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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

______________

FORM 10-K

(Mark One)

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2002

or

 [  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to     

Commission File Number 0-29038

Tanisys Technology, Inc.

(Exact name of registrant as specified in its charter)

              Wyoming                                            

                     74-2675493

        (State or other jurisdiction of

   (I.R.S. Employer

         incorporation or organization)

            Identification Number)

                 12201 Technology Blvd., Suite 125

           78727

                             Austin, Texas

              (Address of principal executive offices)  

        (Zip Code)

(512) 335-4440

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:  NONE

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, No Par Value Per Share

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.   [  ]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 30, 2002 was approximately $40,000 based upon the closing sale price of the Common Stock as reported on the Nasdaq OTC Bulletin Board. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Indicated below is the number of shares outstanding of the registrant’s only class of common stock at December 30, 2002:

Number of Shares

Title of Class

    Outstanding

Common Stock, no par value

      24,147,534

#

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

2002 ANNUAL REPORT ON FORM 10-K

INDEX

           PAGE

PART I     

Item 1.

Business

 4

Item 2.

Properties

11

Item 3.

Legal Proceedings

11

Item 4.

Submission of Matters to a Vote of Security Holders

11

PART II    

Item 5.

Market for the Company’s Common Equity and Related

Stockholder Matters

12

Item 6.

Selected Financial Data

16

Item 7.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

17

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 8.

Financial Statements and Supplementary Data

30

Item 9.

Changes in and Disagreements with Accountants on Accounting

and Financial Disclosure

57

PART III.

Item 10.

Directors and Executive Officers of the Company

57

Item 11.

Executive Compensation

59

Item 12.

Security Ownership of Certain Beneficial Owners and Management

66

Item 13.

Certain Relationships and Related Transactions

69

Item 14.

Controls and Procedures

71

PART IV.

Item 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

71

Signatures

78

Certification of Chief Executive Officer Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

79

Certification of Chief Financial Officer Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

80

Exhibits

81

#

PART I.

ITEM 1.

BUSINESS

Forward-Looking Statements - Cautionary Statements

The following discussions contain trend information and other forward-looking statements that involve a number of risks and uncertainties. The actual results of Tanisys Technology, Inc., and its wholly owned subsidiaries, 1st Tech Corporation ("1st Tech"), DarkHorse Systems, Inc. ("DarkHorse") Rosetta Marketing and Sales, Inc. ("Rosetta"), and Tanisys (Europe) Ltd. (collectively, the “Company” or "Tanisys"), could differ materially from their historical results of operations and those discussed in the forward-looking statements. All of the stock of Tanisys (Europe) Ltd. was sold in December 1999 as part of the sale of the memory module manufacturing business.  The forward-looking statements are based on the beliefs of the Company's management as well as assumptions made by and information curren tly available to the Company's management. When used herein, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors. Factors that could cause actual results to differ materially include, but are not limited to, business conditions and growth in the electronics industry and general economies, both domestic and international; lower than expected customer orders; customer relationships and financial condition; relationships with vendors; the interest rate environment; governmental regulation and supervision; seasonality; distribution networks; delays in receipt of orders or cancellation of orders; competitive factors, including increased competition and new product offerings by com petitors and price pressures; the availability of parts and supplies at reasonable prices; changing technologies; acceptance and inclusion of the Company's technologies by original equipment manufacturers ("OEMs"); changes in product mix; new product development; the negotiation of new contracts; significant quarterly performance fluctuation due to the receipt of a significant portion of customer orders and product shipments in the last month of each quarter; product shipment interruptions due to manufacturing problems; one-time events; and other factors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. The forward-looking statements should be read in light of these factors and the factor s identified in "Item 1. Business" and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." All references to year periods refer to the Company's fiscal years ended September 30, 2002, 2001 or 2000, and references to quarterly periods refer to the Company's fiscal quarters ended December 31, March 31, June 30 and September 30.

General

The Company designs, manufactures and markets production level automated test equipment for a wide variety of semiconductor memory technologies, including Dynamic Random Access Memory (“DRAM”), Synchronous Dynamic Random Access Memory (“SDRAM”), Double Data Rate Synchronous DRAM (“DDR”), Rambus DRAM (“RDRAM®”) and Flash Memory. Operating under the Tanisys Technology name since 1994, the Company has developed into an independent manufacturer of memory test systems for standard and custom semiconductor memory.  These systems are used at semiconductor manufacturers, computer and electronics Original Equipment Manufacturers (“OEMs”) and independent memory module manufacturers. The Company markets a line of memory test systems under the DarkHorse® Systems brand name.  The Company's customer base covers a number of worldw ide markets including semiconductor manufacturers, memory module manufacturers, computing systems OEMs and contract manufacturing companies.

Effective May 21, 1996, the Company acquired, through mergers with its wholly owned subsidiaries, all of the outstanding common stock of 1^st Tech Corporation (“1^st Tech”) and DarkHorse Systems, Inc. (“DarkHorse”) and began operations in Austin, Texas. The consolidated group of companies began providing custom design, engineering and manufacturing services, test solutions and standard and custom semiconductor memory module products to leading original equipment manufacturers (“OEMs”) in the computer, networking and telecommunications industries.

Until December 1999, a significant portion of the Company’s revenues were derived from manufacturing and sales of semiconductor memory modules.  In December of 1999, the Company sold certain assets and liabilities related to the memory module manufacturing business and exited the memory module manufacturing business.  Included in the sale was all the stock of Tanisys (Europe) Ltd., a wholly owned subsidiary of the Company.  Since 1999, the Company has concentrated all its resources on the memory test systems business as new technologies such as higher speed synchronous DRAM, Rambusâ memory, Double Data Rate synchronous DRAM and Flash memory become prevalent requirements of computing products.

The Company was incorporated under the laws of the State of Wyoming in 1993.  The Company’s offices are located at 12201 Technology Boulevard, Suite 125, Austin, Texas 78727, and the telephone number is 512-335-4440.  The Company’s worldwide website address is www.tanisys.com.

Common Stock Reverse Split

At the Company’s Annual Meeting of Stockholders on May 23, 2000, the Company’s stockholders approved a one-for-two reverse stock split of the Company’s Common Stock (the “Reverse Split”) effective May 25, 2000.  The Reverse Split had no effect on the number of authorized shares of Common Stock, preferred stock, or Series A Preferred Stock.  Any stockholder otherwise entitled to any fractional share interest due to the Reverse Split received in lieu thereof, one additional share of Common Stock for the fractional share such stockholder would have been entitled to as a result of the Reverse Split.

The number of shares and per share amounts of the Company’s Common Stock, warrants and stock options set forth herein have been retroactively adjusted for all periods presented to reflect the Reverse Split.

Industry Overview

The severe economic downturn in the worldwide semiconductor industry that began affecting the Company in early fiscal 2001 has had an impact on purchases and capital spending in many of the worldwide markets the Company serves.  Management is uncertain how long the current downturn may continue in these markets.

According to Dataquest, Semico Research and other market research firms, the demand for semiconductor memory in digital electronic systems has grown significantly over the last several years. This demand results from the increased importance of memory in determining system performance. An increasing demand for greater system performance requires that electronics manufacturers increase the amount of semiconductor memory incorporated into a system.

Factors contributing to the demand for memory include unit sales of personal computers ("PCs") in the business and consumer market segments, increasing use of PCs to perform memory-intensive graphics tasks, increasingly faster microprocessors, the release of increasingly memory-intensive software and the increasing performance requirements of PCs, workstations, servers and networking and telecommunications equipment. Additionally, there are future high growth requirements for semiconductor memory with the escalating needs of wireless and portable devices such as cell phones, digital cameras, personal digital assistants and other consumer oriented products.

Semiconductor memory products are segmented into three primary classes: Dynamic Random Access Memory ("DRAM"), Static Random Access Memory ("SRAM") and non-volatile memory, such as Flash memory. DRAM typically is the large "main" semiconductor memory of systems, SRAM provides higher performance and Flash memory and other non-volatile memory retain their contents when power is removed. In addition, within each of these broad categories of memory products, semiconductor manufacturers are offering an increasing variety of memory devices designed for application specific uses.

The growing variety of memory components drives the increasing demand for the Company’s DarkHorse brand of cost-effective production memory test systems to test each of these categories of memory.

Memory Module Market

Since the memory module market influences the memory module test systems market, the Company believes it is appropriate to comment briefly about the memory module market. Semiconductor memory modules (“modules”) are small printed circuit board assemblies containing semiconductor memory devices and support components. Many computer and electronic systems use modules to permit OEMs to more easily upgrade their systems and to increase flexibility by permitting different types of modules to configure one base system for multiple price or performance targets. Semiconductor memory modules are nearly always attached to a main system board in a daughter card fashion rather than directly to a computer system board, for reasons of upgradeability and flexibility.  Memory modules permit OEMs to manufacture systems on a build-to-order (“BTO”) basis by configuring the syste m after the customer's order is placed. The benefits of BTO for OEMs are faster announcement of new systems, increased customer satisfaction, reduced inventory risk and reduced costs, all of which require cost effective, high speed, high quality and flexible memory module test systems capability.

Modules typically are manufactured by leading semiconductor memory component companies and independent third party suppliers. Semiconductor manufacturers sell modules almost exclusively to OEMs.  Third party manufacturers of modules supply product to two primary market segments: the OEM channel and the reseller channel. Third party suppliers to the OEM channel typically offer custom product, although some computer and peripheral OEMs use off-the-shelf modules. Third party suppliers to the reseller channel typically offer standard DRAM modules as an upgrade product sold through computer distributors and retail channels. Both semiconductor memory suppliers and independent third party module manufacturers are customers for memory module test systems.  In addition, contract manufacturing companies and systems OEMs have the requirement to test memory modules.

Memory Module Test Systems Market

Memory module test systems are important to assure that semiconductor memory modules meet the necessary specifications of performance. The memory module test systems market typically is segmented into memory semiconductor manufacturing and third party memory module manufacturers for PC OEMs and the aftermarket.  System OEMs typically require the manufacturer of their memory modules to test their completed modules under demands similar to actual use. Most module manufacturers perform "at-speed" testing of all modules with accurate test systems. The Company believes that module test system buyers typically evaluate reliability, productivity, accuracy, advanced automation, software flexibility, service, customer support and price as purchase criteria. New purchases of capital equipment for test capacity are likely, due to changing memory technology architectures and strong growth in memory demand.

The actual test sequence for a memory module is unique to its design in terms of architecture, pinout, speed rating, voltage, organization and size and will use any of several common test algorithms. Therefore, the number of potential memory test configurations is much greater than the number of semiconductor memory module types. This makes test development a potentially costly and labor intensive task. The ability of a test system manufacturer to provide support for the development of low cost, accurate tests is a significant consideration in the buying decision.

Flash Memory Market

Flash memory is a non-volatile memory capable of retaining data even when power has been removed.  Flash is projected to be one of the fastest growing segments of the semiconductor industry.  The Flash memory market consists primarily of device level and card level segments.  The Flash memory market is projected to grow significantly over the next 5 years, as consumer applications such as digital cameras, camcorders, PDA’s, cell phones, and solid state replacements for CD audio/video and VHS tapes drive unit and density growth.

Flash cards are a growing end use application of Flash memory, with these cards being used in many of the consumer applications mentioned previously, specifically hand-held devices such as PDA’s, MP3 players, cell phones and digital cameras.

Flash Memory Test Systems Market

The market for Flash card test is an emerging market with very few entrenched competitors.  Many manufacturers currently use in-house test solutions, as their volumes have been too low in the past to justify an outside test product.  However, as volumes continue to grow rapidly in the small form-factor flash-card market, most manufacturers are now moving to outside test solutions to meet their needs.

Products and Services of the Company

The Company designs, manufactures and markets semiconductor memory test systems. The Company's memory test systems are oriented for both memory module assembly manufacturing and memory aftermarket purposes and include a broad line of test fixtures, test algorithm suites and test services.

Memory Module Test Systems Products

The Company's memory module test systems are marketed under the DarkHorse brand name to utilize existing brand awareness. The current product line includes various models of the SIGMA·3 aimed at specific variations in technology.  The Company has developed and continues to sell a version of the SIGMA·3 memory module test system with capabilities to test Double Data Rate SDRAM (“DDR”).  Another major feature of the SIGMA·3 test system is its backward compatibility to test older memory technologies such as SDRAM, EDO and Fast Page mode memory.  In addition, the Company has continued to install its Rambusâ version of the SIGMA·3 which operates at frequencies of over 800 MHz.

The Company’s DarkHorse SIGMA·3 Model 400e DDR Memory Test System provides manufacturers of memory modules with an affordable and reliable test solution for DDR DRAM Memory.  The DDR memory architecture has been selected as one of the standard memory module technologies for the next generation of personal computers.  The Model 400e gives the industry a flexible and affordable at-speed test solution for DDR modules.  Currently providing a full 333 MHz data rate, this test system is designed for high volume production environments, characterization and failure analysis.

The Company differentiates its memory test systems by targeting its systems’ features specifically for the purpose of cost effective, high quality, production level testing of memory products. The Company’s memory test systems are designed for comparable performance at lower prices relative to the general-purpose test systems offered by competitors.

Flash Memory Test Systems Products

The Company’s Flash memory test system, the SIGMA·4™ Model 500, has been designed to provide Flash manufacturers with a scalable, highly flexible test platform capable of testing small form-factor flash cards such as the MultiMedia Card™ (“MMC”), Secure Digital Card (“SD”), Compact Flash and Memory Stick.     The system has immense expandability because of the Company’s Distributed Network Architecture™ (“DNA”) which allows manufacturers unlimited scalability to meet their growing test capacity needs.

Customers, Sales and Marketing

In North America and Europe, a majority of the Company’s memory test systems are sold directly to semiconductor and independent memory module manufacturers.  In Asia, the Company sells its test systems through distribution partners and independent sales representative organizations.  In fiscal 2002, 2001 and 2000, the Company’s ten largest customers accounted for 83.0%, 90.7% and 81.5% of memory test system net sales, respectively.  In fiscal 2002, 2001, and 2000, the Company had one customer which accounted for 7.7%, 26.2%, and 23.9% of the Company’s memory test system net sales, respectively.

Sales to distribution partners in Asia accounted for 6.5%, 1.6% and 11.7% of the Company’s net sales in fiscal 2002, 2001 and 2000, respectively. Sales to distribution partners are recognized as revenue by the Company upon the shipment of products because the distribution partners, like the Company’s other customers, have issued purchase orders with fixed pricing and are responsible for payment to the Company.

Backlog

Sales generally are made against standard customer purchase orders. The Company's backlog generally includes those customer orders for which it accepted purchase orders and planned shipment dates within the next year.   The Company does not consider its backlog of orders to be material to, or a significant factor in, evaluating and understanding its business.  Backlog is not an indicator of future sales, and orders in the backlog are subject to change in delivery terms or even cancellation. Accordingly, there is no assurance that current backlog will lead to future sales. The Company's total backlog of memory test systems was approximately $544,000 and $81,000 at fiscal 2002 and 2001 year end, respectively.

Competition

The memory module and memory test equipment industries are intensely competitive. These markets include a large number of established companies, several of which have achieved a substantial market share. Certain of the Company's competitors in these markets have substantially greater financial, marketing, technical, distribution and other resources, greater name recognition, and larger customer bases than the Company. In the memory module test systems market, the Company competes primarily with companies supplying automatic test equipment. The Company also faces competition from new and emerging companies that have recently entered or may in the future enter the markets in which the Company participates.

The Company expects its competitors to continue to improve the performance of their current products, to reduce their current product sales prices and to 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 the Company's products. There can be no assurance that enhancements to or future generations of competitive products will not be developed that offer better prices or technical performance features than the Company's products. To remain competitive, the Company must continue to provide technologically advanced products, improve quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis, reduce manufacturing costs and compete favorably on the basis of price. In addition, increased competitive pressure in the past has led, and may continue to le ad, to intensified price competition, resulting in lower prices and gross margin, which could materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully in the future.

Sources and Availability of Raw Material

The Company’s operations utilize a wide variety of semiconductors, electromechanical components and assemblies, and other raw materials such as sheet metal.  The Company believes that the materials and supplies necessary for the manufacture and assembly of its products are presently available in the quantities required.  The materials, supplies and product subassemblies are purchased from a substantial number of vendors.  For a number of its products, the Company has existing alternate sources of supply, or such sources are readily available.  Portions of the Company’s manufacturing and assembly operations are dependent upon the ability of suppliers to deliver quality components and subassemblies in time to meet manufacturing, assembly, and distribution schedules.  The failure of suppliers to deliver in a timely manner may ad versely affect the Company’s operating results until alternative sources are developed.  In addition, the Company periodically experiences constrained supply of certain component parts in some product lines as a result of strong demand in the industry for those parts.  If such constraints persist for a period of time, they may adversely affect the Company’s results of operations.  However, the Company believes that alternate suppliers could be arranged within a reasonable time so that material long-term adverse impacts would be minimized.

Research and Development

The Company's management believes that the timely development of new memory test systems and technologies is essential to maintain the Company's competitive position. In the electronics market, the Company's research and development activities are focused primarily on new memory testing technology and continual improvement in its memory test products. Additionally, the Company provides research and development services for customers as either joint or contracted development. The Company plans to continue to devote substantial research and development efforts to the design of new memory test systems that address the requirements of semiconductor companies, OEMs and independent memory module manufacturers.

The Company's research and development expenses were $1,506,138 in fiscal 2002, $2,425,061 in fiscal 2001 and $2,005,052 in fiscal 2000. A portion of the research and development expense is focused on creating a patent portfolio to protect the Company’s intellectual property and to create a competitive edge over competitors.

Intellectual Property

The Company has filed the following applications with the U.S. Patent and Trademark Office for patents to protect its intellectual property rights in products and technology that have been developed or are under development:

Nested Loop Method of Identifying Synchronous Memories. Issued as U.S. Patent 5,812,472 on September 22, 1998. The patent describes how to automatically identify a synchronous memory module configuration using a table-based method with nested loops.

Parametric Test System and Method.   Issued as U.S. Patent 6,008,664 on December 28, 1999.  This patent describes a method for performing a leakage test more quickly.

Contact Test Method and System for Memory Testers.  Issued as U.S. Patent 5,956,280 on September 21, 1999.  This patent describes a contact test for determining pin-to-pin and ground shorts, as well as opens for memory modules.

Synchronous Memory Tester.  Issued as U.S. Patent 5,914,902 on June 22, 1999.  This patent describes the operation of the synchronous memory tester.

Synchronous Memory Test Method.  Issued as U.S. Patent 5,912,852 on June 15, 1999.  This patent describes the method of operation of the synchronous memory tester.

Method and System for Identifying a Memory Module Configuration.   Issued as U.S. Patent 5,999,468 on December 7, 1999.  This patent describes a speedier approach for identifying memory modules.

Synchronous Memory Test System.   Issued U.S. Patent Number 5,995,424 on November 30, 1999. This patent describes the operation of the SYNC·LC memory tester.

Synchronous Memory Identification System.  Issued as U.S. Patent 6,183,253 on January 30, 2001.  This patent describes additional applications for the use of table-based method with nested loops to automatically identify a synchronous memory module configuration.

Programmable Pulse Generator.  Issued as U.S. Patent 6,067,648 on May 23, 2000.  This patent describes the PPG operation in the SIGMA·3 tester.

Tester Systems.  Issued as U.S. Patent 6,064,948 on May 16, 2000.  This patent describes the code generation for the SIGMA·3 tester.

Method and System for Testing Rambus® Memory Modules.  Issued as U.S. Patent 6,285,962 on September 4, 2001.  This patent describes a low cost method of testing RAMBUS®  memory modules.

Method and System for Testing Rambus® Memory Modules.  Issued as U.S. Patent 6,480,799 on November 11, 2002.  This patent is a continuation from U.S. Patent 6,285,962 issued on September 4, 2001.

Method and System for Distributed Testing of Electronic Devices.  This patent application with Serial Number 09/966,541 describes a method to easily increase test capacity at a low cost.

Nested Loop Method of Identifying Synchronous Memories.  Issued as Taiwanese (ROC) Patent 132190 on April 21, 2001. The patent describes how to automatically identify a synchronous memory module configuration using a table-based method with nested loops.

Synchronous Memory Test System. Issued as Taiwanese (ROC) Patent 118906 on December 18, 2000.  This patent describes the operation of the synchronous memory tester.

Synchronous Memory Identification System.  Issued as Taiwanese (ROC) Patent 133631 on October 4, 2001.  This patent describes additional applications for the use of table-based method with nested loops to automatically identify a synchronous memory module configuration.

There can be no assurance that the pending patent applications will be approved or approved in the form requested. The Company expects to continue to file patent applications where appropriate to protect its proprietary technologies; however, the Company believes that its continued success depends primarily on factors such as the technological skills and innovation of its personnel rather than on patent protection. In addition, the Company attempts to protect its intellectual property rights through trade secrets, copyrights, trademarks and a variety of other measures, including non-disclosure agreements. There can be no assurance, however, that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise, that the Company 's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that its intellectual property rights can otherwise be protected meaningfully. There can be no assurance that patents will be issued from pending or future applications or that if patents are issued, they will not be challenged, invalidated or circumvented, or that rights granted thereunder will provide meaningful protection or other commercial advantage. Furthermore, there can be no assurance that third parties will not develop similar products, duplicate the Company's products or design around the patents owned by the Company or that third parties will not assert intellectual property infringement claims against the Company. In addition, there can be no assurance that foreign intellectual property laws will adequately protect the Company's intellectual property rights abroad. The failure of the Company to protect its proprietary rights could have a material adverse effect on its busine ss, financial condition and results of operations.

Employees

At September 30, 2002, the Company had 22 employees, including 11 engineering, product development, manufacturing and technical support employees, 7 finance and administration employees and 4 employees in the sales and marketing area.

Recruitment of personnel in the computer industry, particularly engineers, is highly competitive for those individuals with proven technical skills necessary for the Company’s products, although it has become less competitive over the last year.  The Company believes that its future success will depend in part on its ability to attract and retain highly skilled management, engineering, sales, marketing, finance and technical personnel.  There can be no assurance of the Company’s ability to recruit and retain the employees that it may require.

ITEM 2.

PROPERTIES

At September 30, 2002, the company had 14,846 square feet of space under lease for its corporate offices at 12201 Technology Boulevard, Suite 125, Austin, Texas.  The company is currently paying annual rent of approximately $89,000 until April 30, 2003, plus a pro-rata charge for property taxes, common area maintenance and insurance.  On May 1, 2003, the Company will be paying annual rent of approximately $125,000 until April 30, 2004, plus a pro-rata charge for property taxes, common area maintenance and insurance.  On May 1, 2004, the Company will be paying annual rent of approximately $160,000 until April 30, 2005, plus a pro-rata charge for property taxes, common area maintenance and insurance.

ITEM 3.

LEGAL PROCEEDINGS

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

#

PART II.

ITEM 5.

MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

On May 25, 2000, the Company’s stock began trading under its current symbol of “TNIS” on the Nasdaq OTC Bulletin Board, which was established for securities that do not meet the Nasdaq SmallCap Market’s listing requirements.  Consequently, buying or selling the Company’s common stock could be more difficult because of the smaller quantities of shares that could be bought and sold, transactions could be delayed, and security analysts’ and news media’s coverage of the Company stock could be reduced.  These factors could result in lower prices and larger spreads in the bid and ask prices for shares of the Company’s common stock.  From July 28, 1999 to May 24, 2000, the Company’s stock traded on the Nasdaq OTC Bulletin Board under the symbol “TNSU.”  From May 22, 1997 to July 27, 1999, the Company’s stock trad ed on the Nasdaq SmallCap Market under the symbol “TNSU.”  From March 20, 1995 to June 6, 1997, the Common Stock was traded on the Vancouver Stock Exchange (“VSE”) under the symbol “TNS.U,” with prices quoted in U.S. dollars.  On June 6, 1997, as a result of the change to Nasdaq, the Company voluntarily delisted its stock on the VSE.

At the Company’s Annual Meeting of Stockholders on May 23, 2000, the Company’s stockholders approved a one-for-two reverse stock split of the Company’s Common Stock (the “Reverse Split”) effective May 25, 2000.  The Reverse Split had no effect on the number of authorized shares of Common Stock, preferred stock or Series A Preferred Stock.  Any stockholder otherwise entitled to any fractional share interest due to the Reverse Split received in lieu thereof, one additional share of Common Stock for the fractional share such stockholder would have been entitled to as a result of the Reverse Split.

At the Company’s Annual Meeting of Stockholders on February 26, 2002, the Company’s stockholders approved an increase in the number of shares of the Company’s common stock authorized for issuance to 1,000,000,000 shares and an increase in the number of the Company’s preferred stock authorized for issuance to 50,000,000 shares.

The table below sets forth the high and low closing prices of the Common Stock from October 1, 2000 through December 30, 2002, as reported on the Nasdaq OTC Bulletin Board.  These price quotations reflect interdealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.  In addition, the per share amounts have been retroactively adjusted for all periods presented to reflect the Reverse Split.

  Common Stock 

Quarter Ended

High

Low

Fiscal 2001:

December 31, 2000

$2.56

$0.55

March 31, 2001

  1.06

  0.55

June 30, 2001

  0.55

  0.18

September 30, 2001

  0.17

  0.05

Fiscal 2002:

December 31, 2001

  0.09

  0.05

March 31, 2002

  0.08

  0.04  

June 30, 2002

  0.05

  0.01   

September 30, 2002

  0.05

  0.01

Fiscal 2003:

Through December 30, 2002

              0.01

               0.002

Stockholders

On September 30, 2002 and 2001, there were 24,147,534 shares of Common Stock outstanding held by 285 and 159 holders of record, respectively.  The last reported sales price of the Common Stock on December 30, 2002, was $0.002 per share. As of September 30, 2002, the Series A Preferred stockholders controlled 91% of the voting power of all stockholders of the Company.  If none of the financial targets included in the Purchase Agreement are met and the Company fails to pay the note payable to the Series A Preferred stockholders’ by July 15, 2003, then, by December 31, 2003, the Series A Preferred stockholders could potentially control approximately 94% of the voting power of the Company, inclusive of all potentially dilutive options and warrants.

Dividends

During the fiscal year ended September 30, 2000, the Company declared and issued dividends of 111,829 shares of Common Stock to the holders of record of its Series A Convertible Stock.  All of the Series A Convertible Stock had been converted to Common Stock as of September 30, 2000.  

In a private placement on August 13, 2001, the Company entered into a Series A Preferred Stock Purchase Agreement.  The Company recorded dividends of 831,190 shares and 53,229 shares of its Series A Preferred Stock to the holders of the Company’s Series A Preferred Stock for the fiscal years ended September 30, 2002 and 2001, respectively.

The Company has not declared or paid any dividends with respect to the Common Stock, and the current policy of the Board of Directors is to retain earnings, if any, to provide for the growth of the Company’s business. Consequently, no cash dividends are expected to be paid on the Common Stock in the foreseeable future.  Further, there can be no assurance that the proposed operations of the Company will generate the revenue and cash flow needed to declare a cash dividend or that the Company will have legally available funds to pay dividends at any time in the future.

Private Placements

On June 30, 1998, the Company entered into a Convertible Stock Purchase Agreement with an accredited investment group.  The Company issued 400 shares of its Series A Convertible Stock, for $10,000 per share, with offering costs of approximately $460,000.  The Series A Convertible Stock was convertible into the Company's no par value common stock ("Common Stock") at the option of the holder beginning 90 days after the June 30, 1998 closing date.  The conversion price was the lesser of the fixed conversion price of $4.62 per share or a variable conversion price.  The Series A Convertible Stock also provided certain mandatory redemption rights which triggered upon the occurrence of certain events.  Attached to the Series A Convertible Stock were warrants to purchase 100,000 shares of Common Stock at $6.00 per share with a term of four years.  The Company believes that the sale of the Series A Convertible Stock was exempt from registration under the Securities Act by reason of Section 4(2) of the Securities Act.  The underlying Common Stock was registered with the Securities and Exchange Commission under a Registration Statement on Form S-3 effective August 13, 1998; however, upon delisting of the Company’s stock from the Nasdaq SmallCap Market on July 27, 1999, the Company became ineligible to file or maintain certain registration statements.  The net proceeds from this offering were used as working capital for the Company and to make direct or indirect payments to others.

On July 27, 1999, the Company’s Common Stock was delisted from trading on the Nasdaq SmallCap Market, but is currently traded on the Nasdaq OTC Bulletin Board.  The delisting was a triggering event under the Convertible Stock Purchase Agreement, and the preferred stockholders have converted all of the Series A Stock as of September 30, 2000.  During the year ended September 30, 2000, the preferred stockholders converted 225 shares of Series A Convertible Stock for 4,672,541 shares of Common Stock.  In addition, the preferred stockholders exercised a portion of the attached warrants for 66,667 shares of Common Stock during the year ended September 30, 2000.  The remaining warrants expired on June 30, 2002.

In March 2000, the Company issued 1,528,750 shares of its Common Stock for consideration of $1,223,000.  The shares of Common Stock issued in the private placement were restricted securities (Rule 144).  The transaction was exempt from registration pursuant to Section 4(1) of the Securities Act of 1933, as amended.  Proceeds of the private placement were used for working capital.

On August 13, 2001, the Company closed a private placement financing by entering into a Series A Preferred Stock Purchase Agreement with an investment group led by New Century Equity Holdings Corp. (“New Century”) (Nasdaq: NCEH), a Delaware corporation. The Company issued 2,635,000 shares of its Series A Preferred Stock (“Series A Preferred”) for $1.00 per share, with offering costs of approximately $171,000.  New Century participated in the financing through the purchase of 1,060,000 of the above shares of the Company’s Series A Preferred Stock.  The proceeds were utilized to continue product development and marketing efforts and to provide working capital for the Company’s operations.

On September 28, 2001, the Company issued 7,200 shares of Series A Preferred in lieu of cash for costs relating to the offering.

Each share of Series A Preferred is convertible into 33.334 shares of Common Stock.  The holders of the Series A Preferred will be entitled to a cumulative annual dividend of 15%, payable quarterly, which, at the option of New Century may be paid in cash or in additional shares of Series A Preferred.  

The Company recorded dividends of 831,190 shares valued at $408,646 and 53,229 shares valued at $53,229 of Series A Preferred Stock to the holders of the Company’s Series A Preferred Stock for the fiscal years ended September 30, 2002 and 2001, respectively.  Included in these amounts were dividends to New Century of 322,608 shares valued at $159,000 and 21,346 shares valued at $21,346 for the fiscal years ended September 30, 2002 and 2001, respectively.

The financing consisted of the issuance of 2,642,200 shares of the Company’s Series A Preferred Stock including the 7,200 shares for costs related to the offering (see Note 9 to the accompanying consolidated financial statements) and notes payable to the investors in the amount of $2,642,200 (see Note 7 to the accompanying consolidated financial statements).

The holders of the Series A Preferred will have a liquidation preference in the event of any liquidation, sale, merger or similar event, and have registration rights and other customary rights.  The Company has also issued a note payable to the Series A Preferred stockholders in the amount of $2,642,200 with repayments only to be made to the extent the Company’s cash flow meets certain levels.  In conjunction with the debt, the Company has granted a security interest in all of its assets to secure its obligation to make these payments subject to the security interest of the Company’s bank loan facility.  In addition, the Company has also agreed to issue additional shares of Series A Preferred equal to 50% of the then fully diluted Common Stock to the holders if the Company fails to repay the note, plus the mandatory dividends, by July 15, 2003.  The Compa ny has also agreed to issue, at up to six different times, additional shares of Series A Preferred to the investors equal to 25% of the then fully diluted Common Stock if the Company fails to meet any of certain financial targets, beginning with the quarter ended September 30, 2001 and December 31, 2001, and then for the four six-month periods ending June 30, 2002, December 31, 2002, June 30, 2003, and December 31, 2003.  On October 30, 2001, the Company issued 999,051 shares of Series A Preferred due to its failure to meet the financial targets for the quarter ended September 30, 2001 as set forth in the Series A Preferred Stock Purchase Agreement.  New Century received 400,794 of these shares of Series A Preferred.  On January 30, 2002, the Company issued 1,340,510 shares of Series A Preferred due to its failure to meet the December 31, 2001 financial targets, including 537,780 shares of Series A Preferred issued to New Century.  On July 31, 2002, the Company issued 1,693,696 shares of Series A Preferred due to its failure to meet the June 30, 2002 financial targets, including 657,091 shares of Series A Preferred issued to New Century.  The Company does not expect to meet the specified financial targets for the six months ending December 31, 2002.

The Company has also agreed to make payments to the holders of the Series A Preferred for the face amount of the notes payable, to the extent its cash flow meets certain levels, until the holders have been repaid $2,642,200.  The Company has also granted a security interest in all of its assets to secure its obligation to make these payments subject to the security interest of the Company’s bank loan facility. The notes do not bear interest prior to maturity, cannot be prepaid, and mature on July 13, 2003.  Repayment on the notes can only be made with payments calculated by multiplying the excess of the quarterly EBITDA over specified financial targets less quarterly capital expenditures over $300,000 by 50%.  These calculated payments are to be paid until the notes have been repaid in full. However, if the notes have not been repaid in full on or before July 15, 2 003, New Century may at its sole option require the Company to issue to the investors additional shares of Series A Preferred Stock equal to 50% of the then outstanding Common Stock, Preferred Stock, and any Common Stock equivalents on an as-if-converted and fully diluted basis.  Upon maturity, and until such time that New Century exercises the option described above, the notes shall accrue interest at 18% per annum.

The Company obtained an appraisal of the Series A Preferred and the notes payable at August 13, 2001, and allocated the proceeds of the financing to both instruments based on the valuation. The proceeds of $2,642,200 were allocated to the Series A Preferred and the notes payable in the amount of $2,465,200 and $177,000, respectively.

The beneficial conversion feature (discount) in the amount of $7,439,168, for the convertible preferred stock is limited to the proceeds allocated to the Series A Preferred in the amount of $2,465,000. Due to the Series A Preferred being immediately convertible, the $2,465,000 has been recorded as a dividend in the consolidated financial statements for the year ended September 30, 2001.

The $177,000 allocated to the notes payable to the Series A Preferred stockholders consists of the face value of $2,642,200 net of a discount on the debt of $2,465,200 to be amortized over the term of the note.  For the fiscal years ended September 30, 2002 and 2001, the Company charged $1,283,592 and $168,801 of the discount on the debt to interest expense, respectively.  At September 30, 2002, the note balance totals $1,607,006, net of discount.

The Series A Preferred shares vote together with the Company’s Common Stock on an as-if-converted basis and not as a separate class.  Each share of Series A Preferred has a number of votes equal to the number of Common Stock shares then issuable upon conversion of such shares of the Series A Preferred Stock.  Upon the closing of the Purchase Agreement, the Series A Preferred stockholders had 78% of the combined eligible voting power of the outstanding Common Stock and Series A Preferred.  As of September 30, 2002, the Series A Preferred stockholders controlled 91% of the voting power of all stockholders of the Company.  If none of the financial targets included in the Purchase Agreement are met and the Company fails to pay the note payable to the Series A Preferred stockholders’ by July 15, 2003, then, by December 31, 2003, the Series A Preferred stockhol ders could potentially control approximately 94% of the voting power of the Company, inclusive of all potentially dilutive options and warrants.

In connection with the transaction described above, New Century, by authority designated in the Purchase Agreement, has the right to maintain the majority of Board members.  As of September 30, 2002, New Century holds three of the Company’s five Board positions including the Chairman of the Board.  Currently, only four Board positions are filled, with three being held by New Century.  In accordance with the Purchase Agreement, New Century has the right to maintain the majority of Board positions in the event the Board is expanded beyond its current number of five members.

In February 2002, the Company issued 293,772 shares of its Series A Preferred to Parris H. Holmes, Jr., Chairman of the Board of New Century, for advisory services to the Tanisys Board of Directors for a three-year period beginning December 12, 2001 and ending December 12, 2004.  The Series A Preferred issued to Mr. Holmes has the same rights as those shares issued on August 13, 2001.  These shares will be earned by Mr. Holmes over the three-year period with one-third being earned on each annual anniversary date beginning on December 12, 2002.

In March 2002, the Company repurchased 121,856 shares of its Series A Preferred for $150,000 in accordance with a repurchase agreement with a certain investor.  The purchase amount is to be paid monthly through June 2003.

ITEM 6.

SELECTED FINANCIAL DATA

The selected consolidated financial data presented below are derived from the consolidated financial statements of the Company, which for the fiscal year ended September 30, 2002 have been audited by Burton, McCumber & Cortez, L.L.P., independent certified public accountants. The consolidated financial statements for the fiscal years ended September 30, 2001 and 2000, were audited by Brown, Graham and Company, P.C., independent certified public accountants.

On May 21, 1996, the Company acquired 1st Tech Corporation and DarkHorse Systems, Inc.  The acquisitions were accounted for using the purchase method, resulting in total goodwill of $7.2 million to be amortized over a two-year period.  The results of operations have been included in the consolidated financial statements since the acquisition date.  The selected consolidated financial data set forth below are qualified in their entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto in this Annual Report on Form 10-K.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

The following is a discussion of the consolidated financial condition and results of operations of the Company for the fiscal years ended September 30, 2002, 2001 and 2000.  It should be read in conjunction with the Consolidated Financial Statements of the Company, the notes thereto and other financial information included elsewhere in this report.  For purposes of the following discussion, references to year periods refer to the Company’s fiscal year ended September 30 and references to quarterly periods refer to the Company’s fiscal quarters ended December 31, March 31, June 30 and September 30. (See “Business – Forward-Looking Statements – Cautionary Statements” included in Part I, Item 1.)

The Company has operated under the Tanisys Technology name since 1994 and designs, manufactures and markets production level automated test equipment for a wide variety of semiconductor memory technologies.  The Company sells its products to semiconductor manufacturers, computer and electronics Original Equipment Manufacturers (“OEMs”) and independent memory module manufacturers.

Revenues have declined in both fiscal 2002 and 2001 during what the Company believes to be a severe cyclical downturn in the worldwide semiconductor industry.  There is uncertainly as to if and when the next cyclical growth phase will occur as well as the growth rate and length of such an upturn.

The Company’s operating results are affected by a number of factors that have caused in the past and, more likely than not, will cause significant fluctuations in revenues, gross margins, and operating results in the future.  These factors include the cyclicality in the semiconductor market, the timing of new product announcements and introductions by the Company and its competitors, the timing of significant customer orders, fluctuations in product costs, changes in product and customer mix, and general economic conditions.  Due to these and other potential factors, the historical results and percentage relationships discussed in this Annual Report on Form 10-K may not be indicative of the results of operations for any future period.

The Company markets its products using a direct sales organization throughout the world except for Asia where it markets through distribution partners.

The Company has historically sold its test systems primarily to customers that produce the memory technologies related to computers and electronics that utilize volatile memory, such as DRAM, SRAM, DDR and Rambus^Ò.  During fiscal 2002, the Company completed the development of and sold its first non-volatile Flash memory test system.  The Company expects its Flash memory test systems to be a significant portion of its revenues in fiscal 2003.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.  On an ongoing basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, warranty obligations, and contingencies.  Estimates are based on historical experience, current knowledge, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgme nts about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

Revenue from sales is recognized when persuasive evidence of an arrangement exists, such as a purchase order; the related products are shipped to the purchaser, typically freight on board shipping point or at the time the services are rendered; the price is fixed or determinable; and collectibility is reasonably assured.  The Company warrants products against defects, and accrues the cost of warranting these products as the items are shipped.  The only volume discounts given by the Company are those that are negotiated prior to future sales and for a predetermined fixed period of time.  Therefore, no estimated volume discounts are required to be accounted for in the Company’s financial statements.

Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of market value.  Inventory costs include direct materials and certain indirect manufacturing overhead expenses.  The Company’s policy concerning inventory impairment charges is to establish a new, reduced cost basis for the affected inventory that remains until the inventory is sold or disposed.  Only additional impairment charges could affect the cost basis.  If subsequent to the date of impairment it is determined that the impairment charges are recoverable, the Company does not increase the carrying costs of the affected inventory and corresponding income.

The Company evaluates the ability to collect its accounts receivable based on a combination of factors.  The Company records an allowance for doubtful accounts for all specific receivables that are judged to be unlikely for collection.  In addition, reserves for bad debts are recorded based on the size and age of all receivable balances against which specific reserves have not been established.  These estimated allowances are periodically reviewed and adjusted based on the customer’s payment history and information regarding the customer’s credit worthiness known to the Company.

Results of Operations

The following table sets forth certain consolidated financial data of the Company expressed as a percentage of net sales for the years ended September 30, 2002, 2001 and 2000:

Net Sales

Net sales consist of production-level automated test equipment along with related hardware and software, less returns and discounts. The worldwide semiconductor slowdown that occurred during the Company’s fiscal year ended September 30, 2002 impacted net sales resulting in a decrease of 50% to $2,618,903 for fiscal 2002 from $5,206,153 in fiscal 2001.  The Company’s customers depend upon current and anticipated market demand for semiconductors and products that utilize semiconductors.  The industry slowdown has resulted in significantly lower levels of capital expenditures for semiconductor equipment, such as the Company’s automated test equipment.  The Company does not believe that orders for its test systems were lost to competition, but instead have been delayed.  In the meantime, the Company continues to enhance and broaden its product line to su pport all memory technologies in order to deliver high quality, cost effective, high-speed test systems to its customers as the economy recovers.

Net sales for fiscal 2001 of $5,206,153 decreased 44% from $9,300,530 in fiscal 2000.  The slowdown in the general economy and, more specifically, the worldwide semiconductor industry began affecting the Company’s net sales in fiscal 2001.  Thus, the Company’s net sales fell significantly from fiscal 2000 to fiscal 2001.

Cost of Goods Sold and Gross Profit

Cost of goods sold includes the costs of all components and materials purchased for the manufacture of products, direct labor and related overhead costs.  In addition, the Company recorded a special charge to cost of goods sold of $520,367 in fiscal 2002 for the write-down of excess and obsolete inventories.  Gross profit for fiscal 2002 was $619,992 compared to $2,530,408 from the prior year.  As a percent of sales, gross profit was 24% in fiscal 2002, down from 49% in fiscal 2001.  The decreases in both dollars and percent of sales were due to the mix of products sold, lower sales volume in fiscal 2002 resulting in reduced absorption of fixed manufacturing costs, and the special charge for the write-down of excess and obsolete inventories.

In fiscal 2001, gross profit was $2,530,408 down from $6,122,056 in fiscal 2000.  Gross profit margin decreased in fiscal 2001 to 49% from 66% in fiscal 2000 as a result of the mix in products sold and lower sales volume in fiscal 2001 resulting in reduced absorption of fixed manufacturing costs.

The Company’s policy concerning inventory impairment charges is to establish a new, reduced cost basis for the affected inventory that remains until the inventory is sold or disposed.  If subsequent to the date of impairment it is determined that the impairment charges are recoverable, the Company does not increase the carrying amounts of the affected inventory.

Research and Development

Research and development expenses, which include all costs associated with the engineering design and testing of new technologies and products, totaled $1,506,138 in fiscal 2002, down 38% from the prior year’s $2,425,061.  The decline in development costs results from a decrease in new product development initiatives as well as a reduction in workforce due to reduced customer demands and the slowdown in the economy.  Costs are expected to decrease slightly in absolute dollars and decrease as a percent of sales as net sales increase.

Research and development expenses increased 21% to $2,425,061 in fiscal 2001 from $2,005,052 in fiscal 2000. The higher costs reflect the ongoing development of test systems for both DDR and Flash memory technologies, enhancement of a distributed-networking architecture that can be applied to all memory technologies and continuing efforts to broaden product lines and capabilities.

Sales and Marketing

Sales and marketing expenses include compensation of sales and marketing employees and independent sales personnel, as well as the costs of advertising, promotions, trade shows, travel, direct support and related overhead.  Expenses of  $1,013,495 in fiscal 2002 were down 23% from $1,324,401 in fiscal 2001.  Expenses were reduced because of actual and anticipated lower sales volume resulting from the slowdown in the worldwide semiconductor industry.  The Company continues to market its test systems to the world’s largest semiconductor and memory module manufacturers.  Sales and marketing expenses are expected to increase in terms of dollars, but decrease as a percent of sales in future periods as net sales increase.

In fiscal year 2001, sales and marketing expenses decreased 4% to $1,324,401 from fiscal 2000 $1,374,386.  Sales and marketing expenses were lower due to the decrease in sales volume.  

General and Administrative

General and administrative expenses consist primarily of personnel costs, including employee compensation and benefits, and support costs including utilities, insurance, professional fees and all costs associated with a reporting company.  In fiscal year 2002, general and administrative expenses decreased to $497,391 from $706,716, a 30% decrease.  The decrease is the result of cost saving measures taken including personnel reductions.  Expenses are expected to decrease in both absolute dollars and as a percent of sales as net sales increase.

In fiscal year 2001, general and administrative expenses decreased to $706,716 from $776,684 in fiscal 2000, a 9% decrease.  The decrease was due to various cost saving efforts including personnel reductions.

Depreciation and Amortization

Depreciation and amortization includes the depreciation for all fixed assets, exclusive of those used in the manufacturing process and included as part of “Cost of Goods Sold,” and the amortization of intangibles, including patents related to memory module test systems technology.  Depreciation and amortization decreased to $128,646 in fiscal 2002 from $145,259 in fiscal 2001, due to the decline of the remaining asset balances. Depreciation and amortization is expected to remain relatively flat in terms of absolute dollars and decrease as a percentage of sales as net sales increase.

Depreciation and amortization increased to $145,259 in fiscal 2001 from $62,099 in fiscal 2000. The increase reflects investment in new software and hardware tools designed to maximize the efficiency of engineering and research.

Bad Debt Expense

Bad debt expense consists of amounts charged to expense because of trade accounts receivable becoming uncollectible.  The Company’s method of accounting for bad debts is to use historical actual expenses to estimate the amount of current sales that may be uncollectible and to provide for them by creating an allowance that is netted against the trade accounts receivable. The Company writes off amounts related to specific accounts as the collection of these accounts becomes questionable. The Company recorded no bad debt expense in fiscal 2002  compared to $18,930 for fiscal 2001 and $14,292 for fiscal year 2000.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income less interest expense, plus other miscellaneous income and expenses including interest expense resulting from the amortization of debt discount related to the note payable to the Series A Preferred stockholders.  Interest expense of $47,187, $86,336, and $248,355 was attributable to borrowings from a revolving credit note made to fund short-term inventory requirements and accounts receivable and interest resulting from capital leases for fiscal years 2002, 2001, and 2000, respectively.  Interest expense of $1,283,592, $168,801 and $0 resulted from the amortization of the discount related to the note payable to the Series A Preferred stockholders for fiscal years 2002, 2001, and 2000, respectively.  Interest income relates to the investment of available cash in short-term interest bearing accounts and cash equivalent securities and totaled $4,911, $25,373 and $27,698 for fiscal years 2002, 2001, and 2000, respectively.  Total other income (expense) increased to $1,243,291 of expense in fiscal 2002 from $271,036 of expense in fiscal 2001.  For fiscal 2002, other income (expense) also included $22,992 of property and state tax expense, $15,586 of gain from the sale of assets, $92,497 of miscellaneous income, and $2,514 of miscellaneous expenses.

The non-recurring miscellaneous income for the year ended September 30, 2000 included $166,582 of income from the forgiveness of debt by some of the Company’s vendors.  In addition, the Company also had $280,000 of non-recurring miscellaneous income which included $100,000 from reserves for accounts receivable and $180,000 from reserves for inventory that were deemed excessive after analytical and reasonableness reviews.  These reserves were initially established due to the uncertainty in the collection of receivables and the inventory mix in anticipation of customer response to the sale of the memory module manufacturing business disclosed in the financial statements as discontinued operations.

At the date of the sale of the memory module manufacturing business in December 1999, the Company had accounts receivable from certain customers related to both the continuing and discontinued operations.  The Company had some concerns as to whether or not some of these customers would pay for the continuing operations accounts receivable due to the Company’s concern about the realization of assets and the “going concern” opinion issued by the independent auditor.  In addition, some of the receivables were aging beyond reasonable terms.  The result was that an accounting estimate was made to reflect these potential collection issues.  

By the end of the Company’s fiscal year ended September 30, 2000, the potential collection issues had all been resolved resulting in excess reserves for accounts receivable based on historical bad debt analysis and information available at the time relating to the ability to collect the receivables. The Company first applied the reversal of these reserves to bad debt expense.  However, the reserve exceeded bad debt expense and, therefore, the excess was recorded as miscellaneous income.  The Company estimates bad debt expense as a percentage-of-sales, adjusted based on historical analyses of actual bad debts incurred.  In addition, current economic conditions are considered.

After the sale of the memory module manufacturing business, inventory remained that had been utilized in both the continuing and discontinued operations.  While the inventory items had not been impaired as of the date of the sale of the discontinued operations, the Company did not know if it could utilize all of the inventory before it became obsolete.  Therefore, the Company made an estimate based on the best information available at the time as to the potential exposure due to excess inventory.  Accordingly, an inventory reserve was established to account for this estimate.  By the end of the fiscal year ended September 30, 2000, the Company was able to successfully utilize almost all of the inventory in products that were sold and reduced the cost basis of impaired inventory items by charging the impairment costs to the inventory reserve.  The remaining exc ess inventory reserve was then recorded as miscellaneous income.

Provision for Income Taxes

For the years ended September 30, 2002 and 2001, the Company incurred consolidated net operating losses for U.S. income tax purposes of approximately $2,076,000 and $2,302,000 and for non-U.S. income tax purposes of approximately $0 and $426,000, respectively.  At September 30, 2002 and 2001, the Company had temporary differences resulting in future taxable (income) deductions of approximately $369,000 and ($40,000), respectively, principally representing differences in accounting and tax basis in accrued liabilities, reserves, depreciation and anticipated loss from discontinued operations.

At September 30, 2002, the Company had net operating loss carry-forwards totaling approximately $6,000,000.  Due to the limitations provided for in Section 382 of the Internal Revenue Code of 1986, as amended (Code), and as a result of the sale of the Series A Preferred Stock on August 13, 2001, utilization of the net operating loss carry-forwards existing at that date (approximately $25,750,000) is limited to approximately $200,000 per year through 2021.  The balance of the net operating loss carry-forward (approximately $2,200,000) may be used to reduce taxable income in any future year through 2022.  Deferred income tax assets from the net operating loss carry-forwards and asset basis differences totaled approximately $2,100,000 and $1,400,000 at September 30, 2002 and 2001, respectively, and a valuation allowance has been established in those amounts.

Management believes that a valuation allowance is appropriate because of the uncertainty that sufficient taxable income will be generated by the Company in future taxable years to absorb the entire amount of such net operating losses.

As mentioned above, the availability of the net operating loss carry-forwards and future tax deductions to reduce taxable income is subject to various limitations under the Code, in the event of a further ownership change.  This section states that after reorganization or other change in corporate ownership, the use of certain carry-forwards may be limited or prohibited.

Contractual Obligations and Commercial Commitments

The following is a summary of the Company’s estimated minimum contractual obligations and commercial commitments as of September 30, 2002:

Liquidity and Capital Resources

Since inception the Company has utilized the funds acquired in equity financings of its Common Stock, preferred stock, exercise of warrants, exercise of stock options, vendor credits, certain bank borrowings and funds generated from operations to support its operations, carry on research and development activities, acquire capital equipment, finance inventories and accounts receivable and pay its general and administrative expenses. For fiscal 2002, the Company generated net cash from financing activities of $111,236 versus generating net cash from financing activities of $1,820,885 in fiscal 2001. The decrease of $1,709,649 resulted because no significant equity or credit financing occurred in fiscal 2002 while the Company received proceeds from Series A Preferred Stock sales of $2,353,000 in fiscal 2001.  At September 30, 2002, the Company had $146,698 of cash and negative working capital of $2,068,794.

Operating activities used $1,106,496 of cash in fiscal 2002 primarily due to the Company’s net loss, partially offset by cash provided by a decline in accounts receivable of $146,593, a decline in inventory of $586,062, a decline in prepaid expenses of $50,293, and an increase in accounts payable and accrued liabilities of $314,864.  The Company’s net loss for fiscal 2002 includes $1,283,592 of non-cash interest expense resulting from the amortization of the debt discount related to the note payable to the stockholders of the Company’s Series A Preferred Stock.  For fiscal 2001, operating activities used $1,298,412 in cash while operating activities in fiscal 2000 generated $2,780,393 in cash.

Net cash provided by investing activities in fiscal 2002 was $24,215 resulting from the sale of excess equipment.  Net cash used in fiscal 2001 and 2000 was $188,441 and $167,584, respectively, primarily due to the acquisition of capital equipment.  These capital expenditures were primarily for the purchase of test equipment, expansion of engineering facilities and upgrades to enterprise information systems.

The Company used $252,245, $565,821, and $1,654,694 of cash in fiscal years 2002, 2001, and 2000, respectively, to reduce the liabilities from discontinued operations created by the Company’s exit from its memory module manufacturing business in December 1999.

As of September 30, 2002, the Company had a bank line of credit of $2,500,000 which expires on March 22, 2003, at which time the Company believes the credit facility will be renewed.  At September 30, 2002, there was $2,348,373 of unused credit with this bank credit facility.

On August 13, 2001, the Company closed a private placement financing by entering into a Series A Preferred Stock Purchase Agreement with an investment group led by New Century Equity Holdings Corp. (“New Century”) (Nasdaq: NCEH), a Delaware corporation. The Company issued 2,635,000 shares of its Series A Preferred Stock (“Series A Preferred”) for $1.00 per share, with offering costs of approximately $171,000.  As part of the issuance of the Series A Preferred Stock, the Company issued a note payable of $2,642,200 to the Series A Preferred stockholders.  New Century participated in the financing through the purchase of 1,060,000 of the above shares of the Company’s Series A Preferred Stock.  The proceeds were utilized to continue product development and marketing efforts and to provide working capital for the Company’s oper ations.

In March 2000, the Company issued 1,528,750 shares of its Common Stock in a private placement for consideration of $1,223,000.  The shares of Common Stock issued in the private placement were restricted securities.  The transaction was exempt from registration pursuant to Section 4(1) of the Securities Act of 1933, as amended.  Proceeds of the private placement were used for working capital.

On November 2, 1998, the Company completed a private placement of $2,000,000 of debt with warrants.  During the fiscal year ended September 30, 2000, the holders of the debt elected to convert all of the debt into 4,000,000 shares of the Company’s Common Stock pursuant to an offer made by the Company.  Interest was accrued on the notes through January 31, 2000, and the Company issued 168,950 shares of the Company’s Common Stock during the fiscal year ended September 30, 2000, for interest totaling $119,444.

It is uncertain as to whether or not the Company’s existing funds, anticipated cash flows from operations, amounts available from future vendor credits, bank borrowings, capital and operating leases and equity financings will be sufficient to meet its working capital and capital expenditure needs for the next twelve months at the projected level of operations.  There is no assurance that the Company would be able to obtain debt funding or that it would be successful in its attempts to raise a sufficient amount of funds in an equity offering or offerings. The Company’s potential inability to raise needed funds to meet its projected level of operations could have a material adverse effect on the Company’s business, financial condition and results of operations.

International Sales

International sales accounted for 27.0%, 44.0% and 44.6% of net sales in fiscal 2002, 2001, and 2000 respectively. The Company is subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the U.S. or other countries. Because sales of the Company's products have been denominated to date in U.S. dollars, increases in the value of the U.S. dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Some of the Company's customer purchase orders and agreements are governed by foreign laws, which may differ significantly from U.S. laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations.

Significant Customer Concentration          

In North America and Europe a majority of the Company’s memory module test systems are sold directly to semiconductor and independent memory module manufacturers.  In Asia, the Company also sells its test systems through distribution partners and independent sales representative organizations.  In fiscal 2002 and 2001, the Company’s ten largest customers accounted for 83.0% and 90.7% of net memory module test system sales, respectively.  The single largest customer in each of 2002, 2001, and 2000 accounted for 21.5%, 26.2%, and 23.9% of total test system sales, respectively.

The Company, in general, has no firm long-term volume commitments from its customers and generally enters into individual purchase orders and agreements with non-binding forecasts. Customer purchase orders and forecasts are subject to change, cancellation or delay with little or no consequence to the customer. The replacement of canceled, delayed or reduced purchase orders with new business cannot be assured. The Company's business, financial condition and results of operations will depend significantly on its ability to obtain purchase orders from existing and new customers, upon the financial condition and success of its customers, the success of customers’ products and the general economy. Factors affecting the industries of the Company's major customers could have a material adverse effect on the Company's business, financial condition and results of operations.

No Assurance of Product Quality, Performance and Reliability

The Company expects that its customers will continue to establish demanding specifications for quality, performance, reliability and delivery.  To date, the Company has not experienced any significant quality problems that have affected its results of operations, and any known quality problems have been or are in the process of being remedied. There can be no assurance that the problems will not occur in the future with respect to quality, performance, reliability and delivery of the Company's products. If such problems occur, the Company could experience increased costs, delays in or cancellations or rescheduling of orders or shipments, delays in collecting accounts receivable and increases in product returns and discounts, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.

Product Concentration; Dependence on Memory Market

The market for semiconductor memory has been cyclical. As evidenced during the Company’s fiscal years 2002 and 2001, the industry has experienced significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity.  Since the Company’s test systems are sold into the semiconductor and memory module market, future price changes in memory products could have a material adverse effect on the Company's business, financial condition and results of operations.

Fluctuations in Operating Results

The Company's results of operations and gross margin have fluctuated significantly from period to period in the past and may in the future continue to fluctuate significantly from period to period. The primary factors that have affected and may in the future affect the Company's results of operations include the loss of a principal customer or customers or the reduction in orders from a customer. Other factors that may affect the Company's results of operations in the future include fluctuating market demand for and changes in the selling prices of the Company's products, market acceptance of new products and enhanced versions of the Company's products, delays in the introduction of new products and enhancements to existing products, and manufacturing inefficiencies associated with the startup of new product introductions. In addition, the Company's operating results may be affected b y the timing of new product announcements and releases by the Company or its competitors; the timing of significant orders; the ability to produce products in volume; delays, cancellations or rescheduling of orders due to customer financial difficulties or other events; inventory obsolescence, including the reduction in value of the Company's inventories due to unexpected price declines and unexpected product returns; the timing of expenditures in anticipation of increased sales; cyclicality in the Company's targeted markets; and expenses associated with acquisitions.

Sales of the Company's individual products and product lines toward the end of a product's life cycle typically are characterized by steep declines in sales, pricing and gross margin, the precise timing of which may be difficult to predict. The Company could experience unexpected reductions in sales of products as customers anticipate new product purchases. In addition, to the extent that the Company manufactures products in anticipation of future demand that does not materialize, or in the event a customer cancels outstanding orders during a period of either declining product selling prices or decreasing demand, the Company could experience an unanticipated decrease in sales of products. These factors could give rise to charges for obsolete or excess inventory, return of products or discounts.  In the past, the Company has had to write-down and write-off excess or obsolete inven tory. To the extent that the Company is unsuccessful in managing product transitions, its business, financial condition and results of operations could be materially and adversely affected.

The need for continued significant expenditures for research and development and ongoing customer service and support, among other factors, will make it difficult for the Company to reduce its operating expenses in any particular period even if the Company's expectations for net sales for that period are met. The Company believes that period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as indications of future performance.

Dependence on Semiconductor, Computer, Telecommunications and Networking Industries

Demand for the Company’s line of memory module test systems is driven by the increased demand for higher level memory module technology in semiconductor, computer, telecommunications and networking industries. The Company may experience substantial period-to-period fluctuations in future operating results due to factors affecting the semiconductor, computer, telecommunications and networking industries. From time to time, each of these industries has experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions. A decline or significant shortfall in growth in any one of these industries could have a material adverse impact on the demand for the Company's products and therefore a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Com pany's net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the semiconductor, computer, telecommunications, networking or other industries utilizing the Company's products.

Realization of Assets

The Company has continued to generate operating losses throughout fiscal 2001 and 2002, as well as having a history of losses prior to fiscal 2000.  At September 30, 2002, the Company had a negative working capital of $2,068,794 and negative equity of $1,842,418.  The Company is also in default with the payment terms of many of its suppliers.  In addition, the Company has no access to additional working capital, all of its assets are pledged, and it has received a “going concern” opinion from its independent auditors for both fiscal years ended September 30, 2002 and 2001.  Therefore, there can be no assurances that the Company can continue its operations in the future.

Future Additional Capital Requirements; No Assurance Future Capital will be Available

The Company's capital requirements will depend on numerous factors, including market acceptance and demand for its products; the resources the Company devotes to the development, manufacture and marketing of its products; the progress of the Company's product development programs; the resources required to protect the Company's intellectual property; the resources expended, if any, to acquire complementary businesses, products and technologies; and other factors.  The timing and amount of such capital requirements cannot be accurately predicted.  Consequently, the Company may be required to raise additional funds through public or private financing, collaborative relationships or other arrangements.  There can be no assurance that the Company will not require additional funding or that such additional funding, if needed, will be available on terms attractive to the Comp any or at all.  Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Such adjustments may be dilutive to stockholders and may inhibit the Company’s ability to consummate additional equity financing.

Management of Growth; Expansion of Operations

In order to continue to provide quality products and customer service and to meet anticipated demands of its customers, the Company will be required to continue to increase staffing and other expenses, including expenditures on research and development, sales and marketing. Should the Company increase its expenditures in anticipation of a future level of sales that does not materialize, the Company's business, financial condition and results of operations would be materially and adversely affected. In order to achieve anticipated sales levels and profitability, the Company will continue to strive to manage its assets and operations efficiently.

Rapid Technological Change

The semiconductor, computer, telecommunications and networking industries are subject to rapid technological change, short product life cycles, frequent new product introductions and enhancements, changes in end-user requirements and evolving industry standards. The Company's ability to be competitive in these markets will depend in significant part upon its ability to invest significant amounts of resources for research and development efforts, to successfully develop, introduce and sell new products and enhancements on a timely and cost-effective basis and to respond to changing customer requirements that meet evolving industry standards. For example, the semiconductor memory market transitioned from Fast Page mode and EDO memory to SDRAM over a two to three-year period.  Other transitions from SDRAM to Rambusâ and DDR SDRAM continued to occur in 2002 and will continue int o 2003. The success of the Company in developing new and enhanced products will depend upon a variety of factors, including integration of the various elements of its complex technology; timely and efficient completion of product design; timely and efficient implementation of manufacturing, assembly and test processes; and product performance, quality and reliability. The Company has experienced, and may in the future experience, delays from time to time in the development and introduction of new products. Moreover, there can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancements. There can be no assurance that defects or errors will not be found in the Company's products after commencement of commercial shipments, which could result in delayed market acceptance of such products. The inability of the Company to introduce new products or enhancements that contribute to sales could have a material adverse effect on the Company's bu siness, financial condition and results of operations.

Dependence on Sole or Limited Sources of Supply

The Company’s operations utilize a wide variety of semiconductors, electromechanical components and assemblies, and other raw materials such as sheet metal.  The Company believes that the materials and supplies necessary for the manufacture and assembly of its products are presently available in the quantities required.  The materials, supplies and product subassemblies are purchased from a substantial number of vendors.  For a number of its products, the Company has existing alternate sources of supply, or such sources are readily available.  Portions of the Company’s manufacturing and assembly operations are dependent upon the ability of suppliers to deliver quality components and subassemblies in time to meet manufacturing, assembly, and distribution schedules.  The failure of suppliers to deliver in a timely manner may adversely affect the Compan y’s operating results until alternative sources are developed.  In addition, the Company periodically experiences constrained supply of certain component parts in some product lines as a result of strong demand in the industry for those parts.  If such constraints persist for a period of time, they may adversely affect the Company’s results of operations.  However, the Company believes that alternate suppliers could be arranged within a reasonable time so that material long-term adverse impacts would be minimized.  The Company generally has no written agreements with its suppliers. Therefore, there can be no assurance that the Company will receive adequate component supplies on a timely basis in the future. The inability to continue to obtain sufficient supplies of components as required, or to develop alternative sources if required, could cause delays, disruptions or reductions in product shipments or require product redesigns which could damage relationships with current or p rospective customers, could increase costs and/or prices and could have a material adverse effect on the Company's business, financial condition and results of operations.

Dependence on Key Personnel

The Company's future operating results depend in a significant part upon the continued contributions of its key technical and senior management personnel, many of whom may be difficult to replace. The Company's future operating results also depend in significant part upon its ability to attract, train and retain qualified management, manufacturing and quality assurance, engineering, marketing, sales and support personnel. However, competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, training or retaining such personnel now or in the future. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for the Company to hire such persons over time. The loss of any key employee, the failure of any key employee to perform in his or her curren t position, the Company's inability to attract, train and retain skilled employees as needed or the inability of the officers and key employees of the Company to expand, train and manage the Company's employee base could materially and adversely affect the Company's business, financial condition and results of operations.

Dependence on Availability, Recruitment and Retention of Technical Personnel

The Company depends upon its ability to attract, hire and retain technical personnel who possess the skills and experience necessary to meet the Company’s own personnel needs and the technical requirements of its clients.  Competition for individuals with proven technical skills remains strong, although it has become less intense over the last year.  The computer industry has historically experienced a high rate of attrition of such personnel.  The Company competes for such individuals with competitors, providers of outsourcing services, temporary personnel agencies, computer systems consultants, customers and potential customers. Failure to attract and retain sufficient technical personnel would have a material adverse effect on the Company’s business, operating results and financial condition.

Limited Operating History

Although the Company has been in existence since 1984, its current operations have been in place only since its acquisition of DarkHorse in 1996.  Accordingly, the Company is still in many respects subject to certain risks and uncertainties inherent in a new enterprise, including limited capital and other resources, reliance on key personnel, operating in a highly competitive environment, inability to develop long-term relationships with its customers, suppliers and lenders, lack of name recognition, higher overhead costs, and difficulty in addressing unanticipated problems, delays and expenses.

Uncertainty Regarding Protection of Proprietary Rights

In the semiconductor, computer, telecommunications and networking industries, it is typical for companies to receive notices from time to time alleging infringement of patents, copyrights or other intellectual property rights of others. While there is currently no pending intellectual property litigation involving the Company, the Company may from time to time be notified of claims that it may be infringing patents, copyrights or other intellectual property rights owned by third parties. There can be no assurance that third parties will not in the future pursue claims against the Company with respect to the alleged infringement of patents, copyrights or other intellectual property rights. In addition, litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against third party claims of invalidity. Any litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations.

There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future. The failure to obtain a license under a patent or intellectual property right from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of the products utilizing the intellectual property. In addition, should the Company decide to litigate such claims, such litigation could be extremely expensive and time consuming and could materially and adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of the litigation.

The Company attempts to protect its intellectual property rights through a variety of measures, including non-disclosure agreements, trademarks, trade secrets, patents and copyrights. There can be no assurance, however, that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise, that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that the Company can otherwise meaningfully protect its intellectual property rights.

Effects of Delisting from Nasdaq SmallCap Market; Lack of Liquidity of Low Priced Stocks

In July 1999, the Company’s stock was delisted from trading on the Nasdaq SmallCap Market, and on July 28, 1999, the Company’s stock began trading on the Nasdaq OTC Bulletin Board, which was established for securities that do not meet the Nasdaq SmallCap Market’s listing requirements.  Consequently, buying or selling the Company’s Common Stock could be more difficult because of the smaller quantities of shares that could be bought and sold, transactions could be delayed, and security analysts’ and news media’s coverage of the Company stock could be reduced.  These factors could result in lower prices and larger spreads in the bid and ask prices for shares of the Company’s Common Stock.

In addition to delisting, trading in the Common Stock also is subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended, which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a penny stock.  Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors (which are generally institutions).  For these types of transactions, the broker-dealer must make a special suitability determination for the purchase and have received the purchaser's written consent to the transaction prior to the sale.  The additional bu rdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market liquidity of the Common Stock and the ability of stockholders to sell their shares of Common Stock in the secondary market.

Environmental Regulation

The Company's operations and manufacturing processes are subject to certain federal, state, local and foreign environmental protection laws and regulations. Public attention has increasingly been focused on the environmental impact of manufacturing operations that use hazardous materials or generate hazardous wastes, and environmental laws and regulations may become more stringent over time. There can be no assurance that failure to comply with either present or future regulations, or to obtain all necessary permits required under such regulations, would not subject the Company to significant compliance expenses, production suspensions or delay, restrictions on expansion at its present or future locations, the acquisition of costly equipment or other liabilities.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments.

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ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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TANISYS TECHNOLOGY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Burton, McCumber & Cortez, L.L.P., Independent Auditors………………………………..

 32      

Report of Brown, Graham and Company, P.C., Independent Auditors………………………….……..

 33

Consolidated Balance Sheets at September 30, 2002 and 2001.....................…………………………..

 34

Consolidated Statements of Operations for the Years Ended September 30, 2002,

2001 and 2000………………………………………………………………..…...….........……

 35

Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended

September 30, 2002, 2001 and 2000…………………………………………………….……..

 36

Consolidated Statements of Cash Flows for the Years Ended September 30,

2002, 2001 and 2000………………………………………………………………..…......……

 37

Notes to the Consolidated Financial Statements.………………………………………………….……..

 38

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors

Tanisys Technology, Inc.

We have audited the accompanying consolidated balance sheet of Tanisys Technology, Inc. (a Wyoming corporation) and Subsidiaries as of September 30, 2002, and the related consolidated statements of operations, Stockholders' equity, and cash flows for the year then ended.  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 audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  Those standards 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.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tanisys Technology, Inc. and Subsidiaries as of September 30, 2002, and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We have also audited Schedule II of the Company for the year ended September 30, 2002.  In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in note 1 to the consolidated financial statements, conditions exist which raise substantial doubt about the Company's ability to continue as a going concern including 1) the Company has incurred substantial losses in 2002 and 2001, has a history of losses, and has a deficit in stockholders’ equity and in working capital, 2) significantly all of the Company’s assets are pledged as collateral on existing debt and preferred stock.  Management's plans in regard to these matters are also described in note 1.  The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary shoul d the Company be unable to continue in existence.

/s/ BURTON McCUMBER & CORTEZ, L.L.P.

Brownsville, Texas

November 22, 2002

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Tanisys Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Tanisys Technology, Inc. (a Wyoming corporation), and subsidiaries as of September 30, 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended September 30, 2001 and 2000.  The consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tanisys Technology, Inc., and subsidiaries as of September 30, 2001, and the results of their operations and their cash flows for the years ended September 30, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole.  Schedule II is presented for the purpose of additional analysis and is not a required part of the basic financial statements.  Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As shown in the financial statements, the Company has incurred net losses of $2,360,995 for the year ended September 30, 2001. This factor, and others discussed in Note 1, raise substantial doubt about Tanisys Technology, Inc.’s ability to continue as a going concern.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence

/s/ Brown, Graham and Company P.C.

Austin, Texas

October 30, 2001

#

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

#

#

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

#

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2002, 2001 and 2000

1.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The Company was incorporated under the laws of the State of Wyoming in 1993.  The principal business activity of the Company is to design, manufacture and market production level automated test equipment for a wide variety of semiconductor memory technologies, including Dynamic Random Access Memory (“DRAM”), Synchronous Dynamic Random Access Memory (“SDRAM”), Double Data Rate Synchronous DRAM (“DDR”), Rambus DRAM (“RDRAM®”) and Flash Memory. Operating under the Tanisys Technology name since 1994, the Company has developed into an independent manufacturer of memory test systems for standard and custom semiconductor memory.  These systems are used at semiconductor manufacturers, computer and electronics Original Equipment Manufacturers (“OEMs”) and independent memory module manufacturers. The Company markets a line of memo ry test systems under the DarkHorse® Systems brand name.  The Company's customer base covers a number of worldwide markets including semiconductor manufacturers, memory module manufacturers, computing systems OEMs and contract manufacturing companies.

Basis of Presentation

The consolidated financial statements include the accounts of Tanisys Technology, Inc. (“Tanisys”) and its wholly owned subsidiaries, 1st Tech Corporation (“1st Tech”), DarkHorse Systems, Inc. (“DarkHorse”), Rosetta Marketing and Sales Inc., and Tanisys (Europe) Ltd., which was located in Scotland (collectively, the “Company”). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  All significant intercompany balances and transactions have been eliminated in consolidation.  

The Company designs, manufactures and markets production level automated test equipment for a wide variety of memory technologies.

On December 9, 1999, the Company sold its memory module manufacturing business, including all of the common stock of Tanisys (Europe) Ltd.  The assets and liabilities and the loss from the sale of the memory module manufacturing business have been included in the accompanying consolidated financial statements as discontinued operations. (See Note 2 for discussion of discontinued operations)

Realization of Assets

The Company has continued to generate operating losses throughout fiscal 2001 and 2002, as well as having a history of losses prior to fiscal 2000.  At September 30, 2002, the Company had a negative working capital of $2,068,794 and negative equity of $1,842,418.  The Company is also in default with the payment terms of many of its suppliers.  In addition, the Company has no access to additional working capital, all of its assets are pledged, and it has received a “going concern” opinion from its independent auditors for both fiscal years ended September 30, 2002 and 2001.  Therefore, there can be no assurances that the Company can continue its operations in the future.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be classified as cash equivalents.  Cash equivalents are carried at cost, which approximates market value.  The Company places its cash investments in high credit quality instruments.  

Inventory

Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of market value.  Inventory costs include direct materials and certain indirect manufacturing overhead expenses.  

The Company’s policy concerning inventory write-down charges is to establish a new, reduced cost basis for the affected inventory that remains until the inventory is sold or disposed.  Only additional impairment charges could affect the cost basis.  If subsequent to the date of impairment it is determined that the impairment charges are recoverable, the Company does not increase the carrying costs of the affected inventory and corresponding income.

Due to the dramatic decline in the semiconductor business cycle and impact on revenue since early 2001, and continued uncertainty of future sales volumes, the Company continues to monitor its inventory levels in light of product development changes and future sales forecasts.  As a result, the Company recorded a special charge to cost of goods sold of $520,367 in fiscal 2002 for the write-down of excess and obsolete inventories.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation is calculated using the straight-line method over the estimated useful lives, which range from three to seven years.  Leasehold improvements and assets subject to capital leases are amortized using the straight-line method over the shorter of the term of the lease or life of the asset.  Maintenance and repairs are expensed as incurred.

Foreign Currency Translation

The Company uses the U.S. dollar as its functional currency.  All revenue is invoiced and received in U.S. dollars.  On infrequent occasions, the Company may choose to pay immaterial amounts to suppliers in a foreign currency.

Revenue Recognition

Revenue from sales is recognized when persuasive evidence of an arrangement exists, such as a purchase order; the related products are shipped to the purchaser, typically freight on board shipping point or at the time

the services are rendered; the price is fixed or determinable; and collectibility is reasonably assured.  The Company warrants products against defects, and accrues the cost of warranting these products as the items are shipped. The Company generally warrants its products against defects for a period of one year to all of its customers, including its distribution partners.  In the past, product warranty costs have not been material.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

The Company sells its test systems directly to customers through its internal sales organization and through distribution partners in Asia.  The Company has entered into agreements with these distribution partners whereby they may purchase the Company’s test systems at a discount and resell the test systems to their customers. As part of the agreement, the distribution partners provide technical support to their customers.

The Company recognizes revenue from engineering services and maintenance and support agreements as the services are performed.  Revenue from engineering services is recognized as the services are performed.  Maintenance and support agreements are typically for a set period of time and revenue is recognized ratably over the duration of the contracts.  Unearned revenue for engineering services and maintenance and support agreements are classified as accrued liabilities in the accompanying consolidated balance sheets.

Sales to distribution partners are recognized as revenue by the Company upon the shipment of products because the distribution partners, like the Company’s other customers, have issued purchase orders with fixed pricing and are obligated for payment to the Company.

Sales contracts with the Company’s customers do not typically include formal acceptance provisions or installation obligations.  At a customer’s request, the Company will provide an evaluation unit for the customer to qualify the test system as to the customer’s performance standards.  The Company does not recognize revenue on these evaluation units.  Once a customer completes its evaluation of the Company’s test system, the customer may return or purchase the test system.  If the customer purchases the test system, the Company recognizes the revenue upon receipt of the customer’s purchase order.

The only volume discounts given by the Company are those that are negotiated prior to future sales and for a predetermined fixed period of time.  Therefore, no estimated volume discounts are required to be accounted for in the Company’s financial statements.

Research and Development

Research and development expenses relate primarily to the technological development and enhancement of the Company’s products.  Research and development costs are charged to expense as incurred.

Advertising

Advertising costs are expensed as incurred and amounted to $35,677 in fiscal 2002, $19,177 in fiscal 2001, and $21,037 in fiscal 2000.

Stock Options, Warrants and Stock Issues

SFAS 123, “Accounting for Stock-Based Compensation,” establishes financial accounting and reporting standards for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from non-employees.  Under the guidance provided by SFAS 123, the Company has elected to continue to account for employee stock-based compensation using the intrinsic value method prescribed in APB 25, “Accounting for Stock Issued to Employees,” and related Interpretations.

Common Stock has been issued in the past in lieu of cash payments for services provided to the Company in an effort to conserve cash.  When issued as payment for services, the Common Stock is issued at the equivalent of fair market value.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

Earnings (Loss) Per Common Share

Earnings (loss) per common share is computed on the weighted average number of shares outstanding in accordance with SFAS 128, “Earnings Per Share.”  During periods in which the Company incurs losses, giving effect to common stock equivalents is not presented as it would be anti-dilutive.

Amortization of Discount

Amortization of beneficial conversion feature (“discount”) of convertible preferred stock (“stock”) is recognized and measured at the purchase date of the preferred stock.  The amount is calculated as the difference between the conversion price and the fair value of the common stock into which the preferred stock is convertible, multiplied by the number of shares into which the preferred stock is convertible (“intrinsic value”).  The intrinsic value of the beneficial conversion feature is limited to the proceeds received from the sale of the stock.  The discount assigned to the convertible preferred stock is amortized over the period to the securities’ earliest conversion date and charged to retained earnings as a dividend.

Amortization of Advisory Services Contract

The cost associated with the contract with an individual to provide advisory services for a period of three years is being amortized over the life of the contract.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (“FASB”) issues SFAS No. 133, “Accounting for the Derivative Investments and Hedging Activities.” The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. The statement also requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In July, 1999, FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date for FASB No. 133.” SFAS No. 137 deferred the effective date of SFAS No. 133 until the first fiscal year beginning after June 15, 2000. In June, 2000, the FASB issued SFAS No. 138 “Accounting for Derivative Instr uments and Hedging Activities- An Amendment of SFAS No. 133.” SFAS No. 138 amends the accounting and  reporting  standards for certain derivatives and  hedging activities such  as  net settlement  contracts, foreign currency translations and intercompany derivatives. The Company does not currently hold derivative instruments or engage in hedging activities. The adoption of the SFAS No. 133, as amended by SFAS No. 137 and 138, on October 1, 2000 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In June 2001, the FASB issued two statements. SFAS No. 141, “Business Combinations,” and SFAS No. 142, Goodwill and Other Intangible Assets.” SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB No. 16 “Business Combinations.” All business combinations in the scope of this statement are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, “Intangible Assets.” It changes the accounting for goodwill from an amortization method to an impairment only

approach. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

In August 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations.”  SFAS No. 143 requires, among other things, retirement obligations to be recognized when they are incurred and displayed as liabilities, with a corresponding amount capitalized as part of the related long-lived asset. The capitalized element must be expensed using a systematic and rational method over its useful life. The adoption of SFAS No. 143 is not expected to have a significant impact on the Company’s financial position, results of operations or cash flow.

In October 2001, the FASB issued SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is required to be applied starting with fiscal years beginning after December 15, 2001. SFAS 144 requires, among other things, the application of one accounting model for long-lived assets that are impaired or to be disposed of by sale. The adoption of SFAS 144 is not expected to have a significant impact on the Company’s financial statements.

In November 2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 01-09 (“EITF 01-09”), “Accounting for Consideration Given by a Vendor to a Customer/Reseller,” which addresses the accounting for consideration given by a vendor to a customer including both a reseller of the vendor’s products and an entity that purchases the vendor’s products from a reseller.  EITF 01-09 also codifies and reconciles related guidance issued by the EITF including EITF No. 00-25 “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products”(“EITF 00-25”).  EITF 01-09 outlines the presumption that consideration given by a vendor to a customer, a reseller or a customer of a reseller is to be treated as a deduction from revenue.  Treatment of such payments as an expense would only be appropriate if two conditions

are met: a) the vendor receives an identifiable benefit in return for the consideration paid that is sufficiently separable from the sale such that the vendor could have entered into an exchange transaction with a party other than the purchaser or its products in order to receive that benefit; and b) the vendor can reasonably estimate the fair value of that benefit.  The Company adopted EITF 01-09 effective January 1, 2002.  The adoption of EITF 01-09 did not have a material impact on the Company’s results of operations and financial position in 2002 and is not expected to have a material impact in the future.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates and such differences may be material to the financial statements.

2.

DISCONTINUED OPERATIONS

On December 9, 1999, the Company sold certain assets of its memory module manufacturing business, including all the stock of Tanisys (Europe) Ltd., a wholly owned subsidiary of the Company located in Scotland.  

The sale also included the assumption of certain liabilities by the buyer.  The results of the memory module manufacturing operations have been classified as discontinued operations in all fiscal periods presented.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

The loss on the sale, as well as the costs associated with the disposition of the memory module manufacturing business, was recorded in the consolidated financial statements as of September 30, 1999. As of September 30, 2002, the remaining future costs associated with the disposition of the discontinued operations totaled $275,914, including actual and estimated remaining balances of terminated equipment and real estate leases, legal and professional fees, related vendor liabilities, and other miscellaneous accrued expenses.   

Assets and liabilities of the memory module manufacturing business consisted of the following:  

3.

INVENTORY

Inventory consists of the following:

4.

PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

Included in the amounts above is approximately $41,696 and $53,364 of property and equipment acquired under capital leases at September 30, 2002 and 2001, respectively.  The accumulated amortization related to these assets totaled approximately $15,491 and $18,442 at September 30, 2002 and 2001, respectively.

Depreciation and amortization expense includes depreciation and amortization of property and equipment. Depreciation and amortization expense is reflected in the accompanying consolidated statements of operations as follows:

                Year Ended September 30,

5.

ACCRUED LIABILITIES

Accrued liabilities consist of the following:

6.         REVOLVING CREDIT NOTE

On December 17, 1999, the Company entered into an agreement with Silicon Valley Bank (“the Bank”) under an Accounts Receivable Purchase Agreement to sell its receivables for a percentage of the face amount, not to exceed $2,000,000.  This agreement was modified and extended for one year on April 3, 2000, to provide more favorable financing costs.  As part of the agreement, the Company issued stock purchase warrants that allows the Bank to purchase 50,000 shares of Common Stock at a price of $3.40 per share, which was market value on the date of the agreement.  The warrants expire April 3, 2005.

The Company and Silicon Valley Bank entered into a new Revolving Line of Credit agreement on September 19, 2000, to replace the former Accounts Receivable Purchase Agreement dated April 3, 2000.  The Revolving Line of Credit facility provided for financing of up to a maximum of $2,000,000 secured by the assets of the Company and had a maturity date of September 18, 2001.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

On May 30, 2001, the Company entered into an Accounts Receivable Financing Agreement with Silicon Valley Bank to replace the former Revolving Line of Credit Agreement dated September 19, 2000.  As of September 30, 2001, the amount owed under this agreement was $88,456.  The loan facility provided for the financing of up to $2,500,000 of the face amount of the Company’s accounts receivable of which the Bank would loan 80% on domestic accounts and 70% on eligible foreign accounts as determined solely by the Bank.  As part of the loan agreement, the Company issued stock purchase warrants that allows the Bank to purchase 25,000 shares of Common Stock at a price of $1.00 per share, which was market value on the date of the loan agreement. The warrants expire on May 30, 2006.

On March 22, 2002, the Company entered into an Accounts Receivable Purchase Agreement with Silicon Valley Bank to replace the former Accounts Receivable Financing Agreement dated May 30, 2001.  As of September 30, 2002, the amount owed under this agreement was $151,627.  This loan facility provides for the financing of accounts receivable up to an aggregate face amount not to exceed $2,500,000 of which the Bank will loan 80% on domestic accounts and 70% on eligible foreign accounts as determined solely by the Bank.  The finance charges for this loan facility are 1.5% per month of the average daily balance of the face amount of outstanding receivables financed by Silicon Valley Bank plus an administrative fee of 0.5% of the face amount of outstanding financed receivables as of the last business day of each month.  The Company is required to repurchase a receivable i f it becomes more than 90 days old or if the debtor files for bankruptcy.  This agreement will expire on March 21, 2003.

7.

DEBT

In November 1998, the Company received $2,000,000 and issued notes with attached stock warrants to certain stockholders of the Company.  The debt was due in two years and carried an interest rate of 10 percent per annum, due quarterly and payable in either unregistered shares of Common Stock or cash, at the option of the Company.  One stock warrant was issued for every two dollars of debt, resulting in the issuance of 1,000,000 stock warrants.  Each warrant was exercisable into one share of Common Stock beginning on December 1, 1998, at an exercise price of $0.50 per share and increased to $1.00 per share after August 1, 1999. The exercise price increased to $2.00 per share on October 1, 2000.  The warrants expired on November 1, 2001. The noteholders were issued 0, 0, and 75,000 shares of Common Stock upon the exercise of certain warrants for the fiscal years ende d September 30, 2002, 2001 and 2000, respectively.

The Company determined the fair value of the warrants to be $461,538, and has reflected this value as a discount on the debt.  The debt discount was amortized as interest expense over the life of the related debt.

An additional 7,200 shares of Series A Preferred Stock were issued in September 2001, in lieu of cash, for costs related to the offering, as well as the issuance of a $7,200 note payable.

In connection with the placement and issuance of this debt, the Company incurred costs of $21,350 and issued 50,000 stock warrants to the Company’s chairman of the board and 12,500 stock warrants to its legal counsel.  Each warrant was exercisable into one share of Common Stock at $0.02 per share beginning on December 1, 1998.  As of September 30, 1999, all of these warrants had been exercised for 62,500 shares of Common Stock.  The Company valued the warrants at $1.20 per share, or $75,000.  

During the second fiscal quarter of the year ended September 30, 2000, all of the $2,000,000 in debt to certain stockholders was converted to 4,000,000 shares of Common Stock.  Along with the notes payable to these stockholders, all related discounts and debt issuance costs were charged to Common Stock on the Consolidated

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

Balance Sheet for the fiscal year ended September 30, 2000.  For years prior to conversion, the total debt issuance costs of $96,350 was reflected in other noncurrent assets in the accompanying consolidated balance sheet and was amortized on the straight line method over the life of the related debt.

On August 13, 2001, the Company entered into a Series A Preferred Stock Purchase Agreement in conjunction with a private placement financing with an investment group led by New Century Equity Holdings Corp. (“New Century”) (Nasdaq: NCEH), a Delaware corporation.  The financing consisted of the issuance of 2,635,000 shares of the Company’s Series A Preferred Stock (see Note 9) and a note payable to the investors for the amount of $2,635,000.  An additional 7,200 shares of Series A Preferred Stock were issued in September 2001, in lieu of cash, for costs related to the offering as well as the issuance of a $7,200 note payable to the same  individual.  Thus, the private placement issuance totaled 2,642,200 shares of Series A Preferred Stock and notes payable of $2,642,200.  The notes have no interest, cannot be prepaid, and mature on July 13, 2003.  Repayment of the notes can only be made with payments calculated by multiplying the excess of the quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) over specified financial targets less quarterly capital expenditures over $300,000 by 50%.  These calculated payments are to be paid until the debt has been repaid in full.  As of September 30, 2002, no payments have been made on these notes due to the Company’s failure to meet the specified financial targets used in calculating the payments as provided for in the August 13, 2001 Series A Preferred Stock Purchase Agreement and related documents.  However, if the debt has not been repaid in full on or before July 15, 2003, New Century may at its sole option require the Company to issue to the investors additional shares of Series A Preferred Stock equal to 50% of the then outstanding Common Stock, Preferred Stock, and any Common Stock equivalents on an as-if-converted and fully diluted ba sis.  The Company does not expect to meet these financial targets through the July 13, 2003 maturity date and, therefore, anticipates the additional issuance of Series A Preferred Stock as stated effective July 13, 2003.  The Company has granted a security interest in all of its assets to secure the obligation to make the payments subject to the security interest of the Company’s bank loan facility.

At August 13, 2001, the Company valued the notes payable to the Series A Preferred stockholders at $177,000, consisting of the face value of $2,642,200 and a discount on the debt of $2,465,200 to be amortized over the term of the note (see Note 9). For the fiscal years ended September 30, 2002 and 2001, the Company charged $1,283,592 and $168,801 of the discount on the debt to interest expense, respectively.  At September 30, 2002, the note balance totaled $1,607,006, net of discount, and is due on July 13, 2003.

8.

LEASE COMMITMENTS

The Company leases certain equipment and office space under non-cancelable leases with expiration dates ranging from 2003 through 2005.

Future minimum lease payments under all leases from continuing operations at September 30, 2002 were as follows:

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

Rent expense recorded under all operating leases was $128,435, $200,755 and $197,600, for the years ended September 30, 2002, 2001 and 2000, respectively.  Interest rates on the capital leases range from 12.5% to 15.8%.  

9.

PREFERRED STOCK

The Company is authorized to issue 50,000,000 shares of $1 par value Preferred Stock.  The Board of Directors may from time to time issue series of Preferred Stock with terms specified at their discretion.

Pursuant to a Convertible Stock Purchase Agreement (the “Stock Purchase Agreement”), on June 30, 1998 the Company issued 400 shares of its 5% Series A Convertible Preferred Stock, par value $1 per share (“Series A Stock”), for $4,000,000.  

The Series A Stock was convertible into the Company’s no par value common stock (“Common Stock”) at the option of the holder. The conversion price was the lesser of the fixed conversion price of $4.62 per share or a variable conversion price.  The Company valued this beneficial conversion feature at $1,403,509 and reflected this amount in additional paid-in capital and as a charge to the accumulated deficit as a dividend in the years prior to fiscal 2000.

Dividends were payable quarterly in either cash or shares of Common Stock.  All dividends were paid in shares of Common Stock. For the years ended September 30, 2002, 2001 and 2000, the Company paid dividends of $0, $0, and $57,611 by issuing 0, 0, and 111,829 shares of Common Stock, respectively, based on the market value.

Attached to the Series A Stock were warrants to purchase 100,000 shares of Common Stock.  During the year ended September 30, 2000, a portion of these warrants were exercised for 66,667 shares of Common Stock.  The remaining warrants expired on June 30, 2002.  The Company valued the warrants at $283,803 and reflected this amount in additional paid-in capital during the year ended September 30, 1998.

During the year ended September 30, 1999, the preferred stockholders converted 175 shares of Series A Stock for 767,599 shares of Common Stock.

During the fiscal year ended September 30, 2000, the Company converted all of the remaining 225 shares of Series A Stock for 4,672,541 shares of Common Stock in the amount of $1,846,017.

On August 13, 2001, the Company issued 2,635,000 shares of Series A Preferred Stock (“Series A Preferred”) for $1.00 per share pursuant to a Series A Preferred Stock Purchase Agreement (the “Purchase Agreement”) dated August 13, 2001.  The issuance of the Series A Preferred Stock resulted from a private placement financing with an investment group led by New Century.  New Century participated in the financing through the purchase of 1,060,000 of the above shares of the Company’s Series A Preferred Stock which represented approximately 40% of the original issuance of the Series A Preferred.  On August 13, 2001, the date the Purchase Agreement was signed, Mr. Parris H. Holmes, Jr., served as Chairman of the Board of Directors for both New Century and the Company.  The proceeds of $2,635,000, net of offering costs of approxim ately $171,000, were utilized to continue product development and marketing efforts and to provide working capital for the Company’s operations.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

On September 28, 2001, the Company issued 7,200 shares of Series A Preferred in lieu of cash for costs relating to the offering.

In February 2002, the Company issued 293,772 shares of its Series A Preferred to Mr. Holmes for advisory services to the Tanisys Board of Directors for a three-year period beginning December 12, 2001 and ending December 12, 2004.  The Series A Preferred issued to Mr. Holmes has the same rights as those shares issued on August 13, 2001.  These shares will be earned by Mr. Holmes over the three-year period with one-third being earned on each annual anniversary date beginning on December 12, 2002.  The Company has estimated the cost of the services based on the fair value of the stock.

In March 2002, the Company repurchased 121,856 shares of its Series A Preferred for $150,000 in accordance with a repurchase agreement with a certain investor.  The purchase amount is to be paid monthly through June 2003.  The amount owed totaled $115,000 and is included in net current liabilities of discontinued operations in the accompanying balance sheet at September 30, 2002.

Each share of Series A Preferred is immediately convertible into 33.334 shares of Common Stock.  The holders of the Series A Preferred are entitled to a cumulative annual dividend of 15%, payable quarterly, which, at the option of New Century may be paid in cash or in additional shares of Series A Preferred.  

The Company recorded dividends of 831,190 shares valued at $408,646 and 53,229 shares valued at $53,229 of Series A Preferred Stock to the holders of the Company’s Series A Preferred Stock for the fiscal years ended September 30, 2002 and 2001, respectively.  

The financing consisted of the issuance of 2,642,200 shares of the Company’s Series A Preferred Stock including the 7,200 shares for costs related to the offering and notes payable to the investors in the amount of $2,642,200 (see Note 7).

The holders of the Series A Preferred have a liquidation preference in the event of any liquidation, sale, merger or similar event, and have registration rights and other customary rights.  The Company has also issued a note payable to the Series A Preferred stockholders in the amount of $2,642,200 with repayments only to be made to the extent the Company’s cash flow meets certain levels.  In conjunction with the debt, the Company has granted a security interest in all of its assets to secure its obligation to make these payments subject to the security interest of the Company’s bank loan facility.  In addition, the Company has also agreed to issue additional shares of Series A Preferred equal to 50% of the then fully diluted Common Stock to the holders if the Company fails to repay the note, plus the mandatory dividends, by July 15, 2003.  The Company ha s also agreed to issue, at up to six different times, additional shares of Series A Preferred to the investors equal to 25% of the then fully diluted Common Stock if the Company fails to meet any of certain financial targets, beginning with the quarter ended September 30, 2001 and December 31, 2001, and then for the four six-month periods ending June 30, 2002, December 31, 2002, June 30, 2003, and December 31, 2003.  On October 30, 2001, the Company issued 999,051 shares of Series A Preferred due to its failure to meet the financial targets for the quarter ended September 30, 2001 as set forth in the Series A Preferred Stock Purchase Agreement.  New Century received 400,794 of these shares of Series A Preferred.  On January 30, 2002, the Company issued 1,340,510 shares of Series A Preferred due to its failure to meet the December 31, 2001 financial targets, including 537,780 shares of Series A Preferred issued to New Century.  On July 31, 2002, the Company issued 1,693,696 shares of Serie s A Preferred due to its failure to meet the June 30, 2002 financial targets, including 657,091 shares of Series A Preferred issued to New Century.  The Company does not expect to meet the specified financial targets for the six months ending December 31, 2002.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

The Company obtained an appraisal of the Series A Preferred and the notes payable at August 13, 2001, and allocated the proceeds of the financing to both instruments based on the valuation. The proceeds of $2,642,200 were allocated to the Series A Preferred and the notes payable in the amount of $2,465,200 and $177,000, respectively.

The beneficial conversion feature (discount) in the amount of $7,439,168, for the convertible preferred stock is limited to the proceeds allocated to the Series A Preferred in the amount of $2,465,200. Due to the Series A Preferred being immediately convertible, the $2,465,200 was recorded as a dividend in the consolidated financial statements for the year ended September 30, 2001.

The Series A Preferred shares vote together with the Company’s Common Stock on an as-if-converted basis and not as a separate class.  Each share of Series A Preferred has a number of votes equal to the number of Common Stock shares then issuable upon conversion of such shares of the Series A Preferred Stock.  Upon the closing of the Purchase Agreement, the Series A Preferred stockholders had 78% of the combined eligible voting power of the outstanding Common Stock and Series A Preferred.  As of September 30, 2002, the Series A Preferred stockholders controlled 91% of the voting power of all stockholders of the Company.  If none of the financial targets included in the Purchase Agreement are met and the Company fails to pay the note payable to the Series A Preferred stockholders’ by July 13, 2003, then, by December 31, 2003, the Series A Preferred stockhol ders could potentially control approximately 94% of the voting power of the Company, inclusive of all potentially dilutive options and warrants.

In connection with the transaction described above, New Century, by authority designated in the Purchase Agreement, has the right to maintain the majority of Board members.  As of September 30, 2002, New Century holds three of the Company’s five Board positions including the Chairman of the Board.  Currently, only four Board positions are filled, with three being held by New Century.  In accordance with the Purchase Agreement, New Century has the right to maintain the majority of Board positions in the event the Board is expanded beyond its current number of five members.

10.

 STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock Reverse Split

At the Company’s Annual Meeting of Stockholders on May 23, 2000, the Company’s stockholders approved a one-for-two reverse stock split of the Company’s Common Stock (the “Reverse Split”) effective May 25, 2000.  The Reverse Split had no effect on the number of authorized shares of Common Stock, preferred stock or Series A Preferred Stock.  Any stockholder otherwise entitled to any fractional share interest due to the Reverse Split received, in lieu thereof, one additional share of Common Stock for the fractional share such stockholder would have been entitled to as a result of the Reverse Split.

The number of shares and per share amounts of the Company’s Common Stock, warrants and stock options set forth herein have been retroactively adjusted for all periods presented to reflect the Reverse Split.

Private Placement of Common Stock

In March 2000, the Company issued 1,528,750 shares of its Common Stock for consideration of $1,223,000.  The shares of Common Stock issued in the private placement were restricted securities.  The

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

transaction was exempt from registration pursuant to Section 4(1) of the Securities Act of 1933, as amended.  Proceeds of the private placement were used for working capital.

Warrants

During the years ended September 30, 2001 and 2000, the Company issued warrants to various individuals or companies for services in connection with debt.  No stock warrants were issued in fiscal 2002.  Each stock warrant entitles the holder to purchase one share of Common Stock at a particular price, in accordance with the vesting period and expiration date specified within each individual warrant agreement.  The shares issued upon exercise of these stock warrants are subject to resale restrictions.  The following summarizes the warrants issued by the Company:

Stock Options

The Company has two stock option plans.  The 1993 Stock Option Plan permits grants to the Company's directors, key employees and consultants. The 1997 Non-Employee Director Plan permits grants to the Company's non-employee directors.  The stock options granted under each of these plans are granted with an exercise price at fair market value on the date of grant, vest ratably over a predefined period and expire no more than ten years from the date of grant.  At September 30, 2002, the Company had reserved a total of 57,000,000 shares of Common Stock for the plans.

The following table summarizes information about stock options outstanding at September 30, 2002:

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

A summary of the activity of the Company's stock option plans is presented below:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 2002, 2001 and 2000:

The Company applies Accounting Principles Board (“APB”) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans.  Accordingly, no compensation cost has been recognized for grants under the stock option plans since the exercise price of the options equals the fair market value of the Common Stock on the date of grant.

Had compensation cost for all stock option grants been determined based on fair market value at the grant dates consistent with the fair value method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) and net income (loss) per share would have been increased (decreased) to the pro forma amounts indicated below:

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

In 2000, diluted earnings per share was $0.10 as reported and pro forma diluted earnings per share was $0.09.

11.

INCOME TAXES        

For the years ended September 30, 2002 and 2001, the Company incurred consolidated net operating losses for U.S. income tax purposes of approximately $2,076,000 and $2,302,000 and for non-U.S. income tax purposes of approximately $0 and $426,000, respectively.  At September 30, 2002 and 2001, the Company had temporary differences resulting in future taxable (income) deductions of approximately $369,000 and ($40,000), respectively, principally representing differences in accounting and tax basis in accrued liabilities, reserves, depreciation and anticipated loss from discontinued operations.

At September 30, 2002, the Company had net operating loss carry-forwards totaling approximately $6,000,000.  Due to the limitations provided for in Section 382 of the Internal Revenue Code of 1986, as amended (Code), and as a result of the sale of the Series A Preferred Stock on August 13, 2001, utilization of the net operating loss carry-forwards existing at that date (approximately $25,750,000) is limited to approximately $200,000 per year through 2021.  The balance of the net operating loss carry-forward (approximately $2,200,000) may be used to reduce taxable income in any future year through 2022.  Deferred income tax assets from the net operating loss carry-forwards and asset basis differences totaled approximately $2,100,000 and $1,400,000 at September 30, 2002 and 2001, respectively, and a valuation allowance has been established in those amounts.

Management believes that a valuation allowance is appropriate because of the uncertainty that sufficient taxable income will be generated by the Company in future taxable years to absorb the entire amount of such net operating losses.

As mentioned above, the availability of the net operating loss carry-forwards and future tax deductions to reduce taxable income is subject to various limitations under the Code, in the event of a further ownership change.  This section states that after reorganization or other change in corporate ownership, the use of certain carry-forwards may be limited or prohibited.

12.

EARNINGS PER SHARE

Basic income or loss per common share is computed based on the weighted average number of common shares outstanding during each period. For the years ended September 30, 2002 and 2001, diluted income or loss per common share is computed based on the weighted average number of common shares outstanding, after giving effect to the potential issuance of Common Stock on the exercise of options and warrants and the

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

conversion of 7,724,292 and 2,642,200 shares of Series A Preferred Stock and the impact of assumed conversions, respectively.  For the years ended September 30, 2002 and 2001, potentially dilutive securities have not been included in the diluted loss per common share calculation as they would have been antidilutive.

The following table provides a reconciliation between basic and diluted shares outstanding:

If potentially dilutive securities had been included in the loss per common share calculations, the reconciliation between basic and dilutive shares outstanding would be as follows:

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

The following data shows the calculation of the income available to common stockholders used in computing diluted earnings per share:

13.

RELATED PARTY TRANSACTIONS

On August 13, 2001, the Company issued 2,635,000 shares of Series A Preferred Stock for $1.00 per share pursuant to a Series A Preferred Stock Purchase Agreement to a group of investors (see Note 9).  New Century was the lead investor and participated by purchasing 1,060,000 shares of the Company’s Series A Preferred Stock.  The Company’s former Chairman of the Board of Directors, Mr. Parris H. Holmes, Jr., is the Chairman of the Board of Directors for New Century.  Each Series A Preferred share is convertible into 33.334 shares of the Company’s Common Stock with voting rights on an as-if-converted basis.  As a result, the Series A Preferred stockholders have the majority of the voting stock. In connection with the transaction described above, New Century, by authority designated in the Purchase Agreement, has the right to maintain the majority of Bo ard members.  As of September 30, 2002, New Century holds three of the Company’s five Board positions including the Chairman of the Board.  Currently, there are only four Board positions filled with three being held by New Century.  In accordance with the Purchase Agreement, New Century has the right to maintain the majority of Board positions in the event the Board is expanded beyond its current number of five members.  Therefore, New Century has the controlling interest in the Company.

For the fiscal year ended September 30, 2001, the Company paid $41,819 to its Chairman of the Board for expenses related to the August 13, 2001 Series A Preferred transaction.  These expenses were recorded as offering costs.

General and administrative expense includes consulting fees and expenses in the amount of $968, $542, and $72,736 paid to the Company’s chairman with Common Stock, stock options, warrants or cash for the fiscal years ended September 30, 2002, 2001 and 2000, respectively.

General and administrative expense includes professional fees in the amount of $52,050 and $53,711 paid to one of the Company’s outside legal counsel, who also served as corporate secretary of the Company until August 13, 2001, for legal services provided for the years ended September 30, 2001 and 2000, respectively.  All of these fees were paid with cash or Common Stock.

In December 1999, the Company borrowed $200,000 from an officer of the Company for a short-term working capital bridge loan while the Company was finalizing its banking relationship with Silicon Valley Bank.  The loan was repaid in full in January 2000, including interest of $540.

On January 12, 2000, the Company issued 575,000 shares of Common Stock to its chairman, president, secretary and legal consultants in connection with the sale of the memory module manufacturing business.  The

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

common Stock was valued at $223,300 based on the market value at the date of issue and has been included in the estimated loss on disposal of the memory module manufacturing business in the accompanying consolidated financial statements for the fiscal year ended September 30, 1999.

On March 8, 2000, the Company issued 250,000 shares of Common Stock to its chairman, president, and secretary in connection with a private placement of Common Stock.  The Common Stock was valued at $200,000 based on the market value at the date of issue.  The amount was recorded as offering costs.

In February 2002, the Company issued 293,772 shares of its Series A Preferred valued at $83,240 to Parris H. Holmes, Jr., Chairman of the Board of New Century, for advisory services to the Tanisys Board of Directors for a three-year period beginning December 12, 2001 and ending December 12, 2004.  The Series A Preferred issued to Mr. Holmes has the same rights as those shares issued on August 13, 2001.  These shares will be earned by Mr. Holmes over the three-year period with one-third being earned on each annual anniversary date beginning on December 12, 2002.  The expense recorded for fiscal 2002 is $40,172 with the balance being amortized over the remaining life of the agreement.

On March 7, 2002, the Company’s Board of Directors appointed C. Lee Cooke, Jr. as Chief Executive Officer of the Company.  Mr. Cooke also currently serves as the Company’s Chairman of the Board of Directors.  As compensation for such Chief Executive Officer services, Habitek International, an entity owned by Mr. Cooke is entitled to receive $15,469 per month.  As of September 30, 2002, the Company has incurred $105,869 in costs relating to Mr. Cooke’s services of which $42,231 has been paid to Habitek International as of September 30, 2002.

In June 2002, New Century provided a short-term working capital loan of $75,000 that was repaid by the Company in July 2002.  In August 2002, New Century provided a short-term working capital loan of $14,000.  In September 2002, New Century provided two short-term working capital loans of $7,000 and $21,995.  The Company renewed these notes plus the accrued interest.  Therefore, as of September 30, 2002, the Company owed New Century $43,138 for these working capital loans plus $245 of accrued interest at 12% per annum.

The Company recorded dividends of 322,608 shares valued at $159,000 and 21,346 shares valued at $21,346 of the Company’s Series A Preferred Stock to New Century for the fiscal years ended September 30, 2002 and 2001, respectively.

As provided for in the Series A Preferred Stock Purchase Agreement (“Purchase Agreement”) dated August 13, 2001 (see Note 9), New Century has the right to appoint three of the Company’s five-member Board of Directors.  New Century has exercised that right and has appointed three members to the Board of Directors, including C. Lee Cooke, Jr., the Company’s Chief Executive Officer and Chairman of the Board of Directors.  Mr. Cooke also serves on New Century’s Board of Directors.  Currently, there are only four board positions filled with three being held by New Century.  In accordance with the Purchase Agreement, New Century has the right to maintain the majority of board positions in the event the Board is expanded beyond its current number of

five members.  Through ownership of the Company’s Series A Preferred Stock and its right to appoint the majority of the Board of Directors, New Century has the controlling interest in the Company.

14.

SIGNIFICANT CUSTOMERS

The following matrix provides a summary of the Company's customers with more than 10% of total net sales during the years ended September 30, 2002, 2001 and 2000, and customers from which the Company had accounts receivable that exceeded 10% of total accounts receivable at September 30, 2002, 2001 and 2000.  Amounts less than 10% are reflected as a dash.

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

15.

EMPLOYEE BENEFITS

The Company sponsors The Tanisys Technology, Inc. 401(k) Plan (the “Plan”), which qualifies under Section 401(k) of the IRS Code for eligible employees.  Eligible employees may defer a portion of their annual compensation under the Plan subject to maximum limitations.  Generally, all employees of the Company who are 18 years of age are eligible for participation in the Plan on the first day of the month following their dates of hire.  

Under provisions of the Plan, the Company may elect to make discretionary matching contributions to the Plan for the benefit of the participants.  No such discretionary contributions were made in fiscal 2002, 2001 or 2000.

1.

COMMITMENTS AND CONTINGENCIES

On April 1, 2002, the Company entered into a one-year agreement with its Vice President of Sales and Marketing, Mr. John R. Bennett, and continues thereafter on an annual basis unless terminated with 120 days’ notice.  Mr. Bennett’s salary was $60,000 per annum through June 30, 2002, at which time it increased to $127,000 per annum.  Mr. Bennett also receives commissions on the Company’s net sales.  Should the Company undergo a change of control of more than 40% of the voting power of all voting securities, Mr. Bennett will receive a bonus based on the gross value of the transaction.

On September 1, 2002, the Company entered into a one-year employment agreement with its Vice President of Finance and Chief Financial Officer, Mr. Terry W. Reynolds, and may be extended at the sole discretion of the Company. Mr. Reynolds’ salary is $140,000 per annum.  Should the Company undergo a change of control of more than 40% of the voting power of all voting securities, Mr. Reynolds will receive a bonus based on the gross value of the transaction.

From time to time, the Company could become involved in litigation in the normal course of business.  Such litigation could require significant resources.  At September 30, 2002, the Company was not engaged in any litigation.

The Company relies on a combination of patents, trademarks, copyrights and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights.  There can be no

TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Years ended September 30, 2002, 2001 and 2000

assurance that there will not be any disputes regarding the Company’s intellectual property rights.  Additionally, competitors of the Company may be able to design around the Company’s patents.  To preserve its intellectual property rights in the event of a patent infringement, the Company could initiate litigation which would likely result in significant expense and divert the efforts of technical and management personnel.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE.

On November 1, 2002, the Audit Committee of the Board of Directors of the Company engaged Burton McCumber & Cortez, L.L.P. (“BMC”) to replace Brown, Graham & Company, P.C. (“Brown”) as its independent public accountants for the fiscal year ended September 30, 2002.  Brown did not resign but was replaced by the Company with BMC.  Brown performed the independent audit of the Company’s consolidated financial statements for the fiscal years ended September 30, 1999 through 2001.  No disagreements concerning accounting and financial disclosure exist between the Company and either BMC or Brown.

PART III.

ITEM 10.

 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

The Company’s directors, executive officers and key employees and their respective ages and positions as of December 30, 2002 are as follows:

Name

Age

Position(s)

Carlton Lee Cooke, Jr.                             58

President, Chief Executive Officer and Chairman of the

Board of Directors (2)

John R. Bennett

42

Vice President of Sales and Marketing

Paul R. Hunter

47

Vice President of Engineering

Terry W. Reynolds

46

Vice President of Finance and Chief Financial Officer

Justin L. Ferrero

28

Director (1)

David P. Tusa

41

Director (1)

Theodore W. Van Duyn

52

Director (2)

______________________

(1)

Member of the Audit Committee.

(2)

Member of the Compensation/Stock Option Committee.

The following are biographies of the Company’s executive officers and directors, including all positions currently held with the Company and positions held during the last five years.

 C. Lee Cooke has served as Chairman of the Board since February 2002 and as Chief Executive Officer since March 2002.  He was Special Advisor to the Board from August 2001 to February 2002.  Mr. Cooke serves as a Director with New Century, a holding company focused on high growth, technology-based companies and investments.  Since September 1991, he has been Chairman of the Board and Chief Executive Officer of Habitek International, Inc., d/b/a U.S. Medical Systems, Inc.  Mr. Cooke is also a director of Sharps Compliance Corp., a provider of mail-back medical disposal, and serves as an advisory director to M2K, an interactive marketing firm, and the Staubach Group, CTLLC.  He was President and Chief Executive Officer of Cuville, Inc., d/b/a Good2CU.com, from 1999 until 2000.  Mr. Cooke served as Chief Executive Office r of The Greater Austin Chamber of Commerce from 1983 to 1987.  From 1988 to 1991 he served in the elected position as Mayor of Austin, Texas.

John R. Bennett, Vice President of Sales and Marketing, joined the Company in November 1996 with many years of sales and marketing experience in the electronics, computer and peripherals businesses.  Prior to being appointed Vice President in October 1997, Mr. Bennett served as Director of Sales at Tanisys, with prior responsibilities for the sales management of Tanisys' DarkHorse line of memory test equipment.  Other positions held by Mr. Bennett include Senior Consultant, IBM, from October 1995 to November 1996, Vice President, Marketing, CACTUS Inc., from August 1994 to October 1995 and National Marketing Manager and National Sales Manager, CalComp (Division of Lockheed), from July 1988 to August 1994.

Paul R. Hunter, Vice President of Engineering, joined the Company in February 1997 with over 20 years experience in the electronics and computer industry.  Prior to being appointed Vice President in March 2002, Mr. Hunter was the Director of Engineering at Tanisys.  From 1988 to 1997, he was the Technical Director of a high-reliability electronics packaging research program and a principal investigator and lead engineer on several DARPA-sponsored computer architecture projects, all at the Microelectronics and Computer Technology Corporation.  Prior to 1988, Mr. Hunter designed test equipment and application-specific high-performance computers while employed at Texas Instruments and several other large and small companies.  Mr. Hunter has been awarded five patents on test equipment design.

Terry W. Reynolds, CPA, joined the Company as Vice President of Finance in January 2000.   He currently serves the Company as Vice President of Finance and Administration as well as the Company’s Chief Financial Officer.  Prior to joining the Company, Mr. Reynolds served from October 1998 to December 1999 as Chief Financial Officer of Doyle Wilson Homebuilder.  From September 1996 to October 1998, he was the Chief Financial Officer for Windsport, and prior to that he worked for the public accounting firms of Charles Douthitt & Co. and Arthur Andersen LLP.  He has over 20 years experience in financial management and has also held positions with Chrysler Technologies Corporation and First Financial Corporation.

Justin L. Ferrero has served as a Director since August 2001.  Mr. Ferrero is also a Director with New Century Equity Holdings Corp., a holding company focused on high growth, technology-based companies and investments.  He has also served as a Director with Clique Capital, LLC, a company of experienced venture investors providing initial and secondary funding for high-growth companies in a wide range of industries, including technology, new economy and healthcare.  Mr. Ferrero currently is a Partner with the Convex Group, a media production company focused on integrated brand marketing.  His primary focus with the Convex Group is raising capital, strategic alliances, and merger and acquisitions.

David P. Tusa, CPA, has served as a Director and as Corporate Secretary since August 2001.  Mr. Tusa has served as Senior Vice President and Chief Financial Officer of New Century Equity Holdings Corporation, a holding company focused on high-growth, technology-based companies and investments, since August 1999 and was appointed Corporate Secretary in January 2001.  Mr. Tusa was Executive Vice President and Chief Financial Officer of U. S. Legal Support, Inc., a provider of litigation support services with over 36 offices in seven states, from September 1997 to August 1999.  Prior to this, Mr. Tusa served as Senior Vice President and Chief Financial Officer of Serv-Tech, Inc., a $300 million, publicly held provider of specialty services to industrial customers in multiple industries, from April 1994 through August 1997.  Additionally , Mr. Tusa was with CRSS, Inc., a $600 million, publicly held diversified services company, from May 1990 through April 1994, most recently as Corporate Controller.

Theodore W. Van Duyn has served as a Director since March 1994.  Mr. Van Duyn was Chief Technology Officer of BMC Software, Inc. from February 1993 to August 2000.  Mr. Van Duyn joined BMC Software, Inc. in 1985 as Director of Research and served as Senior Vice President, Research and Development, from 1986 until assuming the position of Chief Technology Officer in 1993.  He retired from BMC Software, Inc. in August 2000.

All directors hold office for their elected terms or until their successors are duly elected and qualified.  If a director should be disqualified or unable to serve as a director, the Board of Directors may fill the vacancy so arising for the unexpired portion of his term.  All officers serve at the discretion of the Board of Directors.  There are no family relationships between members of the Board of Directors and any executive officers of the Company.  

ITEM 11.

EXECUTIVE COMPENSATION.

The following Summary Compensation Table sets forth information concerning compensation of the Company’s Chief Executive Officer and each of the four other most highly compensated executive officers of the Company whose base salary and bonus exceeded $100,000 for fiscal year 2001.

Summary Compensation Table

(1)

Mr. Brook resigned as Director, Chief Executive Officer, and President effective March 7, 2002.

(2)

Mr. Hunter was promoted to Vice President of Engineering in March 2002.

(3)

The amount shown reflects the salary of Mr. Reynolds from January 16, 2000, the beginning date of his employment with the Company, through the end of fiscal 2000.

Stock Option Grants in Fiscal 2002

The following table provides information related to stock options granted to the named executive officers during fiscal 2002:

(1)

For each named executive officer, the options listed represent grants under the Company’s 1993 Stock Option Plan. The options granted in fiscal 2002 are exercisable one-fourth on each of the four anniversaries following the date of grant except for Mr. Brook’s options which expired on April 11, 2002, due to his termination of employment.

(2)

Calculations based on stock option exercise price over period of option assuming annual compounding.  The columns present estimates of potential values based on certain mathematical assumptions.  The actual value, if any, that an executive officer may realize is dependent upon the market price on the date of option exercise.

Aggregated Stock Option Exercises in Fiscal 2002 and Fiscal Year End Option Values

The following table provides information related to stock options exercised by the named executive officers during the fiscal year and the number and value of options held at fiscal year end.  The Company does not have any outstanding stock appreciation rights.

(1)

Market value of the underlying securities at September 30, 2002 ($0.01), minus the exercise price.

Report of Compensation and Stock Option Committee

The Compensation and Stock Option Committee of the Board of Directors of the Company has furnished the following report regarding the repricing of options during fiscal 1998.  All options repriced during fiscal 1998 resulted from an exchange of options under the 1993 Option Plan for new options with a lower exercise price under the same plan.

The Committee believes that the value of the Company to its stockholders is necessarily dependent upon the Company’s ability to attract and retain qualified and competent employees.  The 1993 Option Plan was expressly established to provide an additional incentive to such individuals to continue in the service of the Company.  In September of 1998, the Committee believed that the value of certain options previously granted to key employees under the 1993 Option Plan had eroded to such an extent that the intended incentive to such employees had failed, and that as a result, it was in the best interests of the Company and its stockholders to reprice such options.  The Committee believes that by repricing the options previously granted under the 1993 Stock Option P lan, the Company restored the incentive for such employees.  The options granted in replacement of previously granted options were made with an exercise price equal to the fair market price of the underlying Common Stock on the date of the repricing.  The number of shares subject to exercise and the vesting periods remain unchanged.

Ten-Year Option Repricings

The following table provides information related to each option repricing held by any executive officer of the Company during the last ten completed fiscal years.

Employee Benefit Plans

401(k) Plan

The Company maintains the Tanisys Technology, Inc. 401(k) Plan (the “401(k) Plan”).  Participation in the 401(k) Plan is offered to eligible employees of the Company or its subsidiaries (collectively, “Participants”).  Generally, all employees of the Company or its subsidiaries who are 18 years of age are eligible for participation in the 401(k) Plan, with no minimum employment period.

The 401(k) Plan is a form of defined contribution plan that provides that Participants generally may make voluntary salary deferral contributions, on a pre-tax basis, of between 1% and 15% of their base compensation in the form of voluntary payroll deductions up to a maximum amount as indexed for cost-of-living adjustments (“Voluntary Contributions”). On January 1, 2001, the Company began contributing 50% of the first 2% of a Participant’s compensation contributed as salary deferral.  Due to economic conditions, the Company ceased contributing to the 401(k) Plan effective July 16, 2001.  Morgan Stanley is the trustee of the Company’s 401(k) Plan.

1993 Stock Option Plan

The Company’s 1993 Stock Option Plan (as thereafter amended, the “1993 Option Plan”) is administered by a committee (the “Compensation/Stock Option Committee”) which currently consists of two non-employee members of the Board of Directors, Mr. C. Lee Cooke and Mr. Theodore W. Van Duyn.  The 1993 Option Plan grants broad authority to the Compensation/Stock Option Committee to grant options to key employees and consultants selected by such committee; to determine the number of shares subject to options; the exercise or purchase price per share, subject to regulatory requirements; the appropriate periods and methods of exercise and requirements regarding the vesting of options; whether each option granted shall be an incentive stock option (“ISO”) or a non-qualified stock option (“NQSO”) and whether restrictions such as repurchase options are to be imposed on shares subject to options and the nature of such restrictions, if any.  In making such determinations, the Compensation/Stock Option Committee may take into account the nature and period of service of eligible participants, their level of compensation, their past, present and potential contributions to the Company and such other factors as the Compensation/Stock Option Committee in its discretion deems relevant.  The purposes of the 1993 Option Plan are to advance the best interests of the Company by providing its employees and consultants who have substantial responsibility for the Company’s management, success and growth, with additional incentive and to increase their proprietary interest in the success of the Company, thereby encouraging them to remain in the Company’s employ or service.

The 1993 Option Plan further directs the Compensation/Stock Option Committee to set forth provisions in option agreements regarding the exercise and expiration of options according to stated criteria.  The Compensation/Stock Option Committee oversees the methods of exercise of options, with attention being given to compliance with appropriate securities laws and regulations.

The options have certain anti-dilution provisions and are not assignable or transferable, other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order.  During the lifetime of an optionee, the options granted under the 1993 Option Plan are exercisable only by the optionee or his or her guardian or legal representative.  The Company or its subsidiaries may not make or guarantee loans to individuals to finance the exercise of options under the 1993 Option Plan.  The duration of options granted under the 1993 Option Plan cannot exceed ten years (five years with respect to a holder of 10% or more of the Company’s shares in the case of an ISO).

The 1993 Option Plan provides for the grant of ISOs under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), and stock options that do not qualify under Section 422 of the Code (“NQSOs”).  The option price for ISOs may not be less than 100% of the fair market value of the Common Stock on the date of grant, or 110% of fair market value with respect to any ISO issued to a holder of 10% or more of the Company’s shares.  The exercise price of NQSOs also is limited to the fair market value of the Common Stock on the date of grant.  Common Stock issued under the 1993 Option Plan may be newly issued or treasury shares.  The 1993 Option Plan does not permit the use of already owned Common Stock as payment for the exercise price of options.  If any option granted under the 1993 Option Plan terminates, e xpires or is surrendered, new options may thereafter be granted covering such shares.  Fair market value is defined as the closing price of the Common Stock as reported for that day on the Nasdaq OTC Bulletin Board.

The stockholders of the Company approved the 1993 Option Plan on March 31, 1994, which was adopted by the Board of Directors on October 25, 1993.  Under the terms of the 1993 Option Plan, as amended in the 2002 Annual Meeting of Stockholders, 45,000,000 shares of Common Stock are reserved for the granting of options.  At September 30, 2002, options to purchase 11,319,625 shares have been granted and are outstanding.

The 1993 Option Plan terminates on October 24, 2003.  The Compensation/Stock Option Committee is authorized to amend or terminate the 1993 Option Plan at any time, except that it is not authorized without stockholder approval (except with regard to adjustments resulting from changes in capitalization) to (i) reduce the option price at which an ISO may be granted to an amount less than the fair market value per share at the time such option is granted; (ii) change the class of employees eligible to receive options; (iii) materially modify the requirements as to affiliate eligibility for participation in the 1993 Option Plan; (iv) materially increase the benefits accruing to participants under the 1993 Option Plan; or (v) effect an amendment that would cause ISOs issued pursuant to the 1993 Option Plan to fail to meet the requirements of “incentive stock opti ons” as defined in Section 422 of the Code, provided, however, that the Compensation/Stock Option Committee shall have the power to make such changes in the 1993 Option Plan and in the regulations and administrative provisions thereunder or in any outstanding option as in the opinion of counsel for the Company may be necessary or appropriate from time to time to enable any ISOs granted pursuant to the Plan to continue to qualify as “incentive stock options” under the Code and the regulations which may be issued thereunder as in existence from time to time.

On December 6, 2000, the Company filed Registration Statement on Form S-8 with the Commission requesting that 7,000,000 shares of Common Stock be registered and set aside for both of the Company’s stock option plans, including the 5,000,000 shares of Common Stock subject to the 1993 Option Plan.

Employment Agreements

On April 1, 2002, the Company entered into a one-year agreement with its Vice President of Sales and Marketing, Mr. John R. Bennett, and continues thereafter on an annual basis unless terminated with 120 days’ notice.  Mr. Bennett’s salary was $60,000 per annum through June 30, 2002, at which time it increased to $127,000 per annum.  Mr. Bennett also receives commissions on the Company’s net sales.  Should the Company undergo a change of control of more than 40% of the voting power of all voting securities, Mr. Bennett will receive a bonus based on the gross value of the transaction.

On September 1, 2002, the Company entered into a one-year employment agreement with its Vice President of Finance and Chief Financial Officer, Mr. Terry W. Reynolds, and may be extended at the sole discretion of the Company.  Mr. Reynolds’ salary is $140,000 per annum.  Should the Company undergo a change of control of more than 40% of the voting power of all voting securities, Mr. Reynolds will receive a bonus based on the gross value of the transaction.

Compensation Committee Interlocks and Insider Participation

None.

Compensation/Stock Option Committee Report on Executive Compensation

General.  The Compensation/Stock Option Committee of the Board of Directors of the Company (the “Committee”) has furnished the following report on the Company’s executive compensation policies.  The report describes the Committee’s compensation policies applicable to the Company’s executive officers and provides specific information regarding the compensation of the Company’s Chief Executive Officer. (The information contained in the report shall not be deemed to be “soliciting material” or to be “filed” with the Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such fili ng.)

The Committee is comprised of two directors, Messrs. Cooke and Van Duyn, and oversees all aspects of the Company’s executive compensation policy and reports its determinations to the Board of Directors.  The Committee’s overall goal is to develop executive compensation policies that are consistent with, and linked to, strategic business objectives and Company values.  The Committee approves the design of, assesses the effectiveness of, and administers executive compensation programs in support of, the Company’s compensation policies.  The Committee also reviews and approves all salary arrangements and other remuneration for executives, evaluates executive performance and considers related matters.

Compensation Philosophy.  The Company’s executive compensation policies have four primary objectives: to attract and retain highly competent executives to manage the Company’s business, to offer executives appropriate incentives for accomplishment of the Company’s business objectives and strategy, to encourage stock ownership by executives to enhance mutuality of interest with stockholders and to maximize long-term stockholder value.  The Committee believes that the compensation policies should operate in support of these objectives and should emphasize the following:  a long-term and at-risk focus, a pay-for-performance culture, an equity orientation and management development.

Elements of Compensation.  Each element of compensation considers median compensation levels paid within the competitive market.  Competitive market data compares the Company’s compensation practices to a group of comparable companies that tend to have similar sales volumes, market capitalizations, employment levels and lines of business.  The Committee reviews and approves the selection of companies used for compensation comparison purposes.

The key elements of the Company’s executive compensation are base salary, annual incentive and long-term incentive.  These key elements are addressed separately below.  In determining compensation, the Committee considers all elements of an executive’s total compensation package.

Base Salaries.  Base salaries for executives are initially determined by evaluating executives’ levels of responsibility, prior experience, breadth of knowledge, internal equity issues and external pay practices.  Base salaries are below the size-adjusted medians of the competitive market.

Increases to base salaries are driven primarily by individual performance.  Individual performance is evaluated based on sustained levels of individual contribution to the Company.  When evaluating individual performance, the Committee considers the executive’s efforts in promoting Company values, continuing educational and management training, improving product quality, developing relationships with customers, suppliers and employees, and demonstrating leadership abilities among co-workers.  As the former President and Chief Executive Officer, Mr. Richard M. Brook received $180,000 annualized base salary.  As President and Chief Executive Officer effective March 8, 2002, Mr. Carlton Lee Cooke, Jr. received $180,000 annual base salary.

Annual Incentive.  Each year, the Committee evaluates the performance of the Company as a whole, as well as the performance of each individual executive.  Factors considered include revenue growth, net profitability and cost control.  The Committee does not utilize formalized mathematical formulae, nor does it assign weightings to these factors.  The Committee, in its sole discretion, determines the amount, if any, of incentive payments to each executive.  The Committee believes that the Company’s growth in revenue and profitability requires subjectivity on the part of the Committee when determining incentive payments.  The Committee believes that specific formulae restrict flexibility and are too rigid at this stage of the Company’s development.  

Long-Term Incentives.  The Company’s long-term compensation philosophy provides that long-term incentives should relate to improvement in stockholder value, thereby creating a mutuality of interests between executives and stockholders.  Additionally, the Committee believes that the long-term security of executives is critical for the perpetuation of the Company.  Long-term incentives are provided to executives through the Company’s 1993 Stock Option Plan and through restricted stock awards.  

In keeping with the Company’s commitment to provide a total compensation package that favors at-risk components of pay, long-term incentives comprise an appreciable portion of an executive’s total compensation package.  When awarding long-term incentives, the Committee considers executives’ respective levels of responsibility, prior experience, historical award data, various performance criteria and compensation practices at comparable companies.  Again, the Committee does not utilize formal mathematical formulae when determining the number of options/shares granted to executives.

Stock Options.  Stock options generally are granted at an option price not less than the fair market value of the Common Stock on the date of grant.  Accordingly, stock options have value only if the price of the Common Stock appreciates after the date the options are granted.  This design focuses executives on the creation of stockholder value over the long term and encourages equity ownership in the Company.

Section 162(m).  Section 162(m) of the Internal Revenue Code of 1986, as amended, currently imposes a $1.0 million limitation on the deductibility of certain compensation paid to each of the Company’s five highest paid executives.  Excluded from this limitation is compensation that is “performance based.”  For compensation to be performance based it must meet certain criteria, including being based on predetermined objective standards approved by stockholders.  In general, the Company believes that compensation relating to options granted under the Company’s 1993 Stock Option Plan should be excluded from the $1.0 million limitation calculation.  The Compensation/Stock Option Committee intends to take into account the potential application of Section 162(m) with respect to incentive compensation awards and other comp ensation decisions made by it in the future.

Restricted Stock Awards.  There were no grants of restricted Common Stock during the year ended September 30, 2002.

Conclusion.  The Committee believes these executive compensation policies serve the interests of the stockholders and the Company effectively.  The Committee believes that the various pay vehicles offered are appropriately balanced to provide increased motivation for executives to contribute to the Company’s overall future successes, thereby enhancing the value of the Company for the stockholders’ benefit.

Audit Committee Report

The Board of Directors has adopted a written Charter of the Audit Committee of the Board of Directors, a copy of which was included as an exhibit to the Company’s 2002 proxy statement.  Mr. David P. Tusa and Mr. Justin L. Ferrero comprise the Audit Committee of the Board of Directors.

In connection with the September 30, 2002 financial statements, the Audit Committee: (1) reviewed and discussed the audited financial statements with management; (2) discussed with the auditors the matters required by Statement of Auditing Standards No. 61; and (3) received and discussed with the auditors the matters required by Independence Standards Board Statement No. 1.  Based upon these reviews and discussions, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K filed with the Commission.

/s/ David P. Tusa.

David P. Tusa

Director and Audit Committee Member

/s/ Justin L. Ferrero