UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended May 31, 2010

Commission File Number: 000-53633

OCZ TECHNOLOGY GROUP, INC.

(Exact name of Registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		04-3651093 (I.R.S Employer Identification No.)

6373 San Ignacio Avenue

San Jose, California

(Address of Principal Executive

Offices)

95119

(Zip Code)

(408) 733-8400

(Registrant's telephone number, including zip code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of July 9, 2010, there were 26,522,748 shares of the registrant’s common stock, $0.0025 par value, outstanding, which is the only class of common stock of the registrant issued.

OCZ TECHNOLOGY GROUP, INC.

Table of Contents

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
	Item 4T	Controls and Procedures	29

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item 3.	Defaults Upon Senior Securities	30
	Item 4.	Removed and Reserved	30
	Item 5.	Other Information	30
	Item 6.	Exhibits	31
	Signatures		32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OCZ Technology Group, Inc.
Consolidated Balance Sheets
($ in thousands)

	May 31, 2010			February 28, 2010
	unaudited

ASSETS
Current Assets:
Cash and cash equivalents	$	4,311		$	1,224
Accounts receivable, net of allowances of $2,842 and $2,853		21,363			20,380
Inventory, net		13,573			9,846
Note receivable		375			375
Deferred tax asset, net		836			836
Prepaid expenses and other current assets		2,764			1,811
Total current assets		43,222			34,472
Property and equipment, net		2,560			2,629
Intangible asset		70			88
Goodwill		10,097			9,954
Investment		668			668
Other assets		48			38
Total assets	$	56,665		$	47,849

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable	$	10,416		$	10,354
Note payable		250			500
Accounts payable		25,825			26,318
Accrued and other liabilities		3,678			4,389
Total current liabilities		40,169			41,561
Common stock warrant liability		2,980
Total Liabilities		43,149			41,561

Commitments and contingencies		-			-

Stockholders' equity:
Preferred stock, $0.0025 par value; 20,000,000 shares authorized; 0 and 60,990 shares issued and outstanding as of May 31, 2010 and February 28, 2010 respectively		-			-

Common stock, $0.0025 par value; 120,000,000 shares authorized; 26,522,748 and 21,278,643 shares issued and outstanding as of May 31, 2010 and February 28, 2010 respectively		66			53
Additional paid-in capital		43,925			31,862
Accumulated translation adjustment		(164	)		(164	)
Accumulated deficit		(30,311	)		(25,463	)
Total stockholders' equity		13,516			6,288
Total liabilities and stockholders' equity	$	56,665		$	47,849

See accompanying notes to the Consolidated Financial Statements.

OCZ Technology Group, Inc.
Consolidated Statements of Operations
(In thousands, except per share amount)

	Three Months Ended
	May 31,
	unaudited
	2010			2009

Net revenues	$	34,283		$	35,771
Cost of revenues		30,119			32,076
Gross profit		4,164			3,695

Sales and marketing		2,735			2,656
Research and development		1,564			1,490
General, administrative and operations		3,269			3,749
Total operating expenses		7,568			7,895
Operating income (loss)		(3,404	)		(4,200	)
Other income (expense) - net		(3	)		134
Interest and financing costs		(542	)		(253	)
Adjustment to the fair value of common stock warrants		(899	)		-
Income (loss) before income taxes		(4,848	)		(4,319	)

Income tax expense (benefit)		-			(1	)
Net income (loss)	$	(4,848	)	$	(4,318	)

Net income (loss) per share:
Basic	$	(0.19	)	$	(0.20	)
Diluted	$	(0.19	)	$	(0.20	)

Shares used in per share computation:
Basic		25,180			21,300
Diluted		25,180			21,300

See accompanying notes to the Consolidated Financial Statements.

OCZ Technology Group, Inc.

Consolidated Statements of Cash Flow

($ in thousands)

	Three Months Ended
	May 31,
	unaudited
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	(4,848	)	$	(4,318	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Depreciation of property and equipment		257			233
Amortization of intangibles		18			28
Bad debt expense		289			73
Stock-based compensation		184			255
Fair value adjustment of stock warrants		899			-
Non-cash write-off of leasehold improvements		-			102
Changes in operating assets and current liabilities:
Accounts receivable		(1,272	)		3,086
Inventory		(3,727	)		935
Prepaid expenses and other assets		(953	)		346
Accounts payable		(493	)		(40	)
Accrued and other liabilities		(711	)		641
Net cash (used in) provided by operating activities		(10,357	)		1,341

Cash flows from investing activities:
Purchases of property and equipment		(188	)		(275	)
Decrease (increase) in deposits		(10	)		39
Business acquisition earn out payments		(143	)		(116	)
Net cash used in investing activities		(341	)		(352	)

Cash flows from financing activities:
Issurance of common stock		13,973			8
Proceeds from bank loan, net		62			(874	)
Repayment of shareholder loan		(250	)		-
Net cash provided by (used in) financing activities		13,785			(866	)

Effect of foreign exchange rate changes on cash and cash equivalents		-			(50	)
Net increase in cash and cash equivalents		3,087			73
Cash and cash equivalents at beginning of period		1,224			420
Cash and cash equivalents at end of period	$	4,311		$	493

Supplemental disclosures:
Interest paid	$	267		$	161
Income taxes paid	$	-		$	-

See accompanying notes to the Consolidated Financial Statements.

OCZ Technology Group, Inc.

Consolidated Statements of Changes in Stockholders' Equity

(In thousands)

	Preferred Stock					Common Stock
	Shares Number			Shares Amount		Shares Number		Shares Amount		Additional Paid-in Capital			Accumulated Other comprehensive Income (Loss)			Retained Earnings			Total

As at March 1, 2009		0			0		21,278		53		30,911			(112	)		(11,929	)		18,923
Components of comprehensive income (loss):
Net Loss		-			-		-		-		-			-			(13,534	)		(13,534	)
Foreign currency translation adjustment		-			-		-		-		-			(52	)					(52	)
Total comprehensive income (loss)																				(13,586	)
Adjustment of exercise of stock options		-			-		-		-		7			-			-			7
Issurance of preferred stock		61			-		-		-		281			-			-			281
Stock based compensation		-			-		-		-		663			-			-			663
As at February 28, 2010		61			-		21,278		53		31,862			(164	)		(25,463	)		6,288
Components of comprehensive income (loss):
Net Loss		-			-		-		-		-			-			(4,848	)		(4,848	)
Foreign currency translation adjustment		-			-		-		-		-			-			-			-
Total comprehensive income (loss)																				(4,848	)
Fair value of warrants issued in connection with stock offering		-			-		-		-		(2,081	)		-			-			(2,081	)
Issurance of common stock		-			-		5,245		13		13,960			-			-			13,973
Conversion of preferred stock into common		(61	)		-		-		-		-			-			-			-
Stock based compensation		-			-		-		-		184			-			-			184
As at May 31, 2010		0			-		26,523		66		43,925			(164	)		(30,311	)		13,516

See accompanying notes to the Consolidated Financial Statements.

Note 1 – Basis of Presentation

The accompanying interim condensed consolidated financial statements of OCZ Technology Group, Inc, a Delaware corporation (“OCZ” or the “Company”), are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the consolidated financial position of the Company at May 31, 2010, the consolidated statements of operations for each of the three months ended May 31, 2010 and 2009, and the consolidated results of cash flows for each of the three months ended May 31, 2010 and, 2009 have been included. These interim condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s most recent Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The February 28, 2010 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Form 10-K. The results for the interim periods are not necessarily indicative of results to be expected for the full year.

The condensed consolidated financial statements of the Company include the accounts of the Company’s subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities (e.g., sales returns, bad debt and inventory reserves and asset impairments), disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s reported revenues are net of reserves for price protection, sales returns and sales and marketing incentives. Actual results could differ from those estimates.

In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Recognition of the Codification in financial statements is effective for interim and annual periods ending after September 15, 2009. The impact in the Company’s financial statements was only to references for accounting guidance.

2.	Summary of significant accounting policies

Principles of consolidation

The consolidated financial statements include the financial statements of OCZ and its subsidiaries, OCZ Canada and OCZ Ireland. All material intercompany balances and transactions have been eliminated upon consolidation.

Use of estimates

On an ongoing basis, OCZ evaluates its estimates, including, among others, those related to bad debts and allowances, inventories and related reserves, investments, income taxes, warranty obligations, stock compensation, contingencies and litigation. OCZ bases its estimates on historical experience and on other assumptions that OCZ believes are reasonable under the circumstances, the results of which form the basis for OCZ’s judgments about the carrying values of assets and liabilities when those values are not readily apparent from other sources. Estimates have historically approximated actual results. However, future results will differ from these estimates under different assumptions and conditions.

Cash equivalents

For the purposes of the statement of cash flows, OCZ considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Concentration of credit risks

Financial instruments which potentially subject OCZ to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. OCZ maintains credit insurance on the majority of its receivables. During the periods presented herein, OCZ had deposits in banks in excess of the Federal Deposit Insurance Corporation insurance limit. OCZ has not experienced any losses in such accounts, and does not believe it is exposed to any significant risk on trade receivables, cash and cash equivalents.

Comprehensive income

Comprehensive income consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of foreign currency translation adjustments, which are also recognized as a separate component of stockholders’ equity.

Trade accounts receivable and allowance for doubtful accounts

Accounts receivable is stated at the net amount which management expects to collect after providing allowances for doubtful accounts, sales payments and sales credits based on an evaluation of a customer’s specific financial situation. These allowances amounted to approximately $2.84 million as of May 31, 2010 and $2.85 million as of February 28, 2010. Historically, OCZ has not charged interest on past due accounts.

Notes Receivable

On August 31, 2009, OCZ was issued notes receivable related to the sale of various tangible and intangible property. These notes have the following principal amounts and maturities: $375,488 due July 31, 2010, $105,727 due August 31, 2011 and $414,200 due August 31, 2014. The non-current notes receivable are shown as part of the “Investment” caption on the balance sheet and are stated at the net amount which management expects to collect after providing a valuation allowance.

Inventory

Inventory is valued at the lower of cost or market with cost determined using the average cost method. Inventory consists of raw materials, work in progress and finished goods.

OCZ writes down inventory for slow moving and obsolete inventory based on assessments of future demands and market conditions as well as the condition of product on hand.

Property and equipment

Property and equipment are carried at cost, net of accumulated depreciation. The cost of maintenance and repairs is expensed as incurred. Depreciation of property and equipment is provided using the straight line method over the estimated useful lives of the assets as follows:

Vehicles	3 years
Furniture and fixtures	3 — 5 years
Equipment	3 — 5 years
Leasehold improvements	Shorter of term of lease or asset life

Goodwill and Intangibles

Goodwill represents the excess of the purchase price over the estimated fair value of the identifiable tangible and intangible net assets acquired in business acquisitions. Goodwill is reviewed at least annually for impairment as of the last day of February, or more frequently if events and circumstances indicate that the asset might be impaired, in accordance with ASC Topic 350, Intangible – Goodwill and Other. The brand name intangible assets are being amortized over a 4-year period. Subsequent payments made for any contingent consideration are charged to goodwill if the acquisition was made prior to the fiscal year ended February 28, 2010, in accordance with the December 2007 revisions to SFAS No. 141 (ASC Topic 805). For tax purposes, goodwill is deductible over a 15-year period.

In accordance with the provisions of ASC Topic 805, Business Combinations, OCZ allocates the purchase price to the tangible and intangible assets acquired, liabilities assumed, and in-process research and development based on its estimated fair values. Management makes significant estimates and assumptions, which are believed to be reasonable, in determining the fair values of certain assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from product sales, customer relationships, acquired developed technologies and patents, expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed, expected life of the core technology and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Impairment of long-lived assets

OCZ reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not become recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, OCZ recognizes an impairment loss based on the estimated fair value of the asset.

Income taxes

Income taxes are accounted for using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of OCZ’s assets and liabilities. If it is more likely than not that some portion of deferred tax assets will not be realized, a valuation allowance is recorded.

GAAP prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Tax positions shall be initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall be initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. It is management's policy to recognize interest and penalties related to tax uncertainties to income tax expense. OCZ has no amounts accrued for interest or penalties as of May 31, 2010 or February 28, 2010 and does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months.

OCZ Canada pays taxes in Canada. OCZ does not file consolidated tax returns.

All tax periods after the fiscal year ended December 31, 2005 remain open and subject to audit by the IRS and the State of California.

Fair value of financial instruments

OCZ’s financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable and bank loans and factoring arrangements. The carrying values of these financial instruments approximate fair value as they are short-term to mature.

In September 2006, the FASB issued FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.

ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1: Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.

Level 2: Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.

Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

	Level I		Level II		Level III
Note Receivable					$	375,000
Investment		-		-	$	668,000
Fair Value of common stock warrants		-		-	$	(2,980,000	)

OCZ’s value assigned to the note receivable and investment are based on amounts determined in conjunction with the sale of various tangible and intangible assets. A discussion of the valuation technique used to measure fair value for the common stock warrants is in Note 10 as part of the “Warrants” section.

Revenue recognition

OCZ records all of its product sales net of allowances for returns, product rebates, sales credits, and market development funds. Revenue is recognized when there is persuasive evidence of an arrangement, product shipment by a common carrier has occurred, risk of loss has passed, the terms are fixed and collection is probable. OCZ generally uses customer purchase orders and/or contracts as evidence of an arrangement and the underlying payment terms to determine if the sales price is fixed

Probability of collection is assessed for each customer as it is subjected to a credit review process that evaluates its financial position, ability to pay, and the potential coverage by OCZ’s credit insurer. If it is determined from the outset of an arrangement that collection is not probable, the customer is required to pay cash in advance of shipment. OCZ also purchases credit insurance for the majority of its accounts. OCZ provides for price protection credits on a case-by-case basis after assessing the market competition and product technology obsolescence. These credits are recorded as a reduction to revenue at the time OCZ reduces its product prices.

Deferred income

OCZ offers terms to certain customers which defer recognition of a sale transaction until such time that OCZ’s customer sells the product to its customers. As of the three months ended May 31, 2010 and the fiscal year ended February 28, 2010, OCZ shipped merchandise totaling $750,000 and $453,000, respectively, to a certain customer under such arrangement. The sales and related cost of revenues have been removed from the financial statements and the income shown as deferred income. Deferred income as of the three months ended May 31, 2010 and the fiscal year ended February 28, 2010 $139,000 and $95,000, respectively; which are included in accrued and other liabilities.

Marketing cooperative arrangements

OCZ has arrangements with resellers of its products to reimburse the resellers for cooperative marketing costs meeting specified criteria. In certain arrangements, OCZ records advertising costs meeting specified criteria within sales and marketing expenses in the accompanying consolidated statements of operations. For those reimbursements that do not meet the criteria for advertising costs, the amounts are recorded as a reduction to sales in the accompanying consolidated statements of operations.

Research and development costs

Costs of researching and developing new technology or significantly altering existing technology are expensed as incurred.

Shipping and handling

Historically, amounts billed to customers for shipping and handling have been de minimus. For the three months ended May 31, 2010 and 2009 and the fiscal year ended February 28, 2010 these amounts were $17,000, $54,000 and $133,000, respectively, and were accounted for as a reduction in general, administrative and operations expense.

Advertising

Advertising costs are expensed as incurred and in the three months ended May 31, 2010 and 2009 and the fiscal year ended February 28, 2010 were $767,000, $648,000 and $3 million, respectively. Advertising costs are included in sales and marketing expense.

Foreign currency translation

Substantially all of OCZ’s sales are invoiced in U.S. dollars.

The accounts of OCZ’s operations in Canada are maintained in Canadian dollars. All of OCZ’s other accounts are maintained in U.S. dollars. Assets and liabilities are translated into U.S. dollars at rates in effect at the balance sheet date. Net revenues, cost of revenues and expenses are translated at weighted average rates during the reporting period. Foreign currency transaction gains/(loss) of approximately $(4,000), $137,000 and $111,000 were included in other income or expense in the accompanying statement of operations for the three months ended May 31, 2010 and 2009 and the fiscal year ended February 28, 2010, respectively.

Product warranties

OCZ offers its customers warranties on certain products sold to them. These warranties typically provide for the replacement of its products if they are found to be faulty within a specified period. Concurrent with the sale of products, a provision for estimated warranty expenses is recorded with a corresponding increase in cost of goods sold. The provision is adjusted periodically based on historical and anticipated experience. Actual expense of replacing faulty products under warranty, including parts and labor, are charged to this provision when incurred.

Stock-based compensation

On January 1, 2006, OCZ adopted ASC Topic 718 using the modified prospective application method. Under this method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value.

OCZ uses the Black-Scholes model to determine the fair value of stock options on the date of grant and recognizes compensation expense for stock options on a straight-line basis over the period earned and vested. Restricted stock grants are measured based on the fair market value of the underlying stock on the date of grant and compensation expense for restricted stock grants is recognized on a straight-line basis over the requisite service period.

The amount of compensation expense recognized using the Black-Scholes model requires OCZ to exercise judgment and make assumptions relating to the factors that determine the fair value of its stock option grants. The fair value calculated by this model is a function of several factors, including the grant price, the expected future volatility and the expected term of the option and the risk-free interest rate of the option. The expected term and expected future volatility of the options require judgment. In addition, OCZ is required to estimate the expected forfeiture rate and only recognize expense for those stock options expected to vest. OCZ estimates the forfeiture rate based on historical experience and to the extent its actual forfeiture rate is different from its estimate, share-based compensation expense is adjusted accordingly.

Since OCZ’s stock-based compensation plan was established in December 2004, all options have been issued at or above the estimated fair market value so that there is no intrinsic value to be expensed. Stock based compensation charged to expenses was $184,000, $255,000 and $663,000 for the three months ended May 31, 2010 and 2009 and the fiscal year ended February 28, 2010, respectively. As of the fiscal quarter ended May 31, 2010, compensation costs related to non-vested options amounted to approximately $1.428 million and will be recognized in the periods to May 31, 2014 over a weighted average term of 12.8 months.

The fair value of options grants was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended			Fiscal Year Ended			Fiscal Year Ended
	May 31, 2010			February 28, 2010			February 28, 2009
Expected dividend		0	%		0	%		0	%
Risk free interest rate		2.02	%		2.00	%		2.8	%
Expected volatility		0.47			0.58			0.40

Expected life (in years)		4.35			4.28			4.24

3.	Recent accounting pronouncements

Recent accounting pronouncements which are deemed relevant to OCZ’s operations included:

In June 2009, the FASB issued the Accounting Standards Codification ("Codification"), which became the single source of authoritative non-governmental GAAP. The Codification does not change GAAP, but instead introduces a new structure that combines all authoritative standards into a comprehensive, topically-organized online database. All references to the authoritative accounting literature in OCZ’s financial statements are referenced in accordance with the Codification. There were no material changes to the financial statements as a result of implementing the Codification.

In May 2009, the FASB issued ASC 855, Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The statement was effective for OCZ during the fiscal year ended February 28, 2010.

Inventory

Inventory consists of the following:

	May 31, 2010 (in thousands)		February 28, 2010 (in thousands)
Raw materials	$	4,273	$	3,246
Work in progress		7,971		5,319
Finished goods		1,329		1,281
	$	13,573	$	9,846

5.	Property and equipment

Net property and equipment consists of the following:

	May 31, 2010 (in thousands)		February 28, 2010 (in thousands)
Vehicles	$	135	$	135
Furniture and fixtures		38		38
Equipment		4,660		4,471
Leasehold Improvements		439		439
		5,271		5,083
Less: accumulated depreciation		(2,711)		(2,454)
	$	2,560	$	2,629

Depreciation expense for the three months ended May 31, 2010 and 2009 and the fiscal year ended February 28, 2010 amounted to $257,000, $233,000 and $1.0 million, respectively.

6.	Goodwill and other intangible assets

Goodwill represents the excess of the purchase price over the estimated fair value of the identifiable tangible and intangible net assets acquired in business acquisitions.

An impairment loss would be recognized to the extent that the carrying amount exceeds the implied fair value of the goodwill. This is determined in a two step process.

The first step compares the carrying amount of the net assets (including goodwill) of the reporting unit to its fair value. If fair value exceeds the carrying amount of net assets, goodwill is not considered to be impaired and the second step of the impairment test is not required. If the carrying amount of net assets exceeds the reporting unit’s fair value, the second step of the impairment test is undertaken to measure the amount of impairment loss, if any. In determining fair value, consideration is first given to quoted market prices of OCZ’s stock and where this is not available the estimate of fair value will be based upon the best information available and consideration of other valuation techniques.

The second step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. An impairment loss is recognized to the extent the carrying amount of goodwill exceeds the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating fair value in a manner similar to a purchase price allocation applied in a business combination. The residual fair value after this allocation is the implied fair value of goodwill.

Once a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be the new accounting basis and there is no subsequent reversal of previously recognized goodwill impairment loss in future years.

During the year ended February 28, 2010, OCZ recorded a $911,000 charge for impairment of goodwill and other intangibles. In February 2010, OCZ stopped the manufacture and sale of certain Hypersonic PC Systems products. As a result, the goodwill recorded from that acquisition was determined to be fully impaired and all remaining goodwill from the Hypersonic PC Systems acquisition was written off.

Changes in the carrying amount in goodwill and other intangible assets are summarized as follows:

	Goodwill (in thousands)		Other Intangible assets (in thousands)
Cost
As at February 28, 2010	$	10,796	$	446
Additions during the period for acquisition earn out payment		143		—
As at May 31, 2010	$	10,939	$	446