== ===========
</TABLE>

5. FURNITURE, FIXTURES AND EQUIPMENT:

Furniture, fixtures and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Furniture and fixtures............................. $ 558,095 $ 92,866
Equipment.......................................... 17,155,390 14,748,300
----------- -----------
17,713,485 14,841,166
Accumulated depreciation and amortization.......... (6,621,472) (6,872,907)
----------- -----------
$11,092,013 $ 7,968,259
=========== ===========
</TABLE>

For the years ended December 31, 1997, 1998 and 1999, the Company recorded
depreciation and amortization expense of approximately $1,883,000, $3,389,000
and $3,581,000, respectively.

F-14
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. FURNITURE, FIXTURES AND EQUIPMENT: (CONTINUED)

At December 31, 1998 and 1999, furniture, fixtures and equipment included
approximately $10,114,000 and $7,499,000, respectively, of assets under capital
leases with associated accumulated amortization of approximately $3,819,000 and
$5,318,000, respectively. As discussed in Note 3, such 1998 and 1999 amounts
include approximately $2,304,000 of assets under capital leases with a related
party with associated accumulated amortization of approximately $1,060,000 and
$1,520,000 at December 31, 1998 and 1999, respectively.

6. LINE OF CREDIT:

Effective August 3, 1999, the Company entered into a new line of credit
agreement. Amounts borrowed thereunder are collateralized by substantially all
of the Company's assets. Terms of the new agreement include a maximum borrowing
amount of $20,000,000, subject to eligible accounts receivable and inventory
balances, bearing interest at the prime rate plus 0.5% and expiring in
August 2001, unless renewed. There was $13,176,095 and $12,478,675 outstanding
on this line of credit and the previously existing line of credit, bearing
interest at prime (7.75%) and prime plus 0.5% (9.0%) at December 31, 1998 and
1999, respectively. At June 30, 2000, the balance outstanding on the line of
credit was $23,274,981 (unaudited).

The provisions of the line of credit agreement contain various nonfinancial
and financial covenants that, among other things, require the Company to
maintain a minimum tangible net worth amount and a maximum debt to tangible net
worth ratio. The covenants also limit capital expenditures, distributions and
dividends that can be made by the Company. As of December 31, 1999, the Company
was in compliance with all such covenants.

In the event this line of credit agreement is terminated prior to
August 2000 or August 2001, a termination fee of $400,000 or $200,000,
respectively, will be assessed against the Company, unless the termination is
due to the origination of a new credit facility with the bank. However, the
Company believes it may pay down the line of credit to zero, and leave it unused
until it expires, without incurring such termination fees.

See Note 14 regarding subsequent amendments to the line of credit agreement.

7. LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Equipment notes payable, principal and interest
payable in monthly installments of $70,671,
maturing at various dates through December 2004,
collateralized by equipment, interest ranging
between 8.4% and 9.1%.............................. $1,368,628 $2,403,812
Automobile notes payable to bank, principal and
interest payable in monthly installments totaling
$3,418, maturing at various dates through
May 2004, collateralized by automobiles, interest
ranging between 7.5% and 8.2%...................... 77,086 137,300
---------- ----------
1,445,714 2,541,112
Less current portion................................. (351,581) (697,079)
---------- ----------
$1,094,133 $1,844,033
========== ==========
</TABLE>

F-15
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. LONG-TERM DEBT: (CONTINUED)
The equipment notes payable agreements contain various nonfinancial
covenants that, among other things, limit distributions and dividends to
shareholders and require the equipment to remain unencumbered by other liens.

Scheduled principal payments, including the line of credit, during each of
the years ending December 31 are as follows:

8. INCOME TAXES:

The Company has elected to be treated as an S corporation for U.S. federal
income tax purposes. Under this election, the Company's shareholders, rather
than the Company, are subject to federal income taxes on their respective share
of the Company's taxable income. The Company has elected similar treatment for
California franchise tax purposes which, in addition, requires a state income
tax at the corporate level of 1.5%. On May 14, 1999, one of the Company's
existing shareholders transferred a portion of his shares to a trust established
for the benefit of one of his children. This trust did not make an election to
be treated as an eligible S corporation shareholder within the time prescribed
by law, and the failure of the trust to make the election in a timely manner
caused an inadvertent termination of the Company's S corporation status as of
May 13, 1999. However, the Company filed a statement with the IRS to obtain
automatic approval of the trust's late election to be treated as an eligible
S corporation shareholder, and the Company has received verbal confirmation that
the statement has been received and approved by the IRS. As a consequence of
this approval, the trust's original failure to file a timely election did not
cause a termination of the Company's S corporation status.

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Current...................................... $ 126,522 $22,482 $ 783
Deferred..................................... (124,850) -- (518,751)
--------- ------- ---------
$ 1,672 $22,482 $(517,968)
========= ======= =========
</TABLE>

For 1997 and 1998, the difference between the effective tax rate and the
expected California tax rate is due primarily to state tax credits, offset by
increases in the valuation allowance and losses without benefit. For 1999, the
difference between the effective tax rate and the expected California tax rate
is due primarily to state tax credits and decreases in the valuation allowance.

F-16
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES: (CONTINUED)

The components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Financial statement reserves.......................... $ 33,407 $ 36,485
Accrued expenses...................................... 2,485 12,237
Credit carryforwards.................................. 258,906 134,000
Other................................................. 12,819 (2,170)
-------- --------
Total current....................................... 307,617 180,552
-------- --------
Noncurrent deferred tax assets (liabilities):
Depreciation and amortization......................... (112,661) (20,823)
Operating loss carryforwards.......................... 307,675 102,674
Credit carryforwards.................................. 364,816 651,446
Other................................................. (7,942) 6,794
-------- --------
551,888 740,091
Valuation allowance................................... (560,287) (102,674)
-------- --------
Total noncurrent.................................... (8,399) 637,417
-------- --------
$299,218 $817,969
======== ========
</TABLE>

The components of tax credit assets relate primarily to California tax
credit carryforwards for manufacturers' investment credits at December 31, 1998
and 1999, of $123,000 and $32,000, respectively, which begin to expire in the
year 2004, and enterprise zone credits of $501,000 and $753,000, which have an
unlimited carryover. Investment tax credits may be utilized prior to enterprise
zone credits.

For income tax purposes, the Company's foreign subsidiaries, Simple
Technology Canada Ltd. and Simple Technology Limited, are treated as separate
entities and, therefore, are not subject to U.S. taxation. These subsidiaries
had net foreign deferred tax assets of approximately $193,000 and $103,000,
which are primarily attributable to combined net operating loss carryforwards of
approximately $464,000 and $428,000, as of December 31, 1998 and 1999,
respectively. These losses begin to expire in 2002. Due to the subsidiaries' tax
status, these losses may not be used to offset U.S. income. The Company has
established a valuation allowance against these deferred tax assets since it is
not more likely than not that the foreign subsidiaries' net operating loss
carryforwards will be utilized.

The Company's foreign subsidiary, Simple Technology Europe, is treated as a
branch partnership for income tax purposes and, therefore, is subject to U.S.
taxation.

9. COMMITMENTS AND CONTINGENCIES:

DENSE-PAC MICROSYSTEMS, INC.--PATENT INFRINGEMENT

On September 23, 1998, the Company filed a lawsuit against Dense-Pac
Microsystems, Inc. in a United States District Court for infringement of the
Company's IC Tower stacking patent. The Company is seeking damages, including
prejudgment interest, totaling $22.8 million (unaudited) as of June 30, 2000, an
injunction against further infringement of the IC Tower stacking patent by
Dense-Pac, treble damages and attorneys' fees. The Company is also seeking a
declaratory judgment declaring

F-17
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Dense-Pac's stacking patent invalid and not infringed by the Company. On
October 15, 1998, Dense-Pac filed an answer to the Company's complaint denying
the claim of infringement, asserted a defense of patent invalidity against the
IC Tower stacking patent and asserted a counterclaim against the Company for
alleged infringement of its stacking patent. On November 12, 1998, the Company
filed an answer to Dense-Pac's counterclaim denying Dense-Pac's claim of
infringement against the Company and asserting a defense of patent invalidity.
Dense-Pac is seeking injunctive relief and damages equal to 2% of the Company's
sales of its IC Tower stacking products found to infringe its patent, plus
interest. For the year ended December 31, 1999, less than 10% of the Company's
total revenues related to products which Dense-Pac alleges infringe on its
stacking patent. Dense-Pac has also requested an award of attorneys' fees and
treble damages and has reserved the right to seek unspecified lost profits as a
result of the alleged infringement. Trial is set for February 2001.

The outcome of this lawsuit is uncertain. In connection with this lawsuit,
the Company has incurred, and expects to continue to incur, substantial legal
fees and expenses. The Dense-Pac lawsuit has also diverted, and is expected to
continue to divert, the efforts and attention of key management and technical
personnel. As a result, the Company's pursuit and defense of this lawsuit,
regardless of its eventual outcome, has been, and will continue to be, costly
and time consuming. Should the outcome of the lawsuit be adverse, the Company
may be required to pay significant monetary damages to Dense-Pac and may be
enjoined from selling those products found to infringe Dense-Pac's patent unless
the Company is able to negotiate a license from Dense-Pac. In the event the
Company were to obtain a license from Dense-Pac, the Company would likely be
required to make royalty payments to Dense-Pac with respect to sales of the
products covered by the license. Any such payments would increase cost of
revenues and reduce gross profits. There can be no assurances that the Company
could enter into a license agreement with Dense-Pac on commercially reasonable
terms, if at all. If the Company is required to pay significant monetary
damages, is enjoined from selling any of the products or is required to make
substantial royalty payments pursuant to any such license agreement, the
Company's business would be significantly harmed. In addition, if the IC Tower
stacking patent is found to be invalid, the Company's ability to exclude
competitors from making, using or selling the same or similar products to the IC
Tower stacking products would cease and the Company's business would be harmed.
For the years ended December 31, 1998 and 1999, approximately 2.2% (unaudited)
and 7.9% (unaudited) of total revenues, respectively, related to products
utilizing the Company's stacking technology covered by the Company's IC Tower
stacking patent. An adverse outcome could be material to the Company's financial
position or results of operations. See Note 14 regarding a subsequent lawsuit
filed by Dense-Pac against the Company and an executive officer of the Company.

INTERACTIVE FLIGHT TECHNOLOGIES, INC.

On June 8, 1998, Interactive Flight Technologies, Inc. ("Interactive
Flight") filed a lawsuit against Avnet, Inc. in a Superior Court of Arizona
seeking an award for direct and consequential damages arising from the sale by
the Company of allegedly defective hard disk drives to Avnet for inclusion in an
in-flight entertainment system manufactured by Interactive Flight. The Company
purchased the hard disk drives from Integral Peripherals, Inc. ("Integral"), the
manufacturer, through its distributor, Bell Microsystems, Inc. ("Bell").
Integral has since declared bankruptcy and is not party to this lawsuit. On July
16, 1998, Avnet filed a third-party complaint against the Company for
indemnification pursuant to the terms of a distribution agreement between Avnet
and the Company. On September 18, 1998, the Company filed an answer denying the
third-party complaint and filed a third-party complaint against, among others,
Bell seeking indemnification and contribution. On May 24, 1999, Interactive
Flight filed

F-18
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
a first amended complaint to add the Company as an additional defendant based on
the terms of the Company's one-year written warranty which Interactive Flight
contends was assigned to them by Avnet. On June 8, 1999, Avnet filed a cross
claim against the Company seeking indemnification. On June 18, 1999, the Company
answered the first amended complaint and Avnet's cross claim. The Company is the
beneficiary of a potential insurance claim against the Chubb Group based on a
$2,000,000 policy of insurance originally issued to Integral and assigned to the
Company as part of a settlement reached in Integral's bankruptcy proceedings.
Such policy applies only to property damage. To date, Chubb has denied the
Company's claims under the policy. Interactive Flight is seeking out-of-pocket
damages of approximately $4,100,000 from both Avnet and the Company and
consequential damages from Avnet only arising from the alleged loss of contracts
with several airline carriers totaling an additional $10,000,000. Avnet is
seeking indemnification from the Company for both the out-of-pocket damages and
the consequential damages. There are various summary judgment motions pending,
including motions by Avnet and Bell against the Company. There can be no
assurance that these motions will be determined in the Company's favor. Trial is
set for September 2000.

The outcome of this lawsuit is uncertain. The Company has incurred, and
expects to continue to incur, substantial legal fees and expenses. This lawsuit
has diverted and is expected to continue to divert the efforts and attention of
key management and technical personnel. As a result, the Company's pursuit and
defense of this lawsuit, regardless of its eventual outcome, has been, and will
continue to be, costly and time consuming. Should the outcome of this lawsuit be
adverse, the Company would be required to pay significant monetary damages to
Interactive Flight and Avnet and the Company's business would be harmed. In
addition, the Company can give no assurance that Chubb will honor the claim for
coverage or that the Company will prevail on its third-party complaint against
Bell. An adverse outcome could be material to the Company's financial position
or results of operations. See Note 14 regarding subsequent developments related
to the Interactive Flight lawsuit.

MICRON ELECTRONICS, INC.

On October 27, 1999, the Company received a letter from Micron Electronics,
Inc. ("Micron"), requesting that the Company refrain from the manufacture, sale
or offer to sell memory products which infringe on two of Micron's U.S. patents.
The Company is presently evaluating Micron's patents and their relationship to
the Company's memory products. See Note 14 regarding the subsequent filing of a
lawsuit by Micron against the Company.

OTHER LEGAL PROCEEDINGS

The Company is currently not a party to any other material legal
proceedings. However, the Company is involved in other suits and claims in the
ordinary course of business, and the Company may from time to time become a
party to other legal proceedings arising in the ordinary course of business.

As is common in the industry, the Company currently has in effect a number
of agreements in which the Company has agreed to defend, indemnify and hold
harmless certain of its suppliers and customers from damages and costs which may
arise from the infringement by the Company's products of third-party patents,
trademarks or other proprietary rights. The scope of such indemnity varies, but
may, in some instances, include indemnification for damages and expenses,
including attorneys' fees. The Company's insurance does not cover intellectual
property infringement.

F-19
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
LEASE COMMITMENTS

As discussed in Note 3, the Company leases one of its corporate office
facilities and some manufacturing equipment from affiliates of Manouch
Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an executive
officer and director of the Company, and guarantees the related notes payable.
In addition, the Company leases from unaffiliated third parties, under operating
leases and capital leases, an office building and manufacturing equipment with
initial noncancellable lease terms ranging from 4 to 6 years. Future scheduled
minimum annual lease payments for the years ending December 31 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES OTHER LEASE OTHER
(RELATED CAPITAL (RELATED OPERATING
PARTY) LEASES PARTY) LEASES
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
2000............................................ $ 573,600 $ 516,539 $ 231,195 $459,373
2001............................................ 394,949 478,739 232,260 126,452
2002............................................ 5,600 466,139 232,260 --
2003............................................ -- 114,530 232,260 --
2004............................................ -- -- 232,260 --
Thereafter...................................... -- -- 58,065 --
--------- ---------- ---------- --------
Net minimum lease payments...................... 974,149 1,575,947 $1,218,300 $585,825
========== ========
Less, amounts representing interest........... (74,616) (179,324)
--------- ----------
Present value of future minimum capital lease
obligations................................... 899,533 1,396,623
Less, current portion......................... (514,105) (424,173)
--------- ----------
Capital lease obligations, less current
portion....................................... $ 385,428 $ 972,450
========= ==========
</TABLE>

Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $1,092,000, $953,000 and $802,000, respectively. Refer to Note 3
for related party amounts.

A new operating lease with MDC was signed effective April 1, 2000 (see Note
14). The lease term was decreased from 26 years to 5 years and the monthly base
rent was changed from approximately $19,000 to approximately $17,000. The above
table reflects the new lease terms. In addition, the Company and MDC, on June 1,
2000, entered into another lease agreement which is not reflected in the table
above (see Note 14).

REPURCHASE AGREEMENTS

The Company is contingently liable at December 31, 1999 to various financial
institutions on repurchase agreements in connection with wholesale inventory
financing. In general, inventory would be repurchased by the Company upon
customer default with a financing institution and then resold through normal
distribution channels. The amount of potential product returns is estimated and
provided for in the period of the sale for financial reporting purposes. As of
December 31, 1999, the Company has never been required to repurchase inventory
in connection with the customer default agreements noted above. However, there
can be no assurance that the Company will not be required to repurchase
inventory, upon customer default, in the future. Sales under such agreements
were approximately $3,600,000, $1,700,000 and $2,000,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.

F-20
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
401(k) PLAN

The Company has a 401(k) profit sharing plan covering employees with at
least six months of service. Employees may make voluntary contributions of up to
20% of their annual pre-tax compensation to the plan, subject to the maximum
limit allowed by the IRS guidelines, which is currently $10,500 annually. The
Company makes matching contributions equal to one-half of each participating
employee's matchable contributions to the plan which cannot exceed 10% of their
salary. The Company's matching contributions to the plan are subject to vesting
at the rate of 20% per year beginning after the employee's second year of
employment. For the years ended December 31, 1997, 1998 and 1999, the Company
made matching contributions of approximately $254,000, $250,000 and $339,000,
respectively.

10. STOCK OPTION PLAN:

The 1996 Stock Option Plan (the "Plan") provides for the direct sale of
shares and the grant of options to purchase shares of the Company's common stock
to employees, officers, consultants and directors. The Plan includes
nonqualified stock options ("NQSOs") and incentive stock options ("ISOs"). The
option price for the ISOs and NQSOs shall not be less than the fair market value
of the shares of the Company's stock on the date of the grant. For ISOs, the
exercise price per share may not be less than 110% of the fair market value of a
share of common stock on the grant date for any individual possessing more than
10% of the total outstanding stock of the Company. The Board of Directors has
the authority to determine the time or times at which options become
exercisable. Options expire within a period of not more than ten years from the
date of grant. The Plan provides for the issuance of up to 4,521,091 shares of
common stock. A summary of the option activity under the Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
INCENTIVE NONQUALIFIED TOTAL SHARE
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1996............. 2,818,737 485,280 3,304,017 $1.06
Granted................................... 101,400 -- 101,400 $1.18
Exercised................................. -- -- -- --
Forfeited and/or expired.................. (405,367) (18,298) (423,665) $1.06
--------- ------- ---------
Balances at December 31, 1997............. 2,514,770 466,982 2,981,752 $1.06
Granted................................... 55,770 50,700 106,470 $1.18
Exercised................................. -- -- -- --
Forfeited and/or expired.................. (61,357) -- (61,357) $1.13
--------- ------- ---------
Balances at December 31, 1998............. 2,509,183 517,682 3,026,865 $1.07
Granted................................... 439,544 79,416 518,960 $1.18
Exercised................................. -- -- -- --
Forfeited and/or expired.................. (111,423) (49,341) (160,764) $1.11
--------- ------- ---------
Balances at December 31, 1999............. 2,837,304 547,757 3,385,061 $1.08
========= ======= ========= =====
Exercisable at December 31, 1997.......... 1,500,639 303,500 1,804,139 $1.06
========= ======= ========= =====
Exercisable at December 31, 1998.......... 2,108,740 406,523 2,515,262 $1.06
========= ======= ========= =====
Exercisable at December 31, 1999.......... 2,606,675 506,394 3,198,066 $1.07
========= ======= ========= =====
</TABLE>

F-21
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTION PLAN: (CONTINUED)

As of December 31, 1999, options outstanding have a range of per share
exercise prices between $1.06 and $1.18 and a weighted average remaining
contractual life of 6.9 years.

No compensation expense was recorded as a result of stock options granted to
employees through December 31, 1998 as the fair value approximated the per share
exercise price of the respective options granted. With respect to options
granted to employees in 1999, there were 446,459 shares under options granted in
January 1999 with an estimated fair market value of $1.58 per share, 65,910
granted in April 1999 and 6,591 granted in May 1999 with an estimated fair
market value of $2.37 per share, all of which were granted at an exercise price
of $1.18 per share. The difference between the exercise price and the fair
market value at the date of grant of $262,000 is accounted for as unearned
compensation and will be amortized to expense over the related service period.
The Company recorded a total of approximately $120,000 as compensation expense
for the year ended December 31, 1999 related to options granted to employees in
1999. No options have been granted in 2000.

Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue the intrinsic value method of accounting for
stock options granted to employees and directors in accordance with APB Opinion
No. 25 and related interpretations in accounting for stock option plans.
Accordingly, no compensation cost has been recognized for its Plan other than
that described above. Had compensation cost been determined based on the fair
value at the grant dates for stock options under the Plan consistent with the
method promulgated by SFAS No. 123, the Company's net income (loss) for the
years ended December 31, 1997, 1998 and 1999 would have resulted in the pro
forma amounts below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes, as
reported.................................... $ (624,226) $(2,140,413) $11,984,836
Additional compensation expense per SFAS No.
123 (315,429) (117,290) (107,040)
----------- ----------- -----------
Pro forma income (loss) before provision
(benefit) for income taxes.................. (939,655) (2,257,703) 11,877,796
Pro forma provision (benefit) for income
taxes....................................... 2,517 23,714 (513,342)
----------- ----------- -----------
Pro forma net income (loss)................... $ (942,172) $(2,281,417) $12,391,138
=========== =========== ===========
Net income (loss) as reported................. $ (625,898) $(2,162,895) $12,502,804
=========== =========== ===========
Basic net income (loss) per share:
Pro forma................................... $ (0.03) $ (0.07) $ 0.40
=========== =========== ===========
As reported................................. $ (0.02) $ (0.07) $ 0.41
=========== =========== ===========
Diluted net income (loss) per share:
Pro forma................................... $ (0.03) $ (0.07) $ 0.38
=========== =========== ===========
As reported................................. $ (0.02) $ (0.07) $ 0.38
=========== =========== ===========
Weighted average shares outstanding:
Basic....................................... 30,601,027 30,601,027 30,601,027
=========== =========== ===========
Diluted..................................... 30,601,027 30,601,027 32,657,993
=========== =========== ===========
</TABLE>

The fair value of each option grant under the Plan was estimated on the date
of the grant using the minimum value method as the Company is a nonpublic
entity. This value is the current stock price less the present value of the
exercise price for a stock that does not pay dividends. The assumptions

F-22
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTION PLAN: (CONTINUED)
used for the minimum value computation for the years ended December 31, 1997,
1998 and 1999 are as follows: the risk-free interest rate ranges from 4.39% to
6.41%; the exercise price is equal to the fair market value of the underlying
common stock at the grant date, except in 1999 when the estimated fair market
value per share under options granted is higher; the expected life of the option
is the term to expiration, generally 5 years; the forfeiture rate is 8.0%; and
the common stock will pay no dividends.

11. RESTRUCTURING OF OPERATIONS:

In December 1998, the Company adopted a plan to restructure its operations
in Scotland in response to the increasingly competitive market conditions. The
restructuring consisted of a series of planned actions, including the
consolidation of the office and warehouse facility, the sale and disposal of
machinery and equipment and a reduction in the number of employees. The
restructuring charge recorded in 1998, included in general and administrative
expenses, was $397,000 and related primarily to estimated losses associated with
the sale and disposal of machinery and equipment and the consolidation of the
office and warehouse facility. The estimated severance costs associated with the
reduction of 32 employees of approximately $157,000 were recognized in 1999
because the Company did not notify the employees affected by the plan until
early 1999. Also in 1999, the Company recorded additional restructuring charges
of approximately $241,000, offset by approximately $603,000 of deferred
incentive grants, as described below.

At December 31, 1998, the accrued restructuring charge of $397,000 was
reflected on the Company's consolidated balance sheet in accrued and other
liabilities. Also included in accrued and other liabilities at December 31, 1998
was approximately $1,007,000 of unutilized deferred incentive grants awarded by
Scottish governmental agencies in 1996. The first grant was in the form of a
two-year free rent period related to the Company's manufacturing facility. The
second grant consisted of potential payments, to the Company, contingent on the
Company establishing and maintaining specified levels of employee headcount and
attaining certain levels of capital expenditures.

During the free rent period, which consummated in 1998, the Company recorded
rent expense on a straight-line basis over the 15-year life of the lease, which
resulted in a deferred rent credit of $621,000 upon conclusion of the free rent
period. The deferred rent credit would have been amortized over the remaining
13-year life of the lease, with the monthly amortized amount equal to the
difference between the actual rental payments and the straight-line rent
expense. When the restructuring decision was made in December 1998, the deferred
rent credit balance was approximately $603,000 and was included in accrued and
other liabilities. In September 1999, the Company assigned its rights and
obligations under the operating lease of its manufacturing facility to an
unrelated third party. In November 1999, shortly after this lease assignment,
the government of Scotland notified the Company that no additional payments or
repayments would be required. As a result, the remaining $603,000 was recorded
as a reduction to general and administrative expenses in 1999.

The Company was also awarded an incentive grant to be paid in five
installments totaling up to approximately $2,700,000. Such payments were to be
based on the Company's progress toward hiring and maintaining certain employee
headcount levels up to 360 individuals and purchasing certain amounts of fixed
assets up to approximately $5,800,000. The Company received the first payment of
approximately $404,000 in 1997 and based on the terms outlined by the Scottish
government, which require the repayment of grant money should the Company not
comply with the terms of the agreement, the $404,000 was included in accrued and
other liabilities. As a result of the 1998

F-23
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. RESTRUCTURING OF OPERATIONS: (CONTINUED)
restructuring decision, the Company was no longer in compliance with the terms
of this agreement. In late 1999, the Company negotiated a settlement with a
Scottish governmental agency to repay approximately $101,000 of this incentive
grant money in exchange for reduced headcount and capital expenditure
requirements. The Company repaid the settlement amount of $101,000 during 1999.
Under the revised terms, the agency agreed to waive repayment of the remaining
$303,000 if the Company maintained at least 12 sales and marketing employees in
Scotland through December 31, 2001. At December 31, 1999, the remaining $303,000
was included in accrued and other liabilities and the Company was in compliance
with the amended terms of the agreement. The Company is not entitled to a pro
rata portion of this remaining grant amount based on the passage of time.

In 1999, the Company ultimately incurred approximately $638,000 of charges
associated with the disposal of machinery and equipment and the consolidation of
the office and warehouse facility in Scotland, of which $397,000 was applied to
the original restructuring liability with the remainder of $241,000 recognized
in 1999 as a component of general and administrative expenses.

12. SEGMENT INFORMATION:

The Company designs, manufactures and markets a comprehensive line of
memory, storage and connectivity products used in high performance computing,
networking and communications, consumer electronics and industrial applications.
The Company provides both standard and custom memory solutions for two
reportable operating segments, Original Equipment Manufacturer and Aftermarket,
based on dynamic random access memory, static random access memory and Flash
memory technologies. The accounting policies for each of the reportable
operating segments are the same as those described in Note 2.

Beginning in 1999, after completion of management information system
enhancements, the Company used net sales and gross profit as the basis for
evaluating the performance of its operating segments. The Company performed no
such analysis in 1998 and 1997, since no such information was then available.
The Company does not allocate operating expenses, interest or income taxes to
operating segments. Due to the similarity of products manufactured for customers
within each operating segment, the Company does not maintain separate records to
identify assets by operating segment.

Summarized financial information regarding the Company's reportable segments
is shown in the following table:

<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30, 2000
YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
------------------------------------------- ------------------------------------------
ORIGINAL ORIGINAL
EQUIPMENT EQUIPMENT
MANUFACTURER AFTERMARKET CONSOLIDATED MANUFACTURER AFTERMARKET CONSOLIDATED
------------- ------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................ $49,601,356 $142,991,917 $192,593,273 $47,689,663 $84,957,482 $132,647,145
Cost of revenues............ 35,018,292 117,725,187 152,743,479 34,154,662 69,082,145 103,236,807
----------- ------------ ------------ ----------- ----------- ------------
Gross profit.............. $14,583,064 $25,266,730 $39,849,794 $13,535,001 $15,875,337 $ 29,410,338
=========== ============ ============ =========== =========== ============
</TABLE>

F-24
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. SEGMENT INFORMATION: (CONTINUED)

For the six month period ended June 30, 2000 and for the years ended
December 31, 1997, 1998 and 1999, international sales comprised 16.0%
(unaudited), 22.5%, 19.0% and 15.0% of the Company's revenues, respectively.
During these periods, no single foreign country accounted for more than 10.0% of
total revenues. Foreign sales are shipped directly from the Company's foreign
subsidiaries, while export sales are shipped domestically to the Company's
foreign customers. During early 1999, the Company restructured its operations in
Scotland to a sales office, resulting in a substantial shift of foreign sales to
export sales. Financial information regarding the Company's international
revenues is shown in the following table:

<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------
1997 1998 1999 2000
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Export....................................... $12,685,942 $16,779,344 $28,852,113 $21,213,939
Foreign...................................... 23,044,685 6,425,700 121,069 --
----------- ----------- ----------- -----------
$35,730,627 $23,205,044 $28,973,182 $21,213,939
=========== =========== =========== ===========
</TABLE>

13. UNAUDITED PRO FORMA INFORMATION:

In connection with the completion of the initial public offering of the
Company's common stock, the Company's S corporation status will terminate for
tax purposes. In addition, the Company will be required to record a nonrecurring
income tax benefit and a corresponding net increase in net deferred income tax
assets, equal to the difference in the Company's basis for assets and
liabilities for financial reporting and income tax purposes. Accordingly, the
Company's unaudited pro forma consolidated balance sheet at June 30, 2000
includes a net increase of approximately $330,000 which includes an increase in
deferred tax assets in the aggregate by approximately $1,505,000 and an increase
in deferred tax liabilities by approximately $1,175,000, assuming the Company
ceased to be treated as an S corporation on June 30, 2000. The actual amount of
the benefit and corresponding increase in net deferred income tax assets will be
adjusted through September 26, 2000. The Company has calculated the pro forma
deferred tax assets and liabilities and benefit for income taxes using the asset
and liability approach in accordance with SFAS No. 109, "Accounting for Income
Taxes."

The following presents the unaudited pro forma deferred tax assets and
liabilities assuming the Company ceased to be treated as an S corporation on
June 30, 2000:

<S> <C>
Financial statement reserves................................ $ 1,068,000
Accrued expenses............................................ 163,000
Stock options............................................... 52,000
Net operating loss carryforwards............................ 103,000
Tax credits................................................. 622,000
Other....................................................... 277,000
-----------
Gross deferred tax asset.................................. 2,285,000
Less, Valuation allowance................................. (103,000)
-----------
2,182,000
-----------
Effect of state taxes....................................... (359,000)
Accumulated depreciation.................................... (608,000)
Other....................................................... (238,000)
-----------
Gross deferred tax liability.............................. (1,205,000)
-----------
Net deferred tax asset...................................... $ 977,000
===========
</TABLE>

Additionally, the unaudited pro forma consolidated balance sheet at
June 30, 2000 includes an adjustment to reflect a distribution to existing
shareholders of an amount equal to the undistributed earnings from the date of
the Company's formation through June 30, 2000, equal to approximately
$16,257,000, an additional distribution to existing shareholders of additional
paid-in capital previously

F-25
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. UNAUDITED PRO FORMA INFORMATION: (CONTINUED)
invested by them equal to $3,000,000 and an increase in net deferred income tax
assets of approximately $330,000 assuming the Company's S corporation status
terminated on June 30, 2000. The unaudited pro forma consolidated balance sheet
does not give effect to distributions, to be paid to the shareholders of record
as of September 20, 2000 related to the Company's earnings from July 1, 2000
through September 26, 2000.

The following provides a summary reconciliation of the effects of the
unaudited pro forma adjustments to the Company's retained earnings and
additional paid-in capital:

<S> <C>
Retained earnings as of June 30, 2000....................... $ 16,257,000
Distributions to existing shareholders...................... (16,587,000)
Pro forma income tax benefit, net........................... 330,000
------------
Pro forma retained earnings as of June 30, 2000........... $ --
============

Additional paid-in capital as of June 30, 2000.............. $ 3,283,000
Distributions to existing shareholders...................... (3,000,000)
------------
Pro forma additional paid-in capital as of June 30,
2000.................................................... $ 283,000
============
</TABLE>

14. SUBSEQUENT EVENTS (UNAUDITED):

STOCK SPLITS:

On September 8, 2000, the Company effected a 5.07 for 1.0 stock split of all
outstanding common stock and common stock options. All share and per share
amounts have been adjusted to give retroactive effect to the stock split for all
periods presented.

2000 STOCK INCENTIVE PLAN:

In June 2000, the 2000 Stock Incentive Plan was adopted by the Company's
Board of Directors and approved by its shareholders. The 2000 Stock Incentive
Plan will become effective on the date the underwriting agreement for an initial
public offering is signed. At that time, all outstanding options under the
Company's 1996 Stock Option Plan will be transferred to the 2000 Stock Incentive
Plan, and no further option grants will be made under that predecessor plan. The
transferred options will continue to be governed by their existing terms, unless
the Company's compensation committee elects to extend one or more features of
the 2000 Stock Incentive Plan to those options. The 2000 Stock Incentive Plan
has the following five features: (1) a discretionary option grant program under
which eligible individuals may be granted options to purchase shares of common
stock at an exercise price not less than 100% of the fair market value of those
shares on the grant date; (2) a stock issuance program under which eligible
individuals may be issued shares of common stock directly, through the purchase
of such shares at a price not less than 100% of their fair market value at the
time of issuance or as a bonus tied to the attainment of performance milestones
or the completion of a specified period of service; (3) a salary investment
option grant program under which the Company's executive officers and other
highly compensated employees may be given the opportunity to apply a portion of
their base salary to the acquisition of special below-market stock option
grants; (4) an automatic option grant program under which option grants will
automatically be made to new non-employee board members to purchase shares of
common stock at an exercise price equal to 100% of the fair market value of
those shares on the date those individuals are first elected or appointed to the
board; and (5) a director fee option grant program under which the Company's
non-employee board members may be given the opportunity to apply a portion of
the annual retainer fee, if any, otherwise payable to them in cash each year to
the acquisition of special below-market option grants.

F-26
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
AMENDMENT TO LINE OF CREDIT:

In May and June 2000, the Company's line of credit agreement (see Note 6)
was amended to increase the maximum borrowing amount from $20,000,000 to
$22,500,000 and $22,500,000 to $27,500,000, respectively. If the Company
conducts an initial public offering with net proceeds to the Company between
$35.0 million and $70.0 million, the available line of credit will be reduced to
a range of $15.0 million to $20.0 million as determined by the bank in its sole
and absolute discretion. If the net proceeds from an initial public offering are
greater than $70.0 million, the available line of credit will be reduced to a
range of $10.0 million to $15.0 million as determined by the bank in its sole
and absolute discretion. In conjunction with the increase, the Company paid a
facility advance fee of $28,125. Borrowings under the line of credit bear
interest at the prime lending rate. The line of credit matures on August 3,
2002. In the event the Company terminates the credit facility on or before
August 3, 2001, or on or before August 3, 2002, a termination fee of $275,000
and $137,500, respectively, will be assessed against the Company, unless the
termination is due to the origination of a new credit facility with the bank.

MDC EXERCISE OF BUILDING PURCHASE OPTION AND BUILDING LEASE:

In March 2000, MDC exercised an option to purchase a building from a third
party (see Note 3) and subsequently purchased the facility. On June 1, 2000, the
Company and MDC entered into a new operating lease for this building with a term
of five years, expiring May 2005, with scheduled base rental payments of
approximately $33,000 per month.

MDC MORTGAGE NOTE REFINANCE AND BUILDING LEASE:

In April 2000, MDC refinanced its mortgage note payable (see Note 3) with a
bank. In conjunction with this transaction, the Company is no longer required to
guarantee the MDC mortgage note payable. The Company also terminated its
existing building lease with MDC and entered into a new operating lease with MDC
with a term of five years, expiring in March 2005, with scheduled base rental
payments of approximately $17,000 per month.

AMENDED ARTICLES OF INCORPORATION:

In March 2000, the Company amended its Articles of Incorporation and Bylaws
so the Company would have the authorization to issue up to 100,000,000 common
shares and 20,000,000 preferred shares, both with a $0.001 par value. Such
authorizations have been reflected on the Company's consolidated balance sheet
under shareholders' equity.

MICRON ELECTRONICS, INC.:

On April 6, 2000, Micron Electronics, Inc. filed a lawsuit against 18
computer memory manufacturers, including the Company, in the United States
District Court for the Northern District of California, seeking unspecified
damages, including enhanced damages up to three times actual damages based on
the Company's alleged willful infringement, injunctive relief, attorneys' fees
and costs arising from the Company's alleged infringement of three of Micron's
patents. On August 22, 2000, the Company entered into a license agreement with
Micron for the use, sale and importation into the United States of certain
memory modules incorporating Micron's proprietary technology. The license
agreement requires a royalty payment of $0.40 per unit for such memory modules.
Such payments are due quarterly through May, 2016. The license agreement was
entered into in connection with the Company's August 22, 2000 settlement of a
lawsuit originally filed by Micron on April 6, 2000 against 18 computer memory
manufacturers, including the Company, for the Company's alleged infringement

F-27
<PAGE>
SIMPLE TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
of certain of Micron's patents. A Notice of Entry of Order was approved by the
court on August 28, 2000 which dismissed the Micron lawsuit with prejudice.

DENSE-PAC MICROSYSTEMS, INC.--TECHNOLOGY MISAPPROPRIATION:

On April 10, 2000, Dense-Pac Microsystems, Inc. filed a lawsuit against the
Company and Mark Moshayedi, a beneficial shareholder and the Company's Chief
Operating Officer, Chief Technical Officer and Secretary, in the Superior Court
of Orange County, California, seeking unspecified damages, including punitive
damages, injunctive relief, attorneys' fees and costs arising from the Company's
alleged misappropriation of Dense-Pac's technology based on one of Dense-Pac's
patents and the sale of the Company's products incorporating such technology
alleged to have been misappropriated. Dense-Pac's complaint sets forth various
causes of action against the Company and Mark Moshayedi, including common law
misappropriation, intentional and negligent interference with prospective
business advantage, unfair competition, unjust enrichment and trade secret
misappropriation. On May 26, 2000, the Company filed an answer to Dense-Pac's
complaint denying Dense-Pac's allegations against the Company and Mark Moshayedi
and asserting a number of defenses, including failure to state a claim, waiver
and estoppel. The Company is defending and indemnifying Mark Moshayedi in this
lawsuit as part of its obligation under their indemnification agreement. This
lawsuit is in the very early stages. The outcome of this lawsuit is uncertain.
The Company's defense of this lawsuit, regardless of its eventual outcome, will
likely be costly and time consuming. If the Company is unsuccessful in this
lawsuit, the Company may be required to pay significant monetary damages to
Dense-Pac and may be enjoined from manufacturing and selling those products
found to have been misappropriated from Dense-Pac unless the Company is able to
negotiate a license from Dense-Pac. If the Company is required to pay
significant monetary damages, is enjoined from manufacturing and selling any of
its products or is required to make substantial royalty payments pursuant to any
such license agreement, the Company's business would be harmed.

INTERACTIVE FLIGHT TECHNOLOGIES, INC.

On August 18, 2000, the court entered a ruling granting Avnet's motion for
summary judgement requiring the Company to indemnify Avnet for damages and
attorneys' fees incurred by Avnet in its defense of Interactive Flight's
lawsuit. On September 1, 2000, the court entered a ruling in favor of Avnet and
the Company by granting a joint motion for partial summary judgment against
Interactive Flight. The effect of this ruling is to ban Interactive Flight from
pursuing claims for either incidental or consequential damages against Avnet or
the Company. On September 13, 2000, the court granted a motion for summary
judgment in favor of Bell Microsystems and against the Company, effectively
eliminating the Company's claim against Bell Microsystems for indemnification.

SIMPLE TECHNOLOGY CANADA LTD.:

In June 2000, Simple Technology Canada ("STC") distributed all of its assets
totaling approximately $92,000 to its shareholders through the establishment of
an escrow account. Subsequently, the Company made filings with the Canadian tax
authorities to dissolve STC and the Company is currently awaiting their
approval. Upon dissolution, the amount held in escrow will be distributed to the
Company and the beneficial shareholders of the Company in proportion to their
previous ownership interests in STC.

STOCK OPTION GRANTS

On September 28, 2000, the Company granted options to purchase 3,454,000
shares to employees and consultants. The exercise price per share for such
options was $11.00.

F-28
<PAGE>
INSIDE BACK COVER

The Simple Technology logo is in the center of a page divided into four
equal pictures. The top left picture depicts an engineer examining a computer
display showing a schematic of a memory module's placement on a circuit board.
This picture is captioned, "The module design process." The bottom left picture
depicts memory modules on two memory boards. The top right picture depicts two
engineers testing and installing memory boards. This picture is captioned,
"Product testing." The bottom right picture depicts a Simple Technology Compact
Flash-TM- card.
<PAGE>
6,364,000 SHARES

[LOGO]

COMMON STOCK

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PROSPECTUS
SEPTEMBER 29, 2000

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LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC

FIDELITY CAPITAL MARKETS
a division of National Financial Services LLC