10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD 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: 0-22689

SCM MICROSYSTEMS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE	77-0444317
(STATE OR OTHER JURISDICTION OF	(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)	IDENTIFICATION NUMBER)

47211 Bayside Parkway, Fremont, CA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

(510) 360- 2300
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)

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

At November 7, 2002, 15,694,723 shares of common stock were outstanding.

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TABLE OF CONTENTS

	Item 1. Financial Statements
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure about Market Risk
	Item 4. Controls and Procedures
PART II: OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 3.2
EXHIBIT 99.1

Item 1. Financial Statements

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

			Three months ended						Nine months ended
			September 30,						September 30,
			2002			2001			2002			2001
Net revenue			$	40,887		$	46,471		$	129,285		$	138,178
Cost of revenue				28,878			31,377			87,701			103,659
		Gross profit		12,009			15,094			41,584			34,519
Operating expenses:
	Research and development			3,465			3,059			9,366			10,030
	Selling and marketing			7,005			6,862			20,461			22,551
	General and administrative			2,965			4,914			10,230			15,729
	Amortization of goodwill and intangibles			543			3,839			1,165			11,204
	In-process research and development			—			—			—			115
	Separation costs, restructuring and infrequent charges			1,794			—			4,045			3,615
		Total operating expenses		15,772			18,674			45,267			63,244
		Loss from operations		(3,763	)		(3,580	)		(3,683	)		(28,725	)
Loss from investments				(1,802	)		—			(1,802	)		(5,679	)
Interest and other income (expense), net				(215	)		986			(378	)		2,034
Loss before income taxes and minority interest				(5,780	)		(2,594	)		(5,863	)		(32,370	)
Benefit (provision) for income taxes				(13,971	)		547			(13,489	)		6,588
Minority interest in loss of consolidated subsidiaries				—			—			—			164
		Net loss	$	(19,751	)	$	(2,047	)	$	(19,352	)	$	(25,618	)
	Basic net loss per share			($1.26	)	$	(0.13	)	$	(1.24	)	$	(1.67	)
	Diluted net loss per share			($1.26	)	$	(0.13	)	$	(1.24	)	$	(1.67	)
	Shares used to compute basic net loss per share			15,629			15,335			15,588			15,306
	Shares used to compute diluted net loss per share			15,629			15,335			15,588			15,306
Comprehensive loss:
Net loss			$	(19,751	)	$	(2,047	)	$	(19,352	)	$	(25,618	)
Unrealized gain (loss) on investments, net of deferred taxes				(1	)		(750	)		(15	)		405
Foreign currency translation adjustment				135			1,003			3,205			(2,202	)
Total comprehensive loss			$	(19,617	)	$	(1,794	)	$	(16,162	)	$	(27,415	)

See notes to condensed consolidated financial statements.

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SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

			September 30,			December 31,
			2002			2001
ASSETS
Current assets:
	Cash, cash equivalents and short-term investments		$	58,047		$	59,421
	Accounts receivable, net			33,462			44,368
	Inventories			45,609			32,690
	Other current assets			6,438			8,174
		Total current assets		143,556			144,653
Property and equipment, net				10,107			10,464
Investments				809			1,482
Long-term deferred income taxes				—			11,252
Intangible assets, net				7,075			5,231
Goodwill, net				12,688			12,100
Other assets				41			406
		Total assets	$	174,276		$	185,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	28,781		$	28,252
	Accrued compensation and related benefits			3,967			2,755
	Accrued restructuring and professional fees			3,427			4,286
	Accrued royalties			1,915			1,988
	Accrued expenses			8,400			6,002
		Total current liabilities		46,490			43,283
Deferred tax liability				—			434
Minority interest				90			90
Stockholders’ equity:
	Capital stock			16			16
	Additional paid-in capital			225,385			224,433
	Deferred stock compensation			(589	)		(849	)
	Accumulated deficit			(93,760	)		(74,408	)
	Other cumulative comprehensive loss			(3,356	)		(7,411	)
		Total stockholders’ equity		127,696			141,781
		Total liabilities and stockholders’ equity	$	174,276		$	185,588

See notes to condensed consolidated financial statements.

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SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)

					Nine months ended
					September 30,
					2002			2001
Cash flows from operating activities:
	Net loss				$	(19,352	)	$	(25,618	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Deferred income taxes				13,960			(7,977	)
		Depreciation and amortization				3,064			13,617
		In-process research and development				—			115
		Minority interest in earnings of subsidiary				—			(164	)
		Amortization of deferred stock compensation				260			643
		Loss on long-term investments				1,802			5,679
		Loss on disposal of fixed assets				20			352
		Changes in operating assets and liabilities:				—
			Accounts receivable			14,351			6,798
			Inventories			(11,107	)		177
			Other assets			(1,200	)		(3,477	)
			Accounts payable			(1,778	)		1,826
			Accrued expenses			1,571			3,759
				Net cash provided by (used in) operating activities		1,591			(4,270	)
Cash flows from investing activities:
	Capital expenditures					(812	)		(4,064	)
	Proceeds from disposal of fixed assets					7			89
	Purchase of long-term investment								(737	)
	Business acquired, net of cash received					(4,157	)		(2,525	)
	Maturities of short-term investments					1,296			60,697
	Purchases of short-term investments					(5,586	)		(27,506	)
				Net cash (used in) provided by investing activities		(9,252	)		25,954
Cash flows from financing activities:
	Proceeds from issuance of equity securities, net					953			508
				Net cash provided by financing activities		953			508
Effect of exchange rates on cash and cash equivalents						1,044			(1,351	)
Net (decrease) increase in cash and cash equivalents						(5,664	)		20,841
Cash and cash equivalents at beginning of period						59,421			33,699
Cash and cash equivalents at end of period					$	53,757		$	54,540
Supplemental disclosures of cash flow information:
	Cash paid for income taxes				$	553		$	87
	Cash paid for interest				$	49		$	7

See notes to condensed consolidated financial statements.

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SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the SCM Microsystems’ (“SCM”) Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

     Reclassifications — Certain reclassifications have been made to the 2001 financial statement presentation to conform to the 2002 financial statement presentation.

2. LONG-TERM INVESTMENTS

     Long-term investments consist of the following (in thousands):

		September 30,		December 31,
		2002		2001
Investment in ActivCard, at fair value		$	758	$	1,094
Investment in SmartDisk, at fair value			51		388
	Total	$	809	$	1,482

     During each quarter, SCM evaluates investments for possible asset impairment by examining a number of factors including the current economic conditions and markets for each investment, as well as its cash position and anticipated cash needs for the short and long term. During the third quarter of 2002, because of the continued deterioration of general economic conditions, changes in specific market conditions for each investment and difficulties by SmartDisk in obtaining additional funding, SCM determined that investments in SmartDisk and ActivCard were impaired. Accordingly, SCM wrote down these investments to their fair market value as of September 30, 2002. The result was a charge to the income statement of $1.8 million.

     During the first and fourth quarters of 2001, based on the aforementioned criteria, SCM determined that investments in SmartDisk, Spyrus Inc. and Satup Databroadcasting AG were impaired. Accordingly, in the first quarter of 2001, SCM wrote down the investment in SmartDisk to its fair market value as of March 31, 2001 and wrote down the investment in Spyrus to its estimated value, which approximated 20% of the original cost. In the fourth quarter of 2001, SCM wrote off the remaining balances for Spyrus, Satup Databroadcasting AG and the investment in a Singapore subsidiary of PC Card. The result was a charge to the income statement of $5.7 million in the first quarter of 2001 and $2.8 million in the fourth quarter of 2001.

     As of September 30, 2002, SCM’s ownership of all outstanding shares of Spyrus was approximately 13.4% and SCM’s ownership in Satup was approximately 10%.

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3. INVENTORIES

     Inventories consist of (in thousands):

	September 30,		December 31,
	2002		2001
Raw materials	$	20,710	$	20,498
Finished goods		24,899		12,192
	$	45,609	$	32,690

4. ACQUISITIONS

     Dazzle Multimedia, Inc.

     SCM acquired a majority of the shares of Dazzle Multimedia, Inc. (Dazzle) between June 1999 and December 2000. In the first quarter of 2001, SCM acquired an additional 2.8% of the outstanding share capital of Dazzle Multimedia, Inc., a consolidated subsidiary, for approximately $2.4 million. The $2.4 million increased intangible assets by $2.3 million, and $0.1 million was expensed in the first quarter of 2001 for Dazzle’s research and development efforts that had not reached technological feasibility and had no future uses.

     Towitoko AG

     On May 22, 2002, SCM paid $4.5 million in cash to the shareholders of Towitoko AG, a leading supplier of smart card-based security solutions for home banking and private PC access in the German-speaking market. In addition, SCM will pay up to an additional $0.5 million in cash if certain financial performance criteria are met by the end of fiscal 2002. Towitoko AG is a private company based in Munich, Germany. The acquisition has been accounted for under the purchase method of accounting and the results of operations were included in SCM’s results of operations since the date of the acquisition. In connection with the acquisition, SCM incurred acquisition costs of approximately $0.1 million.

     A valuation of the intangible assets related to the acquisition was completed in September 2002. A summary of the allocation of the purchase price is as follows (in thousands):

Cash		$	483
Tangible assets			2,694
Assumed liabilities			(1,854	)
Trade name			259
Customer relations			1,120
Core technology			1,270
Non-compete agreements			119
Goodwill			549
	Total	$	4,640

     Intangible assets and goodwill from the acquisition approximated $3.3 million and represented the excess of the purchase price over the fair value of the tangible assets acquired less the liabilities assumed. The non-compete agreements are being amortized on a straight-line basis over the term of the agreements of two years. The trade name and goodwill are considered to have indefinite useful lives. All other intangible assets are being amortized on a straight-line basis over an estimated useful life of five years. The goodwill from this acquisition is not deductible for tax purposes.

     Pro forma results of operations to reflect the acquisition as if it had occurred on the first date of all periods presented would not be significantly different than SCM’s results of operations as stated.

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5. GOODWILL AND OTHER INTANGIBLE ASSETS

     SCM adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), Goodwill and Other Intangible Assets, as of January 1, 2002. As defined by SFAS No. 142, we identified two reporting units which constitute components of SCM’s business that included goodwill. As of January 1, 2002, the fair value of these two reporting units was assessed and compared to the respective carrying amounts. Upon completion of the transitional impairment test, the fair value for each of SCM’s reporting units approximated or exceeded the reporting unit’s carrying amount and no impairment was indicated.

     Intangible assets and goodwill consist of the following (in thousands):

		September 30, 2002							December 31, 2001
		Gross							Gross
	Amortization	Carrying		Accumulated					Carrying		Accumulated
	Period	Amount		Amortization			Net		Amount		Amortization			Net
Core Technology	60 months	$	6,671	$	(3,653	)	$	3,018	$	5,290	$	(2,769	)	$	2,521
Customer Relations	60 months		2,357		(885	)		1,472		1,139		(673	)		466
Trade name	Indefinite		4,183		(1,703	)		2,480		3,903		(1,703	)		2,200
Non-compete	24 months		848		(743	)		105		719		(675	)		44
Total intangible assets			14,059		(6,984	)		7,075		11,051		(5,820	)		5,231
Goodwill			29,373		(16,685	)		12,688		28,785		(16,685	)		12,100
Total		$	43,432	$	(23,669	)	$	19,763	$	39,836	$	(22,505	)	$	17,331

     In accordance with SFAS No. 142, only SCM’s intangible assets relating to core technology, customer relations and non-compete agreements are subject to amortization. Assembled workforce was recorded as goodwill as of January 1, 2002.

     The changes in the carrying amount of goodwill for the nine months ended September 30, 2002 are as follows:

			Digital Media
	Security		and Video		Total
Balance as of January 1, 2002	$	5,430	$	6,670	$	12,100
Goodwill acquired during the period		588		—		588
Balance as of September 30, 2002	$	6,018	$	6,670	$	12,688

     Amortization of goodwill and intangibles in the first nine months of fiscal 2002 was $1.2 million compared with $11.2 million for the same period of 2001.

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     Estimated future amortization expense is as follows (in thousands):

Fiscal Year	Amount
2002 (remaining 3 months)	$	458
2003		1,468
2004		1,073
2005		843
2006		527
2007		226
Total	$	4,595

     Had the provisions of SFAS No. 142 been applied for the three months ended and nine months ended September 30, 2002 and 2001, SCM’s net income (loss) and net income (loss) per share would have been as follows (in thousands, except per share amounts):

		Three months ended						Nine months ended
		September 30,						September 30,
		2002			2001			2002			2001
Net loss, as reported		$	(19,751	)	$	(2,047	)	$	(19,352	)	$	(25,618	)
Add back amortization:
	Assembled workforce		—			133			—			392
	Trade name		—			317			—			937
	Goodwill		—			2,687			—			7,795
	Related income tax effect		—			(188	)		—			(279	)
Adjusted net income (loss)		$	(19,751	)	$	902		$	(19,352	)	$	(16,773	)
Net income (loss) per share:
Basic net loss per share, as reported		$	(1.26	)	$	(0.13	)	$	(1.24	)	$	(1.67	)
Add back above amortization and related income tax effect			—			0.19			—			0.57
Adjusted basic net income (loss) per share		$	(1.26	)	$	0.06		$	(1.24	)	$	(1.10	)
Diluted net loss per share, as reported		$	(1.26	)	$	(0.13	)	$	(1.24	)	$	(1.67	)
Add back above amortization and related income tax effect			—			0.19			—			0.57
Adjusted diluted net income (loss) per share		$	(1.26	)	$	0.06		$	(1.24	)	$	(1.10	)

6. SEPARATION COSTS, RESTRUCTURING, AND INFREQUENT CHARGES

     During 2001, SCM incurred restructuring charges of approximately $5.2 million primarily relating to legal settlement, lease commitment and other costs and expenses resulting from the consolidation of operations in various facilities. In the first three quarters of 2002, SCM incurred net separation, restructuring and infrequent charges of approximately $0.8 million, $1.4 million, and $1.8 million, respectively, primarily due to costs incurred in preparation of the anticipated separation of our Digital Media and Video division and employee severance costs.

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     The following summarizes the expenses related to these activities during 2001 and the first nine months of 2002 (in thousands):

	Legal			Lease			Asset			Severance and
	Settlements			Commitments			Write Downs			Other Costs			Total
Provision for 2001	$	1,830		$	1,675		$	336		$	1,423		$	5,264
Changes in estimates		—			(15	)		(53	)		(2	)		(70	)
		1,830			1,660			283			1,421			5,194
Payments or write offs in 2001		(1,252	)		(145	)		(240	)		(841	)		(2,478	)
Balance as of December 31, 2001		578			1,515			43			580			2,716
Provision for Q1 2002		—			—			20			769			789
Payments or write offs in Q1 2002		(355	)		(171	)		(21	)		(1,251	)		(1,798	)
Balances as of March 31, 2002		223			1,344			42			98			1,707
Provision for Q2 2002		63			—			23			1,526			1,612
Change in estimate		(150	)		—			—			—			(150	)
Payments or write offs in Q2 2002		(63	)		(134	)		(23	)		(1,504	)		(1,724	)
Balances as of June 30, 2002		73			1,210			42			120			1,445
Provision for Q3 2002		723			611			33			698			2,065
Change in estimate		(25	)		(195	)		(5	)		(46	)		(271	)
Payments or write offs in Q3 2002		(628	)		(203	)		(38	)		(375	)		(1,244	)
Balances as of September 30, 2002	$	143		$	1,423		$	32		$	397		$	1,995

     The severance and other costs for the year ended December 31, 2001 primarily related to the reduction in force of approximately 81 employees. Approximately 20 of these employees were from Operations, 40 were from Sales and Marketing, 13 were from Research and Development and eight were from General and Administrative functions. Approximately 44 were in the U.S., 19 were in Asia and 18 were in Europe.

     The severance and other costs for the quarter ended March 31, 2002 primarily related to legal and consulting costs of $0.4 million for the anticipated separation of our Digital Media and Video division, $0.3 million for severance and related costs and $0.1 million for an asset impairment. The severance and other costs for the quarter ended June 30, 2002 primarily related to legal and consulting costs of $1.4 million for the anticipated separation of our Digital Media and Video division and $0.1 million for severance and related costs. The severance and other costs for the quarter ended September 30, 2002 primarily related to legal and consulting costs of approximately $0.6 million, and $0.1 million of severance and related costs. The severance costs for the first three quarters of 2002 related to the termination of 34 employees, of which 19 were in the United States, ten were in Europe and five were in Asia. Approximately 21 employees were from Sales and Marketing, seven were from Operations, three were from Research and Development and three were from General and Administrative functions.

7. RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2002, the Financial Accounting Standard Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. This statement also establishes that the liability should initially be measured and recorded at fair value. SCM will adopt the provisions of SFAS

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No. 146 for exit or disposal activities that are initiated after December 31, 2002 and the adoption will not have an impact on the historical results of operations or cash flows.

     In August 2001, the FASB issued SFAS No. 144. “Accounting for the Impairment of Long Lived Assets.” SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long Lived Assets to be Disposed Of,” addressing financial accounting and reporting for the impairment or disposal of long lived assets. SCM early adopted SFAS No. 144 in the fourth quarter of 2001. The adoption of SFAS No. 144 did not have a material effect on the Company’s financial position, results of operations or cash flows.

     In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle, which is charged directly to retained earnings. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. SCM adopted SFAS No. 142 on January 1, 2002 and stopped amortizing goodwill and certain other intangibles that resulted from business combinations completed prior to June 30, 2001. Amortization of intangibles in fiscal 2002 for acquisitions is expected to be approximately $1.6 million. Intangible assets of approximately $0.9 million were reclassed to goodwill and amortization ceased effective January 1, 2002.

8. DEFERRED TAX ASSET

     Prior to September 30, 2002, SCM’s deferred tax assets were comprised of net operating loss carryforwards, and deferred expenses of $23.2 million offset by a valuation allowance of $9.4 million. During the third quarter of 2002, the Company determined that it is unable to conclude that all of the deferred tax assets are more likely than not to be realized from the results of operations. Accordingly, a valuation allowance was provided for the net deferred tax assets of $13.8 million, resulting in a full valuation allowance against the net deferred tax asset. The valuation allowance does not impact the Company’s ability to utilize the underlying net operating loss carryforwards.

9. SEGMENT REPORTING, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

     SCM adopted the provisions of Statement of Financial Accounting Standards No. 131 (“SFAS No. 131”), “Disclosures about Segments of an Enterprise and Related Information,” in 1998. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within SCM for making operating decisions and assessing financial performance. Our chief operating decision maker is considered to be our executive staff, consisting of the Chief Executive Officer and Chief Financial Officer.

     Prior to January 1, 2002, management had aligned our organization along three business segments: Digital TV and Video, Digital Media and PC Security. Beginning in 2002 and going forward, we have structured our operations around two businesses: Security, which comprises our digital TV and PC security products, and Digital Media and Video, which comprises our digital media and digital video products. The executive staff reviewed financial information and business performance along these two product segments in the first three quarters of 2002. We evaluate the performance of our business segments at the revenue and gross margin level. We do not include intercompany transfers between segments for management purposes. Segment information for the first three quarters of 2001 has been restated to reflect the new business segments.

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     Summary information by segment for the three and nine months ended September 30, 2002 and 2001, is as follows (in thousands):

		Three months ended				Nine months ended
		September 30,				September 30,
		2002		2001		2002		2001
Digital Media and Video:
	Revenue	$	26,609	$	22,377	$	70,760	$	71,392
	Gross margin		6,481		6,600		18,081		16,212
Security:
	Revenue	$	14,278	$	24,094	$	58,525	$	66,786
	Gross margin		5,528		8,494		23,503		18,307
Total:
	Revenue	$	40,887	$	46,471	$	129,285	$	138,178
	Gross margin		12,009		15,094		41,584		34,519

     Geographic revenue breakdowns are based on the country where the customers are located. Information regarding revenue by geographic region for the three and nine months ended September 30, 2002 and 2001 are as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2002		2001		2002		2001
United States	$	24,925	$	20,626	$	67,228	$	57,622
Europe		10,756		15,853		45,258		51,688
Asia—Pacific		5,206		9,992		16,799		28,868
	$	40,887	$	46,471	$	129,285	$	138,178

     One customer represented 12% of SCM’s total revenue for the third quarter of 2002 and. No customers exceeded 10% of total net revenue for the nine months ended September 30, 2002 and for the three and nine months ended September 30, 2001.

10. RELATED PARTY TRANSACTIONS

     During 2002, SCM has recognized revenue of approximately $1.6 million from sales to ActivCard S.A., a supplier of electronic identity and smart-card solutions. Although SCM is not a sole supplier of specific products to ActivCard, the companies do share the services of Steven Humphreys. Mr. Humphreys is both the CEO of ActivCard and the Chairman of SCM’s Board of Directors. Mr. Humphreys is not directly compensated for revenue transactions between the two companies.

     During 2002, SCM has also recognized revenue of approximately $1.2 million from sales to Telenor Conax AS, a company engaged in the development and provision of smart-card based systems. Oystein Larsen serves as both CEO of Telenor Conax and director of SCM Microsystems. Mr. Larsen is not directly compensated for revenue transactions between the two companies.

11. SUBSEQUENT EVENTS

Repurchase Plan

     On October 24, 2002, the Company announced its Board of Directors’ approval of a stock repurchase program in which up to $5 million may be used to purchase shares of its common stock on the open market in the United States or Germany from time to time over the next two years, depending on market conditions, share prices and

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other factors. As of November 14, 2002, the Company had not made any repurchases under this program.

Stockholder Rights Plan

     On November 8, 2002, the Company’s Board of Directors approved the adoption of a Stockholder Rights Plan. Under the plan, SCM will issue a dividend of one right to purchase one one-thousandth of a share of SCM Series A participating preferred stock at an exercise price of $30.00, subject to adjustment, for each outstanding share of common stock. The dividend is payable on November 25, 2002, the record date, to stockholders of record as of the close of business on that date. However, the rights are not immediately exercisable and will become exercisable only upon the occurrence of certain events. In addition, under certain circumstances, the Company may exchange or redeem the rights. The rights expire on the earlier of November 25, 2012 or the date of the exchange or redemption of the rights.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “will,” “believe,” “anticipate,” “estimate,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements that we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Factors That May Affect Future Operating Results.” These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

     The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this quarterly report. We also urge readers to review and consider our disclosures describing various factors that could affect our business, including the disclosures under Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors and the audited financial statements and notes thereto contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 26, 2002.

Overview

     SCM Microsystems designs, develops and sells hardware, software and silicon that enables people to conveniently and securely access digital content and services, including content and services that have been protected through digital encryption. We were organized in Delaware in 1996. We sell our products primarily into two broad markets: Security and Digital Media. Our target customers vary by market. For the Security market, our target customers are primarily manufacturers in the consumer electronics, computer and conditional access system industries. For the Digital Media market, our target customers are end user consumers as well as manufacturers in the computer and consumer electronics industries. We sell and license our products through a direct sales and marketing organization, both to the retail channel and to original equipment manufacturers, or OEMs. We also sell through distributors, value added resellers and systems integrators worldwide. Operationally, through 2001 we organized our business around three divisions: Digital TV and Video, PC Security and Digital Media. Going forward and beginning in fiscal 2002, we have structured our operations around two businesses: Security and Digital Media and Video. On February 28, 2002, we announced our intention to separate our Digital Media and Video business as an independent entity and make our Security business the core focus of our strategy going forward. On October 25, 2002, we further announced that difficult market conditions have led us to conclude that the full value of the Digital Media and Video business is not realizable at the current time. Although we continue to evaluate the external environment for its suitability for a spin-off or sale of the division, we do not expect this to occur in the immediate future. We intend to continue to build value in this division as a part of SCM.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses SCM’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, customer incentives, allowance for doubtful accounts, inventories, asset impairment, realization of deferred tax assets, accrued warranty reserves, restructuring costs, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of

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assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Management believes the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

• SCM recognizes revenue upon product shipment, when a purchase order has been received, the sales price is fixed and determinable and collection of the resulting receivable is probable. Product sold to distributors is subject to agreements allowing limited rights of return, rebates, and price protection. Accordingly, we reduce revenue recognized for estimated future returns, price protection when given, and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel, and other related factors. The estimates and reserves for rebates and price protection are based on historical rates. While management believes we can make reliable estimates for these matters, nevertheless unsold products in these distribution channels are exposed to rapid changes in consumer preferences or technological obsolescence, product updates or competing products. Accordingly, it is possible that these estimates will change in the near future or that the actual amounts could vary materially from our estimates and that the amounts of such changes could seriously harm our business.

• SCM maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of SCM’s customers were to deteriorate, resulting in an impairment of their ability to make payments, SCM may make additional allowances as necessary.

• SCM writes down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

• SCM holds minority interests in companies having operations or technologies in areas within or adjacent to our strategic focus, some of which are in publicly traded companies and some of which are in non-publicly traded companies whose value is difficult to determine. SCM records an investment impairment when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investment that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

• In assessing the recoverability of our goodwill and other intangibles, SCM must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. On January 1, 2002, SCM adopted SFAS No. 142, “Goodwill and Other Intangibles Assets,” which requires us to analyze our goodwill and intangible assets for impairment on a periodic basis.

• The carrying value of our net deferred tax assets reflects that we have been unable to generate sufficient taxable income in certain tax jurisdictions. If these estimates and related assumptions change in the future, we may be required to reverse current valuation allowances against our deferred tax assets resulting in tax benefits in our consolidated statement of operations. Management evaluates the realizability of the deferred tax assets quarterly. In the third quarter of fiscal 2002, we reevaluated the realizability of the deferred tax assets and recorded a valuation allowance of $13.8 million.

• SCM accrues the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by actual warranty costs including, material usage or service delivery costs incurred in correcting a product failure. If actual material usage or service delivery costs differ from our estimates, revisions to our estimated warranty liability would be required.

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Recent Accounting Pronouncements

     In June 2002, the Financial Accounting Standard Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. This statement also establishes that the liability should initially be measured and recorded at fair value. SCM will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002 and the adoption will not have an impact on our historical results of operations, financial position or liquidity.

     In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment of Long Lived Assets.” SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long Lived Assets to be Disposed Of,” addressing financial accounting and reporting for the impairment or disposal of long lived assets. This statement is effective for our fiscal year beginning January 1, 2002. SCM early adopted SFAS No. 144 in the fourth quarter of 2001.

     In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle, which is charged directly to retained earnings. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. As of January 1, 2002, SCM has adopted SFAS No. 142 and, as a consequence stopped amortizing goodwill that resulted from business combinations completed prior to June 30, 2001. Amortization of intangibles for fiscal 2002 for acquisitions is expected to be approximately $1.6 million. Intangible assets of approximately $0.9 million were reclassed to goodwill and amortization ceased effective January 1, 2002.

Acquisitions

     Dazzle Multimedia, Inc.

     SCM acquired a majority of the shares of Dazzle Multimedia, Inc. (Dazzle) between June 1999 and December 2000. In the first quarter of 2001, SCM acquired an additional 2.8% of the outstanding share capital of Dazzle, a consolidated subsidiary, for approximately $2.4 million. The $2.4 million increased intangible assets by $2.3 million, and $0.1 million was expensed in the first quarter of 2001 for Dazzle’s research and development efforts that had not reached technological feasibility and had no future uses.

     Towitoko AG

     On May 22, 2002, SCM paid $4.5 million in cash to the shareholders of Towitoko AG, a leading supplier of smart card-based security solutions for home banking and private PC access in the German-speaking market. In addition, SCM could pay an additional $0.5 million in cash if certain financial performance criteria are met by the end of fiscal 2002. Towitoko AG is a private company based in Munich, Germany. The acquisition has been accounted for under the purchase method of accounting and the results of operations were included in our results of operations since the date of the acquisition. In connection with the acquisition, SCM incurred acquisition costs of approximately $0.1 million.

     Intangible assets and goodwill from the acquisition approximated $3.3 million and represented the excess of the purchase price over the fair value of the tangible assets acquired less the liabilities assumed. Non-compete

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agreements entered into in connection with the acquisition, are being amortized on a straight-line basis over the term of the agreements of two years. The trade name and goodwill are considered to have indefinite useful lives. All other intangible assets are being amortized on a straight-line basis over an estimated useful life of five years.

     At the time of the acquisition, Towitoko had no significant research and development projects that were incomplete. Instead, Towitoko was focused on maintaining its current products that were separated into three product groupings based on their similarities and the markets they targeted. Those groupings were Project Solutions, which consisted of several hardware products that utilized significantly the same software aimed at large customers and original equipment manufacturers; Retail Solutions using several hardware products with software aimed at the retail market; and Business Solutions, which included several related software solutions. The Retail Solutions and Business Solutions products will continue to be sold into Towitoko’s and now SCM’s distribution channels. The hardware in the Project Solutions grouping will be phased out over the next year and will be replaced with SCM’s existing hardware utilizing Towitoko’s software.

Results of Operations

     Net Revenue. Revenue from product sales is recognized upon product shipment, when a purchase order has been received, the sales price is fixed and determinable and collection of the resulting receivable is probable. Provisions for estimated warranty repairs and returns and allowances are provided for at the time products are shipped. Net revenue for the quarter ended September 30, 2002 was $40.9 million, down 12% compared to $46.5 million for the same quarter of 2001. The decrease in revenue in the third quarter of 2002 compared with the same quarter in 2001 was due primarily to lower revenue from our Security division of $9.8 million, partially offset by an increase in revenue from our Digital Media and Video division of $4.2 million. Revenue within our Security division was lower in the third quarter of 2002 versus the same quarter of the previous year due to the creation of a revenue reserve of approximately $4 million taken during the quarter as a result of modifications to the payment terms for a digital television customer. This was only partially offset by an increase in shipments of our smart card readers to the U.S. government. The increase in Digital Media and Video revenue was due to increased consumer demand for our digital media reader/writers and our digital video hardware and software products in the third quarter. For the first nine months of 2002, net revenue was $129.3 million, compared to $138.2 million for the same period of 2001, a decrease of 6%. The decrease in revenue in the first nine months of 2002 compared with the same period in 2001 was due primarily to lower revenue from our conditional access modules of $8.3 million, particularly in the third quarter as detailed above. Sales to SCM’s top 10 customers accounted for 49% and 40% of total net revenue in the first nine months of 2002 and 2001, respectively.

     Gross Profit. Gross profit for the third quarter of 2002 was $12.0 million, or 29% of total net revenue, compared to $15.1 million, or 32%, for the third quarter of 2001. The decrease in gross profit as a percentage of revenue for the third quarter of 2002 as compared to the same period in 2001 was primarily due to an increase in the overall revenue contribution of lower margin Digital Media and Video product revenue compared to Security product revenue.

     Digital Media and Video products were 65% of total revenue in the third quarter of 2002 compared to 48% for the same quarter in 2001. Digital Media and Video product margins were 24% for the third quarter of 2002 compared to 29% for the same quarter in 2001 due primarily to a higher proportion of low margin media product sales compared to the same period in 2001. For the first nine months of 2002, gross profit was $41.6 million, or 32% of revenue, compared to gross profit of $34.5 million, or 25% of revenue for the first nine months of 2001. Lower gross profit levels for the first nine months of 2001 resulted from a $10.0 million increase in inventory reserves taken in the first quarter of 2001 for our St@rKey PC satellite receiver as well as for our digital media reader products and related components. Our St@rKey product was designed to receive MPEG 1 video over satellite, but changing market requirements prompted us to attempt to rework the product to receive MPEG 2 video. During the first quarter of 2001, we determined that St@rKey was not technically feasible to manage MPEG 2 in its current form, and therefore took a related inventory charge. We also increased inventory reserves in the first quarter of 2001 for our digital media readers, many of which are custom built for individual customers, after experiencing cancellations of some orders and reducing our expectations for future sales of these products due to generally weaker economic conditions. Excluding the inventory reserve increase, gross profit as a percentage of revenue for the first nine months of 2001 would have been 32%, which is comparable to the gross profit percentage for the first nine months of 2002.

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     Our gross profit has been and will continue to be affected by a variety of factors, including additional future inventory charges, competition, the volume of sales in any given quarter, product configuration and mix, the availability of new products, product enhancements, product returns, software and services, and the cost and availability of components. Accordingly, gross profit percentages are expected to fluctuate from period to period.

     Research and Development. Research and development expenses consist primarily of employee compensation and fees for the development of prototype products. In those instances where we develop software, to date, the period between achieving technological feasibility and completion of the software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, SCM has not capitalized any software development costs. For the third quarter of 2002, research and development expenses were $3.5 million, or 8% of revenue, an increase of 13% compared with $3.1 million, or 7% of revenue, in the third quarter of 2001 and an increase of $0.4 million compared with the second quarter of 2002. The sequential increase from the second to third quarter 2002 is primarily due to increased project costs for new product development within the Digital Media and Video division. For the first nine months of 2002, research and development expenses were $9.4 million, or 7% of revenue, a decrease of 7% compared with $10.0 million, or 7% of revenue, in the first nine months of 2001. The decrease in absolute amounts between the two nine-month periods reflects the results of our strategic movement of engineering activities from high-cost regions such as Silicon Valley and Munich to our lower cost locations, such as India. Research and development costs as a percentage of net revenue are expected to fluctuate from period to period.

     Selling and Marketing. Selling and marketing expenses consist primarily of employee compensation and advertising and other marketing costs. Selling and marketing expenses for the third quarter of 2002 were $7.0 million, or 17% of net revenue, an increase of 2% compared with $6.9 million or 15% of net revenue, in the third quarter of 2001. For the first nine months of 2002, selling and marketing expenses were $20.5 million, or 16% of revenue, down 9% compared with $22.6 million, or 16% of revenue, in the same period of 2001. For the nine-month period, selling and marketing expenses were lower in 2002 than in 2001 because of decreases in the U.S. and Europe, primarily due to personnel related expense reductions and lower office administrative costs.

     General and Administrative. General and administrative expenses consist primarily of compensation expenses for employees performing SCM’s administrative functions, professional fees such as legal, audit, tax and consulting fees, and changes to allowances for doubtful accounts receivable. In the third quarter of 2002, general and administrative expenses were $3.0 million, or 7% of revenue, a decrease of 40% compared with $4.9 million, or 11% of revenue, in the third quarter of 2001. For the first nine months of 2002, general and administrative expenses were $10.2 million, or 8% of revenue, down 35% compared with $15.7 million, or 11% of revenue for the first nine months of 2001. This decrease in absolute amounts for the three- and nine-month periods of 2002 compared with the same periods in 2001 was primarily due to overall savings from restructuring activities executed during the second half of 2001 and the first nine months of 2002, and the nine-month period comparison is also affected by a reduction in allowance for doubtful accounts of $1.6 million from 2001 to 2002. We expect that general and administrative costs will fluctuate as a percentage of total net revenue.

     Amortization of Goodwill and Intangibles. Amortization of goodwill and intangibles in the third quarter of 2002 was $0.5 million compared with $3.8 million for the same period of 2001. For the first nine months of 2002, amortization of goodwill and intangibles was $1.2 million compared with $11.2 million for the first nine months of 2001. Amortization of goodwill and intangibles was lower in the first nine months of 2002 because the previous year period included amortization of goodwill and intangibles that have since been written down. As the Company implemented SFAS No. 142 as of January 1, 2002, goodwill is no longer amortized. During the second quarter of 2002, gross goodwill and intangibles increased by $3.3 million due to the acquisition of Towitoko. Including Towitoko, amortization of intangibles for all of fiscal 2002 is expected to be approximately $1.6 million.

     In-Process Research and Development. In-process research and development costs of $0.1 million in the first quarter of 2001 were written off for development efforts that had not yet reached technological feasibility at the time of our residual 2.8% acquisition of Dazzle’s share capital during the quarter. These development efforts had no alternative future uses as of this acquisition date.

     Separation Costs, Restructuring and Infrequent Charges. During the third quarter of 2002, SCM incurred separation costs, restructuring and infrequent charges of $1.8 million, primarily related to the planned separation of our Digital Media and Video division. These expenses included legal and consulting costs of $1.2 million, lease

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commitments of $0.4 million, and severance and related costs of $0.1 million. For the first nine months of 2002, separation costs, restructuring and infrequent charges were $4.0 million. These expenses included legal and consulting costs of $2.1 million, investment banking fees of $0.8 million, lease commitments of $0.4 million, severance and related costs of $0.5 million and an asset impairment of $0.1 million. For the first nine months of 2001, SCM incurred restructuring and infrequent charges of $3.6 million primarily related to legal settlement costs and expenses related to the consolidation of operations at various facilities

     Loss from Investments. From time to time, we make strategic investments in both private and public companies. During each quarter, we evaluate our investments for possible asset impairment. We examine a number of factors, including the current economic conditions and markets for each investment, as well as its cash position and anticipated cash needs for the short and long term. During the third quarter of 2002, because of the continued deterioration of general economic conditions, changes in specific market conditions for each investment and difficulties involved in obtaining additional funding by SmartDisk, we determined that our investments in SmartDisk and ActivCard had been impaired. Accordingly, we wrote down our investments in SmartDisk and ActivCard to their fair market value as of September 30, 2002. The result was a charge to the income statement of $1.8 million. During the first quarter of 2001, we determined that our investments in SmartDisk and Spyrus had been impaired and we wrote down our investment in SmartDisk to its fair market value as of March 31, 2001 and wrote down our investment in Spyrus to its estimated value, which approximated 20% of the original cost. The result was a charge to the income statement of $5.7 million.

     Interest and Other Income (Expense), Net. Interest and other income (expense), net, consists of interest earned on invested cash, offset by interest paid or accrued on outstanding debt and foreign currency gains or losses. For the third quarter of 2002, interest income and other, net, was a net expense of $0.2 million, consisting of net interest income of $0.3 million and a foreign exchange loss of $0.5 million. For the third quarter of 2001, we recorded a net gain of $1.0 million, resulting from net interest income of $0.5 million and a foreign exchange gain of $0.5 million. For the first nine months of 2002, interest income and other, net, was a net expense of $0.4 resulting from net interest income of $0.9 million and a foreign exchange loss of $1.3 million. For the first nine months of 2001, interest income and other, net, was a net gain of $2.0 million, consisting of net interest income of $1.8 million and a foreign exchange gain of $0.2 million. The period over period decrease in interest and other, net in the third quarter of 2002 was primarily the result of lower market interest rates and unfavorable exchange rate movements. Net foreign currency loss for the third quarter of 2002 was $0.5 million compared to a gain of $0.5 million for the third quarter of 2001. The foreign exchange loss in the third quarter of 2002 was primarily due to unfavorable rate changes for the Euro ($0.6 million) and the British pound ($0.1 million) offset by favorable rate change for the Singapore dollar ($0.2 million) compared to the United States dollar. We currently do not use financial instruments to hedge local currency activity at any of our foreign locations. Instead, we believe that a natural hedge exists, in that local currency revenue substantially offsets the local currency denominated operating expenses. Our foreign currency transactions gains and losses are primarily the result of the revaluation of intercompany receivables/payables (denominated in U.S. dollars) and trade receivables (denominated in a currency other than the functional currency) to the functional currency of the subsidiary.

     Benefit (Provision) for Income Taxes. The provision for income taxes for the third quarter of 2002 was $14.0 million compared to a benefit for income taxes of $0.5 million for the same period of 2001. This resulted from an increase in the valuation allowance for deferred tax assets of $13.8 million taken during the quarter in accordance with SFAS 109. For the first nine months of 2002, we recorded a provision for income taxes of $13.5 million, due to the valuation allowance increase noted above. This compares with a benefit for income taxes of $6.6 million in the first nine months of 2001.

     Minority Interest. The minority interest in earnings reflects the proportional profits or losses that are attributable to the minority shareholder in an SCM subsidiary.

Liquidity and Capital Resources

     As of September 30, 2002, our working capital was $97.1 million, compared to working capital of $101.4 million as of December 31, 2001.

     Cash, cash equivalents and short term investments for the nine months ended September 30, 2002 decreased by $1.4 million. Cash and cash equivalents for the nine months ended September 30, 2002 decreased by $5.7 million

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primarily due to uses of cash for investing activities of $9.3 million being partially offset by cash provided from operations of $1.6 million and proceeds from the issuance of equity of $1.0 million. Cash provided by operations of $1.6 million was primarily due to a $19.4 million net loss, the adding back of the impairment of the deferred tax asset of $13.8 million, the loss on investments of $1.8 million, depreciation and amortization of $3.1 million and the amortization of deferred stock compensation of $0.3 million, a decrease in accounts receivable of $14.4 million and increases in accrued expenses of $1.6 million. These were offset by increases in inventories of $11.1 million, other assets of $1.2 million, and a decrease in accounts payable of $1.8 million. Cash used in investing activities was primarily for the net purchase of short-term investments of $4.3 million, the purchase of Towitoko net of cash received of $4.2 million and capital expenditures of $0.8 million.

     On October 24, 2002, we announced a stock repurchase program under which we intend to repurchase up to $5.0 million of our common stock in the open market over the next two years, subject to market conditions, share price and other factors. As of November 14, 2002, we had not made any purchases under this program.

     We have a revolving line of credit with a bank in Germany providing total borrowings of up to 0.8 million Euro (approximately $0.7 million as of September 30, 2002). The German line has no expiration date and bears interest at 7%. Borrowings under this line of credit are unsecured. We have an unsecured line of credit in France of 0.3 million Euro (approximately $0.3 million as of September 30, 2002), which bears interest at 4.76% and has no expiration date. In addition, we have three separate overdraft facilities for our Singapore manufacturing facility of 4.0 million, 4.0 million and 5.9 million Singapore Dollars with base interest rates of 4.8%, 6.5% and 7.0%, respectively. All of the facilities are unsecured and due upon demand. Our various available facilities totaled approximately $7.8 million as of September 30, 2002. There were no amounts outstanding under any of these credit facilities as of September 30, 2002 and December 31, 2001.

     We believe that our current capital resources and available borrowings will be sufficient to meet our operating and capital requirements through at least the next twelve months. We may, however, seek additional debt or equity financing prior to that time. We cannot assure you that additional capital will be available to us on favorable terms or at all. The sale of additional debt or equity securities may cause dilution to existing stockholders.

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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

     If any of the following risks actually occur, our business, financial condition, results of operations, cash flows or product market share could be materially adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment.

We have incurred operating losses and may not achieve profitability.

     We have a history of losses with an accumulated deficit of $93.8 million as of September 30, 2002. Although we were profitable for the first and second quarters of 2002 and for the second and third quarters of 2001 (before one-time items and the amortization and impairment of goodwill and intangibles), we were not profitable in the third quarter of 2002. We may continue to incur losses in the future and may be unable to maintain profitability.

Our quarterly operating results will likely fluctuate.

     Our quarterly operating results have varied greatly in the past and will likely vary greatly in the future depending upon a number of factors. Many of these factors are beyond our control. Our revenue, gross margins and operating results may fluctuate significantly from quarter to quarter due to, among other things:

• business and economic conditions overall and in our markets, and in particular, the demand in the retail channel;

• the timing and amount of orders we receive from our customers that, in the case of our consumer products, products sold to the U.S. government and products sold to broadcasters, may be tied to seasonal demand, budgetary cycles or equipment roll-out schedules, respectively;

• cancellations or delays of customer product orders, or the loss of a significant customer;

• our backlog and inventory levels;

• our customer and distributor inventory levels and product returns;

• new product announcements or introductions by us or our competitors;

• our ability to develop, introduce and market new products and product enhancements on a timely basis, if at all;

• the sales volume, product configuration and mix of products that we sell;

• our success in expanding our selling and marketing organization and programs;

• technological changes in the market for our products;

• increased competition or reductions in the average selling prices that we are able to charge;

• fluctuations in the value of foreign currencies against the U.S. dollar;

• the timing and amount of marketing and research and development expenditures;

• our investment experience related to our strategic equity investments; and

• costs related to events such as acquisitions, litigation and write-off of investments.

     Due to these and other factors, our revenue may not increase or remain at current levels. Because a high percentage of our operating expenses are fixed, a small variation in our revenue can cause significant variations in our earnings from quarter to quarter and our operating results may vary significantly in future periods. Therefore, our historical results may not be a reliable indicator of our future performance.

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A number of factors make it difficult to estimate operating results prior to the end of a quarter.

     We do not typically maintain a significant level of backlog. As a result, revenue in any quarter depends on contracts entered into or orders booked and shipped in that quarter. In recent periods, customers, including distributors of our consumer products, have tended to make a significant portion of their purchases towards the end of the quarter, in part because they are able, or believe that they are able, to negotiate lower prices and more favorable terms. This trend makes predicting revenue difficult. The timing of closing larger orders increases the risk of quarter-to-quarter fluctuation. If orders forecasted for a specific group of customers for a particular quarter are not realized or revenue is not otherwise recognized in that quarter, our operating results for that quarter could be materially adversely affected.

Weakness in the economy could decrease demand and constrain growth in demand for our products or for our customers’ products, decreasing our revenue and causing customers to decrease or cancel orders to us or to delay payment.

     Over the past several quarters, economic conditions in the United States and abroad have resulted in decreased demand and constrained growth in demand from end users for many companies’ products, including ours. In our Security business, decreased demand, particularly in the European digital television industry, has contributed to declining and lower than expected revenue. If these trends continue, revenue and results of operations in our Security business will be adversely affected. Also, in our Digital Media and Video business, throughout 2001 and during 2002, we have experienced decreased demand as well as decreased growth in demand for our retail digital media and video products sold through the retail and OEM channels. Actual reductions or a constrained rate of growth in consumer spending impacts our OEM business as well as our retail business because our OEM customers may reduce or cancel orders for our products if their own visibility of future orders is compromised by decreased demand or if increased pricing pressures force them to reduce costs by ceasing to bundle our products along with their own. Decreased or lower than expected sales will most likely adversely affect our stock price. Also, reduced or cancelled orders for our products could lead to decreased sales in a particular period and, because many of our products are custom made for particular customers, could also cause us to write off inventory. In some cases, customers could delay payment or be unable to pay for orders made to us, causing us to increase our allowance for doubtful accounts or to write off certain receivables. In addition, if we anticipate that demand for our products will not increase, we may decide to reduce our operating expense base in order to maintain or reach profitability. Decreased sales, expense base decreases or any write-offs, or any combination of these, could have a materially adverse affect on our operating results.

There are risks associated with our decision to separate our Digital Media and Video business and our Security business.

     On February 28, 2002, we announced our intention to create two distinct businesses within SCM, a Security business and a Digital Media and Video business. In addition, we announced our intention to separate our Digital Media and Video business as an independent entity and make our Security business the core focus of our strategy going forward. During the first nine months of 2002, we restructured our internal organization in order to independently manage our Security business and our Digital Media and Video business. We have continued to evaluate various options to separate the Digital Media and Video business, including trade sale or spin-off, in order to determine which will maximize value for our stockholders. Recent extreme volatility in the capital markets has made it difficult to predict the timing and success of either of these options. As a result of these factors, on October 25, 2002, we announced that, although we continue to believe that separation is the best long-term strategy, we do not expect a spin-off or sale to occur in the immediate future. If the capital markets do not stabilize, we may not be able to successfully create a public market for the Digital Media and Video business, and potential acquirers may not be able to secure funding to purchase the business.

     If we were unable to properly implement the separation, our revenue, results of operations and our stock price could be adversely affected. This implementation requires management to make and effect several administrative and employment-related decisions efficiently. If we do not implement these decisions efficiently, our operating results could be adversely affected. Furthermore, there is no assurance that, if we do implement the separation efficiently, we will realize the benefits we contemplate from the separation. If we do not realize these benefits, our operations could be adversely affected and our stock price could decline. Risks related to our separation strategy include:

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• the separation process and results thereof will occupy a significant portion of senior management time and effort and may distract management and employees from the operation of our businesses;

• the separation could be delayed or cancelled;

• our separation strategy could be perceived negatively by our customers or cause them to choose our competitors’ products instead of ours;

• implementation of the separation strategy could make it more difficult for us to attract and retain employees and may otherwise adversely affect employee morale; and

• adverse market perception of the separation may cause our stock price to decline.

Our listing on the Frankfurt Stock Exchange exposes our stock price to additional risks of fluctuation.

     Our common stock currently experiences a significant volume of trading on the Neuer Markt of the Frankfurt Stock Exchange. Because of this, factors that would not otherwise affect a stock traded solely on Nasdaq may cause our stock price to fluctuate. Investors outside the United States may react differently and more negatively than investors in the United States to events such as acquisitions, one-time charges and lower than expected revenue or earnings announcements. Any negative reaction by investors in Europe to such events could cause our stock price to decrease. The European economy and market conditions in general, or downturns on the Neuer Markt specifically, regardless of the Nasdaq market conditions, could negatively impact our stock price. In addition, in September 2002, the Deutsche Börse AG announced that it intended to close trading on the Neuer Markt by the end of 2003 and relist certain stocks on alternative indices which they plan to create. Because our stock is currently traded on the Neuer Markt, this decision could adversely affect our stock price. We believe that the Deutsche Börse AG intends to allow SCM to trade its shares on the new Prime Standard of the Frankfurt Stock Exchange. However, there is no assurance that this will occur. Moreover, plans for the operation of the new Prime Standard have not yet been fully communicated. Because we have a significant number of German stockholders, if the Prime Standard’s new structure is not communicated effectively or implemented efficiently, then our stock price could be adversely affected.

Our stock price has been and is likely to remain volatile.

     The stock market has recently experienced significant price and volume fluctuations that have particularly affected the market prices of the stocks of technology companies. During the 12-month period from October 31, 2001 to October 30, 2002, the reported sale prices for our common stock on the Nasdaq market ranged between $17.23 and $3.20 per share. Volatility in our stock price may result from a number of factors, including:

• variations in our or our competitors’ financial and/or operational results;

• the fluctuation in market value of comparable companies in any of our markets;

• comments and forecasts by securities analysts;

• expected or announced relationships with other companies;

• trading patterns of our stock on the Nasdaq Stock Market or the Neuer Markt or other market of the Frankfurt Stock Exchange;

• any loss of key management;

• announcements of technological innovations or new products by us or our competition;

• developments related to our decision to separate our Digital Media and Video business and focus on our Security business as a core strategy;

• litigation developments; and

• general market downturns.

     In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of our management’s attention and resources.

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Sales of our products depend on the development of several emerging markets.

     We sell our products primarily to emerging markets that have not yet reached a stage of mass adoption or deployment. If demand for products in these markets does not develop and grow sufficiently, revenue and gross profit margins in either or both of our Security or our Digital Media and Video businesses could level off or decline. We cannot predict the future growth rate, if any, or size or composition of the market of our products in any of these markets. The demand and market acceptance for our products, as is common for new technologies, will be subject to high levels of uncertainty and risk and may be influenced by several factors, including general economic conditions.

     In our Security business, these factors also include the following:

• the slow pace and uncertainty of adoption in Europe of open systems platforms that require conditional access modules, such as ours, that use the Digital Video Broadcasting-Common Interface standard;

• the strength of entrenched security and set-top receiver suppliers in the United States who may resist the use of removable conditional access modules, such as ours, and prevent or delay opening the U.S. digital television market to greater competition; and

• the ability of financial institutions, corporate enterprises and the U.S. government to create and deploy smart card-based applications that will drive demand for smart card readers such as ours.

     For instance, we believe that, over time, the European digital television industry will transition to removable, modular security, and that our Security business will benefit from this transition. However, as this transition occurs, we believe that large television operators in Europe are struggling because of their inefficient delivery models and that smaller operators have also been adversely affected by turmoil in the industry. We believe these factors have contributed to recent revenue declines in our Security business. If these conditions continue, the revenue and results of operations in our Security business could continue to be adversely affected.

     In our Digital Media and Video business, demand for our products will also be influenced by the following:

• the ability of flash memory card manufacturers to develop higher capacity memory cards that will drive demand for digital media readers, such as ours, that enable rapid transfer of large amounts of data;

• the availability of low cost hardware and software OEM solutions to allow expansion in the PC OEM market; and

• increased consumer acceptance of DVDs, CDs and DVD players and readers that will drive demand for solutions such as ours to create and publish digital content.

We rely heavily on our strategic relationships.

     If we are unable to anticipate market trends and the price, performance and functionality requirements for our products, we may not be able to develop and sell products that are commercially viable and widely accepted. We must collaborate closely with our customers, suppliers and other strategic partners to ensure that critical development, marketing and distribution projects proceed in a coordinated manner. Also, this collaboration is important because these relationships increase our exposure to information necessary to anticipate trends and plan product development. If any of our current relationships terminate or otherwise deteriorate, or if we are unable to enter into future alliances that provide us with comparable insight into market trends, our product development and marketing efforts may be adversely affected.

     Furthermore, a number of our Digital Media and Video products incorporate technology developed by strategic third party technology providers. Reliance on these third parties exposes us to a number of risks:

• our technology providers often may have limited financial resources and operating histories;

• we may be unable to adequately control or influence the technology development and engineering process and must rely on these providers to timely deliver properly working technology meeting our specifications;

• our customers may prefer that we develop and own all our technology;

• we may acquire the technology only on a non-exclusive basis; and

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• we must rely on our third party providers to protect their technology rights and ensure that they do not infringe the rights of others.

Our future success will depend on our ability to keep pace with technological change and meet the needs of our target markets and customers.

     The markets for our Security and Digital Media and Video products are characterized by rapidly changing technology and the need to differentiate our products through technological enhancements. Our customers’ needs change and new products are introduced frequently. Product life cycles are short and industry standards are still evolving. These rapid changes in technology, or the adoption of new industry standards, could render our existing products obsolete and unmarketable. If one of our products is deemed to be obsolete or unmarketable, then we might have to reduce revenue expectations or write off inventories for that product. Our future success will depend upon our ability to enhance our current products and to develop and introduce new products on a timely basis that address the increasingly sophisticated needs of our customers and that keep pace with technological developments, new competitive product offerings and emerging industry standards. In addition, in cases where we are selected to supply products based on features or capabilities that are still under development, we must be able to complete our product design and delivery process in a timely basis, or risk losing current and any future business from our customers.

     For example, our SmartReady, SmartSecure, SmartTrust and SmartRetail smart card reader product families are designed to provide smart card-based security for PCs. Smart cards are beginning to be widely deployed by the U.S. government and financial institutions and to a lesser degree by corporations and other large organizations, in some cases in advance of anticipated security-oriented applications. However, standards for smart card readers are still emerging. We may not be able to comply with emerging standards in a timely manner or at all. If we cannot meet the standards requirements of the market or our prospective customers, we would likely lose orders to competitors.

     Because we operate in markets for which industry-wide standards have not yet been fully set, it is possible that any standards eventually adopted could prove disadvantageous to or incompatible with our business model and product lines. If any of the standards supported by us do not achieve or sustain market acceptance, our business and operating results would be materially and adversely affected.

Our markets are highly competitive, and our customers may purchase products from our competitors.

     The markets for our products are intensely competitive and characterized by rapidly changing technology. We believe that the principal competitive factors affecting the markets for our products include:

• the extent to which products support existing industry standards and provide interoperability;

• technical features;

• ease of use;

• quality and reliability;

• level of security;

• brand name, particularly in retail channels;

• strength of distribution channels; and

• price.

     We believe that competition in our markets is likely to intensify as a result of increasing demand for the type of products we offer. We currently experience competition from a number of companies. In our Security business, our competitors include:

• Advanced Card Systems, Gemplus, O2Micro and OmniKey in smart card readers, ASICs and universal smart card reader interfaces.

     In our Digital Media and Video business, our competitors include:

• Carry Computer Engineering, DataFab, Lexar, SanDisk, Simple Technology and SmartDisk for digital media readers; and

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• ADS, Adaptec, Canopus, Pinnacle Systems, Roxio and ULead for digital video capture and editing products.

     We also experience indirect competition from some of our customers who sell alternative products or are expected to introduce competitive products in the future. We may in the future face competition from these competitors and new competitors, such as Motorola, that develop digital security products. In addition, the market for our products may ultimately include technological solutions other than ours and our competitors.

     Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing and other resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or standards and to changes in customer requirements. Our competitors may also be able to devote greater resources to the development, promotion and sale of products and may be able to deliver competitive products at a lower end user price. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Therefore, new competitors, or alliances among competitors, may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced operating margins and loss of market share.

Seasonal trends in sales of our products may affect our quarterly operating results.

     Our business and operating results normally reflect seasonal trends. We have typically experienced lower revenue and operating income in the first quarter and second quarter and higher revenue in the third quarter and fourth quarter of each calendar year. The seasonal trends in our business and operating results are primarily due to the retail selling cycles of our consumer-oriented products, including our Digital Media and Video products. Because the market for consumer products is stronger in the second half of the year, we generally expect that our sales to retail distributors and to consumer-oriented OEMs will increase during that period. Revenue in our Digital Media and Video business was higher during the third quarter of 2002 than was revenue during either the first quarter or the second quarter of 2002. However, revenue in our Security business declined in the third quarter of 2002. Because of the seasonal aspect of our business and other factors, there is no assurance we can sustain the quarterly revenue increases we had in our Digital Media and Video business. Because of the current unpredictability of the U.S. and world economies, there is no assurance that demand will increase or remain as strong in the fourth quarter of 2002.

A significant portion of our sales comes from a small number of customers and the loss of one of more of these customers could negatively impact our operating results.

     Our products are generally targeted at OEM customers in the consumer electronics, computer, digital appliance, digital media and conditional access system industries, and to retail distributors. Sales to a relatively small number of customers historically have accounted for a significant percentage of our total sales. For example, sales to our top 10 customers accounted for approximately 42% of our total net revenue in fiscal 2001, with one customer, Aston-France S.A.R.L., accounting for 11% of our net revenue. For the first nine months of 2002, sales to our top 10 customers accounted for approximately 49% of our total net revenue, with no customer accounting for 10% or more of our net revenue. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our total sales for the foreseeable future. The loss or reduction of orders from a significant OEM or retail customer, including losses or reductions due to manufacturing, reliability or other difficulties associated with our products, changes in customer buying patterns, or market, economic or competitive conditions in the digital information security business or digital media and video business, could result in decreased revenue and/or inventory or receivables write-offs and otherwise harm our business and operating results.

We face risks related to our dependence on a retail distribution model for distribution of our Digital Media and Video products.

     Historically, we sold substantially all our products directly to OEM customers. Following our acquisitions of Dazzle Multimedia and Microtech, we now sell a significant percentage of our products through our retail channel. Direct retail distribution creates additional risks for us including:

• increased exposure to demand cycles caused as a result of seasonal or economic trends;

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• generally lower margins for products due to, among other factors, greater price competition and increased promotional and distribution costs;

• the need to develop, and the related marketing expense of developing brand recognition for our Dazzle branded products;

• the need to protect the reputation of our brand for quality and value; and

• the need to successfully and cost-effectively maintain current retail channels and develop new retail distribution channels for these products.

     We sell a substantial portion of our Digital Media and Video products through retailers, including Best Buy, Circuit City, CompUSA, Dixons/PC World, Fry’s Electronics, Office Depot, Radio Shack, Staples, Sears, B&H Photo and MicroCenter. These retailers may have limited capital to invest in inventory, and their decisions to purchase our products are partly a function of pricing, terms and special promotions offered by our competitors over which we have no control and which we can not predict. We could lose market share if the retailers that carry our products do not grow as quickly as retailers that carry our competitors’ products. If retailers choose not to purchase our products or choose to purchase less than what we expect, our sales will decrease or not grow at the rate we expect.

     We also sell our digital media and video products through distributors, including Ingram Micro, Northamber and Tech Data. Our distributor agreements are generally nonexclusive and may be terminated by either party without cause. If these agreements are terminated, we may not be able to find other distributors willing to purchase our digital video products. Certain distributors have experienced financial difficulties in the past. Distributors that account for significant sales of our consumer products may experience financial difficulties in the future, which could lead to reduced sales or write-offs. Because a large percentage of our Digital Media and Video sales are to a small number of customers that are primarily retailers or distributors, this can exert pressure on our revenue generated from these customers. As a result of this pricing pressure, we have reduced and may need to continue to reduce the prices of some of our Digital Media and Video products. Any reduction in prices will negatively impact our gross margins unless we are able to reduce our costs. Also, some customers are requesting that we sell our products to them on a consignment basis. If we agree to these arrangements, our inventory levels will increase, and this will increase our costs and the risk of inventory write-offs.

We may have to take back unsold inventory from our customers.

     Although our contractual obligations to accept returned products from our retail, distributor and OEM customers are limited, if consumer demand is less than anticipated these customers may ask that we accept returned products. We may determine that it is in our best interest to accept returns in order to maintain good relations. While we have experienced some product returns to date, returns may increase more than present levels in the future.

We have global operations, which require significant managerial and administrative resources.

     Operating in diverse geographic locations imposes significant burdens on our managerial resources. In particular, our management must:

• divert a significant amount of time and energy to manage employees and contractors from diverse cultural backgrounds and who speak different languages;

• manage different product lines for different markets;

• manage our supply and distribution channels across different countries and business practices; and

• coordinate these efforts to produce an integrated business effort, focus and vision.

     In addition, we are subject to the difficulties associated with operating in a number of time zones, which may subject us to additional unforeseen difficulties or logistical barriers. Operating in widespread geographic locations requires us to implement and operate complex information and operational systems. In the future we may have to exert managerial resources and implement new systems that may be costly. Any failure or delay in implementing needed systems, procedures and controls on a timely basis or in expanding current systems in an efficient manner could have a material adverse effect on our business and operating results.

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Our key personnel are critical to our business, and such key personnel may not remain with us in the future.

     We depend on the continued employment of our senior executive officers and other key management and technical personnel. If any of our key personnel leave and are not adequately replaced, our business would be adversely affected. We provide compensation incentives such as bonuses, benefits and option grants, which are typically subject to vesting over four years, to attract and retain qualified employees. In addition, certain of our executive officers are subject to one-year non-compete agreements. Non-compete agreements are, however, generally difficult to enforce. Retention of employees and key management may become more difficult because of the uncertainty associated with the proposed separation of our Security and Digital Media and Video businesses. Even though we provide competitive compensation arrangements to our executive officers and other employees, we cannot be certain that we will be able to retain them, including those individuals that are subject to non-compete agreements.

     We believe that our future success will depend in large part on our continuing ability to attract and retain highly qualified technical and management personnel. Competition for such personnel is intense, and we may not be able to retain our key technical and management employees or to attract, assimilate or retain other highly qualified technical and management personnel in the future.

Our OEM customers may develop technology similar to ours, resulting in a reduction in related customer purchases, canceled orders and direct competition from these customers.

     We sell our products to many OEMs who incorporate our products into their offerings or who resell our products in order to provide a more complete solution to their customers. If our OEM customers develop their own products to replace ours, this would result in a loss of sales to those customers as well as increased competition for our products in the marketplace. In addition, these OEM customers could cancel outstanding orders for our products, which could cause us to write down inventory already designated for those customers.

The increased size and complexity of our businesses may create significant burdens on our systems.

     Our business has grown substantially, with net revenue increasing from $23.6 million in 1995 to $184.9 million in 2001. Net revenue was $129.3 million for the nine months ended September 30, 2002. We have expanded our Security business from solutions for the PC platform to include solutions for the digital television platform and have entered into the digital media and video markets. Recently, we have further reorganized into two distinct, internal, business divisions, with mostly separate management teams, to better address the demands of these different markets. This reorganization is a strategic step in our plan to eventually separate our core Security business from our Digital Media and Video business. Managing businesses in each of these markets requires skilled management and substantial resources. To address our need for additional resources and because of various acquisitions, we have increased in size from 67 employees at December 31, 1995 to 521 as of December 31, 2001. As of September 30, 2002, we had 524 employees.

     Although our revenue has not increased in fiscal 2002, our business model contemplates continued revenue growth in certain markets. If this growth occurs and we do not manage it effectively, our stock price and financial condition could be materially and adversely affected. Our growth and our growth plans have placed and are likely to continue to place a significant burden on our operating and financial systems and increase responsibility for senior management and other personnel. Our existing management or any new members of management may not be able to improve our existing systems and controls or implement new systems and controls in response to our anticipated growth. In addition, our intention to reduce or re-deploy personnel to reduce expenses from time to time may limit our capacity to grow.

Any delays in our normally lengthy sales cycle could result in significant fluctuations in our quarterly operating results.

     Our initial sales cycle for a new OEM customer or retail distributor usually takes six to nine months. During this sales cycle, we may expend substantial financial resources and our management’s time and effort with no assurance that a sale will ultimately result. The length of a new customer’s sales cycle depends on a number of factors that we may not be able to control. These factors include the customer’s product and technical requirements and the level of competition we face for that customer’s business. Any delays in the sales cycle for new customers would limit our

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receipt of new revenue and might cause us to expend more resources to obtain new customer wins.

We face risks associated with our past and future acquisitions.

     In the second quarter of 2002, we acquired Towitoko AG, a leading supplier of smart card-based security solutions for home banking and private PC access in the German-speaking market. We may buy or make investments in additional complementary companies, products and technologies. Any acquisition could expose us to significant risks.

     Use of Cash or Issuance of Securities

     A potential investment is likely to result in the use of our limited cash balances or require that we issue debt or equity securities to fund the acquisition. Future equity financings would be dilutive to the existing holders of our common stock. Our ability to use future equity financings to fund acquisitions may be limited by certain tax rules and we may be required to use debt financing instead. Future debt financings could involve restrictive covenants, and we may be unable to obtain debt financing on favorable terms or at all.

     Acquisition Charges

     We may incur acquisition-related charges in connection with any acquisition.

     Integration Risks

     Integration of an acquired company or technology is frequently a complex, time consuming and expensive process. The successful integration of an acquisition requires, among other things, that we:

• integrate and train key management, sales and other personnel;

• integrate the acquired products into our product offerings both from an engineering and sales and marketing perspective;

• integrate and support pre-existing supplier, distribution and customer relationships;

• coordinate research and development efforts; and

• consolidate duplicate facilities and functions.

     The geographic distance between the companies, the complexity of the technologies and operations being integrated, and the disparate corporate cultures being combined may increase the difficulties of integrating an acquired company or technology. Management’s focus on the integration of operations may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. In addition, it is common in the technology industry for aggressive competitors to attract customers and recruit key employees away from companies during the integration phase of an acquisition.

     Unanticipated Assumption of Liabilities

     If we buy a company, we may have to incur or assume that company’s liabilities, including liabilities that are unknown at the time of the acquisition.

We conduct a significant portion of our operations outside the United States. Economic, political, regulatory and other risks associated with international sales and operations could have an adverse effect on our business sales.

     We were originally a German corporation, and we continue to conduct a substantial portion of our business in Europe. Approximately 58%, 48% and 52% of our revenue for the years ended December 31, 2001, 2000 and 1999, respectively, was derived from customers located outside the United States. Approximately 48% of our revenue for the nine months ended September 30, 2002 was derived from customers located outside the United States. Because a significant number of our principal customers are located in other countries, we anticipate that international sales will continue to account for a substantial portion of our revenue. As a result, a significant portion of our sales and operations may continue to be subject to certain risks, including:

• changes in foreign currency exchange rates;

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• changes in a specific country’s or region’s political or economic conditions and stability, particularly in emerging markets;

• unexpected changes in foreign laws and regularity requirements;

• potentially adverse tax consequences;

• longer accounts receivable collection cycles;

• difficulty in managing widespread sales and manufacturing operations; and

• less effective protection of intellectual property.

We could lose money and our stock price could decrease as a result of write downs of our strategic investments.

     We have made strategic minority investments in private and public companies and in the future we may make additional strategic minority investments. Our strategic investments involve a number of risks and we have written down a number of these investments, including ActivCard, SmartDisk, Spyrus, and Satup. We may not realize the expected benefits of these transactions and we may lose all or a portion of our investment, particularly in the case of our private investments. If we were to lose these investments or if the investments were determined to be impaired, we would be forced to write off all or a portion of these investments, which would have a negative impact on our earnings in any given quarter.

Our products may have defects, which could damage our reputation, decrease market acceptance of our products, cause us to lose customers and revenue and result in liability to us, including costly litigation.

     Highly complex products such as our Digital Media and Video hardware and software products may contain defects for many reasons, including defective design or defective material. Often, these defects are not detected until after the products have been shipped. If any of our products contain defects or have reliability, quality or compatibility problems, our reputation might be damaged significantly, we could lose or experience a delay in market acceptance of the affected product or products, and we might be unable to retain existing customers or attract new customers. In addition, these defects could interrupt or delay sales. We may have to invest significant capital, technical, managerial and other resources to correct potential problems and potentially divert these resources from other development efforts. If we fail to provide solutions to potential problems, we could also incur product recall, repair or replacement costs and even litigation costs. These potential problems might also result in claims against us by our customers or others.

     In addition, customers of our Security business rely on our token-based security products to prevent unauthorized access to their digital information. A malfunction of or design defect in our products could result in legal or warranty claims. Although we place warranty disclaimers and liability limitation clauses in our sales agreements and maintain product liability insurance, these measures may be ineffective in limiting our liability. Liability for damages resulting from security breaches could be substantial and the adverse publicity associated with this liability could adversely affect our reputation. These costs could have a material adverse effect on our business and operating results. In addition, a well-publicized security breach involving token-based and other security systems could adversely affect the market’s perception of products like ours in general, or our products in particular, regardless of whether the breach is actual or attributable to our products. In that event, the demand for our products could decline, which would cause our business and operating results to suffer.

Our business could suffer if we or our contract manufacturers cannot meet production requirements.

     Most of our products are manufactured outside the United States because we believe that global sourcing enables us to achieve greater economies of scale, improve gross margins and maintain uniform quality standards for our products. Any significant delay in our ability to obtain adequate supplies of our products from our current or alternative sources would materially and adversely affect our business and operating results. In an effort to reduce our manufacturing costs, we have shifted volume production of many of our Security Division product components to our wholly owned subsidiary in Singapore, SCM Microsystems (Asia) Pte. Ltd. More recently we have transferred our Digital Media and Video product production from Singapore to independent contract manufacturers in Asia in preparation for the proposed separation of these two businesses. Foreign manufacturing poses a number of risks, including:

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• transportation delays and interruptions;

• difficulties in staffing;

• currency fluctuations;

• potentially adverse tax consequences;

• unexpected changes in regulatory requirements;

• tariffs and other trade barriers; and

• political and economic instability.

     If we or any of our contract manufacturers cannot meet our production requirements, we may have to rely on other contract manufacturing sources or identify and qualify new contract manufacturers. Despite efforts to do so, we may be unable to identify or qualify new contract manufacturers in a timely manner and these new manufacturers may not allocate sufficient capacity to us in order to meet our requirements.

     We design and manufacture new products and technologies to address emerging markets that are early in their life cycles. In many cases, our products are the first of their kind to address the evolving business requirements of our customers. While we perform initial beta testing on all our products, in certain cases we are unable to test the efficacy of the design or functionality of our products for mass production. If we are successful in securing large contracts for our products, we cannot be certain that we will be able to produce them in sufficient quantities and that they will meet customer specifications.

We have a limited number of suppliers of key components.

     We rely upon a limited number of suppliers of several key components of our products. For example, we currently utilize the foundry services of TEMIC, Philips and Atmel to produce our ASICs for our digital TV modules, we utilize the foundry services of Atmel and Samsung to produce our ASICs for our smart cards readers, and we purchase digital video compression chips from Zoran and LSI Logic and digital video editing software from Main Concept, DVD Cre8 and Cineform. Our reliance on only one supplier could impose several risks, including an inadequate supply of components, price increases, late deliveries and poor component quality. Disruption or termination of the supply of these components could delay shipments of our products. These delays could have a material adverse effect on our business and operating results and could also damage relationships with current and prospective customers.

We may be exposed to risks of intellectual property infringement by third parties.

     Our success depends significantly upon our proprietary technology. We currently rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect our proprietary rights. Our software, documentation and other written materials are protected under trade secret and copyright laws, which afford only limited protection. We generally enter into confidentiality and non-disclosure agreements with our employees and with key vendors and suppliers.

     Our SmartOS and SmartReady trademarks are registered in the United States, and we continuously evaluate the registration of additional trademarks, as appropriate. We currently have patents issued in both the United States and Europe and have other patent applications pending worldwide. In addition, we have licenses for various other U.S. and European patents associated with our products. Although we often seek to protect our proprietary technology through patents, it is possible that no new patents will be issued, that our proprietary products or technologies are not patentable or that any issued patent will fail to provide us with any competitive advantages.

     There has been a great deal of litigation in the technology industry regarding intellectual property rights. Litigation may be necessary to protect our proprietary technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to use our proprietary information and software. In addition, the laws of some foreign countries do not protect proprietary and intellectual property rights to as great an extent as do the laws of the United States. Because many of our products are sold and a portion of our business is conducted overseas, primarily in Europe, our exposure to intellectual property risks may be higher. Our means of protecting our proprietary and intellectual property rights may not be adequate.

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We may face claims of infringement of the intellectual rights of third parties, which could subject us to costly litigation, supplier and customer indemnification claims and the possible restriction on the use of our intellectual property.

     We have from time to time received claims that we are infringing upon third parties’ intellectual property rights. For example, the Massachusetts Institute of Technology and Electronics for Imaging, Inc. have sued us for patent infringement. See “Part II, Item 1. Legal Proceedings.”

     We expect the likelihood of infringement claims to increase as the number of products and competitors in our markets grows and as we increasingly incorporate third party technology into our products. Any claims or litigation may be time-consuming and costly, cause product shipment delays, or require us to redesign our products. Furthermore, as a result of these claims, we could be required to license intellectually property from a third party. These licenses may not be offered when we need them or on acceptable terms. If we do obtain licenses from third parties, we may be required to pay license fees or royalty payments or we may be required to license some of our intellectual property to others in return for such licenses. In addition, if we are unable to obtain a license that is necessary for us to manufacture our allegedly infringing products, we could be required to suspend the manufacture of products or stop our suppliers from using processes that may infringe the rights of third parties. We may be unsuccessful in redesigning our products or in obtaining the necessary licenses under reasonable terms or at all.

     Our suppliers and customers may also receive infringement claims based on intellectual property included in our products. We have historically agreed to indemnify suppliers and customers for alleged patent infringement. The scope of this indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorney’s fees. In the fourth quarter of 2000, we incurred a $3.8 million charge related to a customer’s alleged infringement of a third party’s patent rights. Although it was unclear that our technology violated any patent or other right or that we were obligated to do so, we elected to indemnify the customer to preserve the customer relationship. We may periodically engage in litigation as a result of these indemnification obligations. Our insurance policies exclude coverage for third party claims for patent infringement.

Our failure to promote our brand successfully and achieve strong brand recognition in our target markets could limit or reduce demand for our Digital Media and Video products.

     We believe that brand recognition will be important to our success, particularly the recognizability of our Dazzle brand. We plan to continue to market this brand to increase awareness. If we fail to promote our brand successfully, we may not be able to generate demand for our products and our revenue might not grow. If our marketing expenses are disproportionately large in relation to our revenue, our results of operations could be adversely affected. The ability of competitors to increase the recognition and acceptance of their brands may affect the relative value of our brand. Also, if our products perform poorly or have other problems, the value of our brand will decrease.

We may experience significant amortization charges and may have future non-recurring charges as a result of past acquisitions.

     In connection with our previous acquisitions accounted for under the purchase method of accounting, in future periods we may experience significant charges related to the amortization of certain intangible assets. In addition, if we later determine that our intangible assets or goodwill are impaired, we will be required to take a related non-recurring charge to earnings. For example, in 2001 we recorded an asset impairment of approximately $36.1 million based on management’s findings that intangible assets and goodwill from previous acquisitions were impaired.

Factors beyond our control could disrupt our operations and increase our expenses.

     We face a number of potential business interruption risks that are beyond our control. In recent periods, the State of California experienced intermittent power shortages and interruptions of service to some business customers. Additionally, we may experience natural disasters that could interrupt our business. Our corporate headquarters are located near a major earthquake fault. The potential impact of a major earthquake on our facilities, infrastructure and overall operations is not known. An earthquake could seriously disturb our entire business process.

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Provisions in our agreements, charter documents, Delaware law and our rights plan may delay or prevent acquisition of us, which could decrease the value of your shares.

     Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include a classified board of directors and limitations on actions by our stockholders by written consent. Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

     SCM has adopted a stockholder rights plan. The rights are not intended to prevent a takeover of SCM. However, the rights may have the effect of rendering more difficult or discouraging an acquisition of SCM deemed undesirable by the SCM Board of Directors. The rights would cause substantial dilution to a person or group that attempts to acquire SCM on terms or in a manner not approved by the SCM Board of Directors, except pursuant to an offer conditioned upon redemption of the rights

     Although we believe the above provisions and the adoption of a rights plan provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders. Also, because these provisions may discourage a change of control, they could decrease the value of our common stock.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

Foreign Currencies

     SCM Microsystems transacts business in various foreign currencies, primarily in certain European countries, the United Kingdom, Singapore and Japan. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to yen-denominated sales in Japan and local currency denominated operating expenses in the UK, Europe and Singapore, where we sell in both local currencies and U.S. dollars. We currently do not use financial instruments to hedge local currency activity at any of our foreign locations. Instead, we believe that a natural hedge exists, in that local currency revenue substantially offsets the local currency denominated operating expenses. We assess the need to utilize financial instruments to hedge foreign currency exposure on an ongoing basis.

     Our foreign currency transactions gains and losses are primarily the result of the revaluation of intercompany receivables/payables (denominated in U.S. dollars) and trade receivables (denominated in a currency other than the functional currency) to the functional currency of the subsidiary.

Fixed Income Investments

     Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments for speculative or trading purposes. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. We do not expect any material loss with respect to our investment portfolio.

     We do not use derivative financial instruments in our investment portfolio to manage interest rate risk. We do, however, limit our exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios. At the present time, the maximum duration of all portfolio investments is limited to two years. The guidelines also establish credit quality standards, limits on exposure to one issue or issuer, as well as the type of instrument. Due to the limited duration and credit risk criteria established in our investment guidelines, the exposure to market and credit risk is not expected to be material.

Item 4. Controls and Procedures

     During the 90-day period prior to the filing of this quarterly report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Our Chief Executive Officer and Chief Financial Officer believe, based on the evaluation, that the design and operation of our disclosure controls and procedures are effective to ensure that material information relating to SCM is made known to them by others within SCM during the period in which this Report on Form 10-Q was being prepared. There have been no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect internal controls subsequent to that evaluation, including any corrective actions with regard to significant deficiencies and material weakness.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

     The Massachusetts Institute of Technology, or MIT, and Electronics for Imaging Inc., or EFI, have sued us for infringing a patent relating to a color reproduction system that is allegedly embedded in our bundled products. This patent expired on May 4, 2002. We believe that, in total, MIT and EFI have sued 214 companies under this patent. We are defending and do not believe our products infringe this patent or that this claim is valid.

Item 2. Changes in Securities and Use of Proceeds

     On November 8, 2002, our Board of Directors approved a stockholders rights plan. Under the plan, we declared a dividend of one preferred share purchase right for each share of SCM common stock held by our stockholders of record as of the close of business on November 25, 2002. Each preferred share purchase right entitles the holder to purchase from us one one-thousandth of a share of Series A Participating Preferred Stock, par value $0.001 per share, at a price of $30.00, subject to adjustment. The rights are not immediately exercisable, however, and will become exercisable only upon the occurrence of certain events. If a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of, 15 percent or more of our common stock while the stockholder rights plan remains in place, then, unless the rights are redeemed by us for $0.001 per right, the rights will become exercisable by all rights holders except the acquiring person or group for shares of SCM or the third party acquirer having a value of twice the right’s then-current exercise price. The stockholder rights plan may have the effect of deterring or delaying a change in control of SCM.

Item 3. Defaults upon Senior Securities

     Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

     At the Annual Meeting of Stockholders of the Company, held on July 10, 2002, the following matters were acted upon by the stockholders of the Company:

1.	The election of Steven Humphreys, Oystein Larsen and Ng Poh Chuan as directors of the Company, each to hold office for a three-year term or until a successor is elected and qualified.
2.	To ratify the appointment of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending December 31, 2002.

     The number of shares of Common Stock outstanding and entitled to vote at the Annual Meeting was 15,607,454 and 6,061,641 shares were represented in person or by proxy, constituting a quorum, which is defined as at least one-third of shares outstanding. The results of the voting on each of the matters presented to stockholders at the Annual Meeting are set forth below:

1. Election of Directors

	Votes For		Votes Withheld
a) Steven Humphreys		6,006,430		0
b) Oystein Larsen		6,061,641		0
c) Ng Poh Chuan		6,060,641		0

							Broker
	Votes For		Votes Withheld		Abstentions		Non-Votes
2.  Ratification of Independent Accountants		5,900,414		68,790		115,707		0

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Item 5. Other Information

     Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No.	Description
3.2	Amended and Restated Bylaws of SCM Microsystems, Inc.
3.3 (*)	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of SCM Microsystems, Inc.
4.1 (*)	Preferred Stock Rights Agreement, dated as of November 8, 2002, between SCM Microsystems, Inc. and American Stock Transfer and Trust Company.
99.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(*)  Incorporated by reference from SCM’s Current Report on Form 8-K filed on November 14, 2002

(b) Reports on 8-K

     A current report on the Form 8-K was filed pursuant to the Securities and Exchange Act of 1934, as amended, on November 14, 2002, to announce the adoption of a stockholder rights plan and file a certificate of designation for the Series A Participating Preferred Stock and the stockholder rights plan.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SCM MICROSYSTEMS, INC.

Date:  November 14, 2002

/s/  ANDREW WARNER
Andrew Warner
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

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SCM Microsystems, Inc.

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert Schneider, Chief Executive Officer of SCM Microsystems, Inc., certify that as of the date hereof:

1.	I have reviewed this quarterly report on Form 10-Q of SCM Microsystems, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002	By:	/s/  ROBERT SCHNEIDER
		Robert Schneider
		Chief Executive Officer

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SCM Microsystems, Inc.

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Andrew Warner, Vice President, Finance and Chief Financial Officer of SCM Microsystems, Inc., certify that as of the date hereof:

1.	I have reviewed this quarterly report on Form 10-Q of SCM Microsystems, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002	By:	/s/  ANDREW WARNER
		Andrew Warner
		Vice President, Finance and Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
3.2	Amended and Restated Bylaws of SCM Microsystems, Inc.
3.3 (*)	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of SCM Microsystems, Inc.
4.1 (*)	Preferred Stock Rights Agreement, dated as of November 8, 2002, between SCM Microsystems, Inc. and American Stock Transfer and Trust Company.
99.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(*)   Incorporated by reference from SCM’s Current Report on Form 8-K filed on November 14, 2002

EX-3.2 3 f85771exv3w2.txt EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF SCM MICROSYSTEMS, INC. A DELAWARE CORPORATION TABLE OF CONTENTS

PAGE ---- ARTICLE I STOCKHOLDERS...........................................................................1 Section 1.1 Annual Meeting..............................................................1 Section 1.2 Special Meetings............................................................1 Section 1.3 Notice of Meetings..........................................................1 Section 1.4 Quorum......................................................................2 Section 1.5 Conduct of the Stockholders' Meeting........................................2 Section 1.6 Conduct of Business.........................................................2 Section 1.7 Notice of Stockholder Business..............................................2 Section 1.8 Proxies and Voting..........................................................3 Section 1.9 Stock List..................................................................4 ARTICLE II BOARD OF DIRECTORS....................................................................4 Section 2.1 Number and Term of Office...................................................4 Section 2.2 Vacancies and Newly Created Directorships...................................4 Section 2.3 Removal.....................................................................4 Section 2.4 Regular Meetings............................................................5 Section 2.5 Special Meetings............................................................5 Section 2.6 Quorum......................................................................5 Section 2.7 Participation in Meetings by Conference Telephone...........................5 Section 2.8 Conduct of Business.........................................................5 Section 2.9 Powers......................................................................6 Section 2.10 Compensation of Directors..................................................6 Section 2.11 Nomination of Director Candidates..........................................6 ARTICLE III COMMITTEES...........................................................................7 Section 3.1 Committees of the Board of Directors........................................7 Section 3.2 Conduct of Business.........................................................8 ARTICLE IV OFFICERS..............................................................................8 Section 4.1 Generally...................................................................8 Section 4.2 Chairman of the Board.......................................................8 Section 4.3 President...................................................................8 Section 4.4 Chief Executive Officer.....................................................9 Section 4.5 Chief Operating Officer.....................................................9 Section 4.6 Vice President..............................................................9 Section 4.7 Treasurer...................................................................9 Section 4.8 Secretary...................................................................9 Section 4.9 Delegation of Authority....................................................10 Section 4.10 Removal...................................................................10 Section 4.11 Action With Respect to Securities of Other Corporations...................10

-i- TABLE OF CONTENTS (Continued)

PAGE ---- ARTICLE V STOCK.................................................................................10 Section 5.1 Certificates of Stock......................................................10 Section 5.2 Transfers of Stock.........................................................10 Section 5.3 Record Date................................................................10 Section 5.4 Lost, Stolen or Destroyed Certificates.....................................10 Section 5.5 Regulations................................................................10 ARTICLE VI NOTICES..............................................................................11 Section 6.1 Notices....................................................................11 Section 6.2 Waivers....................................................................11 ARTICLE VII MISCELLANEOUS.......................................................................11 Section 7.1 Facsimile Signatures.......................................................11 Section 7.2 Corporate Seal.............................................................11 Section 7.3 Reliance Upon Books, Reports and Records...................................11 Section 7.4 Fiscal Year................................................................11 Section 7.5 Time Periods...............................................................12 ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS..........................................12 Section 8.1 Right to Indemnification...................................................12 Section 8.2 Right of Claimant to Bring Suit............................................13 Section 8.3 Non-Exclusivity of Rights..................................................13 Section 8.4 Indemnification Contracts..................................................13 Section 8.5 Insurance..................................................................13 Section 8.6 Effect of Amendment........................................................13 ARTICLE IX AMENDMENT............................................................................14 Section 9.1 Amendment of Bylaws........................................................14

-ii- AMENDED AND RESTATED BYLAWS OF SCM MICROSYSTEMS, INC. A DELAWARE CORPORATION ARTICLE I STOCKHOLDERS Section 1.1 Annual Meeting. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 1.2 Special Meetings. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called only (i) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (ii) by the holders of not less than 10% of all shares entitled to cast votes at the meeting, voting together as a single class and shall be held at such place, on such date, and at such time as they shall fix. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice. Section 1.3 Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 1.4 Quorum. At any meeting of the stockholders, the holders of one-third of all of the shares of stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 1.5 Conduct of the Stockholders' Meeting. At every meeting of the stockholders, the Chairman, if there is such an officer, or if not, the President of the Corporation, or in his absence the Vice President designated by the President, or in the absence of such designation any Vice President, or in the absence of the President or any Vice President, a chairman chosen by the majority of the voting shares represented in person or by proxy, shall act as Chairman. The Secretary of the Corporation or a person designated by the Chairman shall act as Secretary of the meeting. Unless otherwise approved by the Chairman, attendance at the stockholders' meeting is restricted to stockholders of record, persons authorized in accordance with Section 1.8 of these Bylaws to act by proxy, and officers of the Corporation. Section 1.6 Conduct of Business. The Chairman shall call the meeting to order, establish the agenda, and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the stockholders in attendance. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one stockholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 1.6 and Section 1.7, below. The Chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.6 and Section 1.7, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 1.7 Notice of Stockholder Business. At an annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the -2- meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) properly brought before the meeting by or at the direction of the Board of Directors, (c) properly brought before an annual meeting by a stockholder, or (d) properly brought before a special meeting by a stockholder, but if, and only if, the notice of a special meeting provides for business to be brought before the meeting by stockholders. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 60 calendar days nor more than 90 calendar days in advance of the date that the Corporation's (or the Corporation's predecessors) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a special meeting, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding the foregoing provisions of this Section 1.7, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.7 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 1.8 Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. No stockholder may authorize more than one proxy for his shares. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as -3- may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast. Section 1.9 Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE II BOARD OF DIRECTORS Section 2.1 Number and Term of Office. The number of directors shall initially be nine (9) and, thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). A vacancy resulting from the removal of a director by the stockholders as provided in Article II, Section 2.3 below may be filled at special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected, except in the case of the death, resignation or removal of any director. Section 2.2 Vacancies and Newly Created Directorships. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 2.3 Removal. Subject to the rights of holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any -4- time, with cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by a majority of the directors then in office, though less than a quorum, or by the stockholders as provided in Article II, Section 2.1 above. Directors so chosen shall hold office until the new annual meeting of stockholders. Section 2.4 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 2.5 Special Meetings. Special meetings of the Board of Directors may be called by one-third of the directors then in office (rounded up to the nearest whole number) or by the Chairman of the Board of Directors, the Chief Executive Officer, the President, any Vice President or the Secretary and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived personally or by telephone to each director or sent by first-class mail, courier service or telegram, telecopy, facsimile or other electronic or wireless means, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is by mail, such notice shall be deposited in the United States mail not fewer than five (5) days before the time of the holding of the meeting. If the notice is by courier service, telegram, overnight mail, telecopy, facsimile or other electronic or wireless means, such notice shall be deemed adequately delivered when the notice is transmitted at least forty-eight (48) hours prior to the time set for such meeting. If the notice is by telephone or by hand delivery, such notice shall be deemed adequately delivered when the notice is given at least forty-eight (48) hours prior to the time set for such meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. Section 2.6 Quorum. At any meeting of the Board of Directors, a majority of the total number of authorized directors shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 2.7 Participation in Meetings by Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 2.8 Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all -5- matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or requited by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.9 Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, mailing and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (8) To adopt from time to time regulations, not inconsistent with these bylaws, for the management of the Corporation's business and affairs. Section 2.10 Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 2.11 Nomination of Director Candidates. Subject to the rights of holders of any class or series of Preferred Stock then outstanding, nominations for the election of Directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of Directors generally. However, any stockholder entitled -6- to vote in the election of Directors generally may nominate one or more persons for election as Directors at a meeting only if timely notice of such stockholder's intent to make such nomination or nominations has been given in writing to the Secretary of the Corporation. A stockholder nomination for director to be elected at an annual meeting shall be received at the Corporation's principal executive officers not less than 60 calendar days nor more than 90 calendar days in advance of the date that the Corporation's (or the Corporation's predecessors) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time the previous year's proxy statement, or in the event of a special meeting, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote for the election of Directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. In the event that a person is validly designated as a nominee in accordance with this Section 2.11 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee upon delivery, not fewer than five days prior to the date of the meeting for the election of such nominee, of a written notice to the Secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to this Section 2.11 had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substitute nominee. If the chairman of the meeting for the election of Directors determines that a nomination of any candidate for election as a Director at such meeting was not made in accordance with the applicable provisions of this Section 2.11, such nomination shall be void. ARTICLE III COMMITTEES Section 3.1 Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such -7- lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 3.2 Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the authorized members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV OFFICERS Section 4.1 Generally. The officers of the Corporation shall consist of a President, a Chief Executive Officer, a Chief Operating Officer, one or more Vice Presidents, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Chairman of the Board, if there shall be such an officer, and the President shall each be members of the Board of Directors. Any number of offices may be held by the same person. Section 4.2 Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these bylaws. Section 4.3 President. Subject to the provisions of these bylaws and to the direction of the Board of Directors, the President shall have, in coordination with the Chief Executive Officer and the Chief Operating Officer, the responsibility for the general management and control of the -8- business and affairs of the Corporation, and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers (except for the Chief Executive Officer and Chief Operating Officer), employees and agents of the Corporation. Section 4.4 Chief Executive Officer. Subject to the provisions of these bylaws and to the direction of the Board of Directors, the Chief Executive Officer shall have, in coordination with the President and the Chief Operating Officer, the responsibility for the general management and control of the business and affairs of the Corporation, and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers (except for the President and Chief Operating Officer), employees and agents of the Corporation. Section 4.5 Chief Operating Officer. Subject to the provisions of these bylaws and to the direction of the Board of Directors, the Chief Operating Officer shall have, in coordination with the Chief Executive Officer and the President, the responsibility for the general management and control of the business and affairs of the Corporation, and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers (except for the Chief Executive Officer and President), employees and agents of the Corporation. Section 4.6 Vice President. Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. One Vice President shall be designated by the Board to perform the duties and exercise the powers of the President in the event of the President's absence or disability. Section 4.7 Treasurer. Unless otherwise designated by the Board of Directors, the Chief Financial Officer of the Corporation shall be the Treasurer. The Treasurer shall have the responsibility for maintaining the financial records of the Corporation and shall have custody of all monies and securities of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Section 4.8 Secretary. Secretary shall issue all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders, the Board of Directors, and all committees of the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. -9- Section 4.9 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.10 Removal. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. Section 4.11 Action With Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V STOCK Section 5.1 Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any of or all the signatures on the certificate may be facsimile. Section 5.2 Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 5.4 of these bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 5.3 Record Date. The Board of Directors may fix a record date, which shall not be more than sixty (60) nor fewer than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5.5 Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. -10- ARTICLE VI NOTICES Section 6.1 Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram, telecopy or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice shall be deemed to be given shall be the time such notice is received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, if hand delivered, or the time such notice is dispatched, if delivered through the mails or be telegram or mailgram. Section 6.2 Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS Section 7.1 Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 7.2 Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. Section 7.3 Reliance Upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. -11- Section 7.5 Time Periods. In applying any provision of these bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, or of a Partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Delaware Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and amounts expended in seeking indemnification granted to such person under applicable law, this bylaw or any agreement with the Corporation) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 8.2 of this Article VIII, the Corporation shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if (a) such indemnification is expressly required to be made by law, (b) the action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the Corporation, (c) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law, or (d) the action, suit or proceeding (or part thereof) is brought to establish or enforce a right to indemnification under an indemnity agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, unless the Delaware General Corporation Law then so prohibits, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is tendered by such person while a director or officer, including, without limitation. service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or -12- officer, to repay an amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. Section 8.2 Right of Claimant to Bring Suit. If a claim under Section 8.1 of this Article VIII is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The burden of proving such claim shall be on the claimant. It shall be a defense to any such action (other then an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 8.3 Non-Exclusivity of Rights. The rights conferred on any person in Sections 8.1 and 8.2 of this Article VIII shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 8.4 Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VIII. Section 8.5 Insurance. The Corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 8.6 Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VIII by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. -13- ARTICLE IX AMENDMENT Section 9.1 Amendment of Bylaws. The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. -14- EX-99.1 4 f85771exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert Schneider, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended September 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of SCM Microsystems, Inc. By: /s/ ROBERT SCHNEIDER ------------------------------------ Name: Robert Schneider Title: Chief Executive Officer I, Andrew Warner, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended September 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of SCM Microsystems, Inc. By: /s/ ANDREW WARNER ------------------------------------ Name: Andrew Warner Title: Vice President, Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.2

                                                                     EXHIBIT 3.2


                              AMENDED AND RESTATED

                                     BYLAWS

                                       OF

                             SCM MICROSYSTEMS, INC.

                             A DELAWARE CORPORATION



                                TABLE OF CONTENTS



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ARTICLE I STOCKHOLDERS...........................................................................1

        Section 1.1  Annual Meeting..............................................................1
        Section 1.2  Special Meetings............................................................1
        Section 1.3  Notice of Meetings..........................................................1
        Section 1.4  Quorum......................................................................2
        Section 1.5  Conduct of the Stockholders' Meeting........................................2
        Section 1.6  Conduct of Business.........................................................2
        Section 1.7  Notice of Stockholder Business..............................................2
        Section 1.8  Proxies and Voting..........................................................3
        Section 1.9  Stock List..................................................................4

ARTICLE II BOARD OF DIRECTORS....................................................................4

        Section 2.1  Number and Term of Office...................................................4
        Section 2.2  Vacancies and Newly Created Directorships...................................4
        Section 2.3  Removal.....................................................................4
        Section 2.4  Regular Meetings............................................................5
        Section 2.5  Special Meetings............................................................5
        Section 2.6  Quorum......................................................................5
        Section 2.7  Participation in Meetings by Conference Telephone...........................5
        Section 2.8  Conduct of Business.........................................................5
        Section 2.9  Powers......................................................................6
        Section 2.10  Compensation of Directors..................................................6
        Section 2.11  Nomination of Director Candidates..........................................6

ARTICLE III COMMITTEES...........................................................................7

        Section 3.1  Committees of the Board of Directors........................................7
        Section 3.2  Conduct of Business.........................................................8

ARTICLE IV OFFICERS..............................................................................8

        Section 4.1  Generally...................................................................8
        Section 4.2  Chairman of the Board.......................................................8
        Section 4.3  President...................................................................8
        Section 4.4  Chief Executive Officer.....................................................9
        Section 4.5  Chief Operating Officer.....................................................9
        Section 4.6  Vice President..............................................................9
        Section 4.7  Treasurer...................................................................9
        Section 4.8  Secretary...................................................................9
        Section 4.9  Delegation of Authority....................................................10
        Section 4.10  Removal...................................................................10
        Section 4.11  Action With Respect to Securities of Other Corporations...................10



                                      -i-


                               TABLE OF CONTENTS
                                  (Continued)



                                                                                               PAGE
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ARTICLE V STOCK.................................................................................10

        Section 5.1  Certificates of Stock......................................................10
        Section 5.2  Transfers of Stock.........................................................10
        Section 5.3  Record Date................................................................10
        Section 5.4  Lost, Stolen or Destroyed Certificates.....................................10
        Section 5.5  Regulations................................................................10

ARTICLE VI NOTICES..............................................................................11

        Section 6.1  Notices....................................................................11
        Section 6.2  Waivers....................................................................11

ARTICLE VII MISCELLANEOUS.......................................................................11

        Section 7.1  Facsimile Signatures.......................................................11
        Section 7.2  Corporate Seal.............................................................11
        Section 7.3  Reliance Upon Books, Reports and Records...................................11
        Section 7.4  Fiscal Year................................................................11
        Section 7.5  Time Periods...............................................................12

ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS..........................................12

        Section 8.1  Right to Indemnification...................................................12
        Section 8.2  Right of Claimant to Bring Suit............................................13
        Section 8.3  Non-Exclusivity of Rights..................................................13
        Section 8.4  Indemnification Contracts..................................................13
        Section 8.5  Insurance..................................................................13
        Section 8.6  Effect of Amendment........................................................13

ARTICLE IX AMENDMENT............................................................................14

        Section 9.1  Amendment of Bylaws........................................................14



                                      -ii-



                              AMENDED AND RESTATED

                                     BYLAWS

                                       OF

                             SCM MICROSYSTEMS, INC.

                             A DELAWARE CORPORATION

                                    ARTICLE I

                                  STOCKHOLDERS

        Section 1.1 Annual Meeting. An annual meeting of the stockholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.

        Section 1.2 Special Meetings. Special meetings of the stockholders,
for any purpose or purposes prescribed in the notice of the meeting, may be
called only (i) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption) or (ii) by the
holders of not less than 10% of all shares entitled to cast votes at the
meeting, voting together as a single class and shall be held at such place, on
such date, and at such time as they shall fix. Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice.

        Section 1.3 Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).

        When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.



        Section 1.4 Quorum. At any meeting of the stockholders, the holders of
one-third of all of the shares of stock entitled to vote at the meeting, present
in person or by proxy, shall constitute a quorum for all purposes, unless or
except to the extent that the presence of a larger number may be required by
law.

        If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.

        If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.

        Section 1.5 Conduct of the Stockholders' Meeting. At every meeting of
the stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by the
Chairman, attendance at the stockholders' meeting is restricted to stockholders
of record, persons authorized in accordance with Section 1.8 of these Bylaws to
act by proxy, and officers of the Corporation.

        Section 1.6 Conduct of Business. The Chairman shall call the meeting
to order, establish the agenda, and conduct the business of the meeting in
accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.

        The Chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.6 and
Section 1.7, below. The Chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 1.6 and
Section 1.7, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.

        Section 1.7 Notice of Stockholder Business. At an annual or special
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the


                                                                             -2-


meeting. To be properly brought before a meeting, business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) properly brought before the meeting by
or at the direction of the Board of Directors, (c) properly brought before an
annual meeting by a stockholder, or (d) properly brought before a special
meeting by a stockholder, but if, and only if, the notice of a special meeting
provides for business to be brought before the meeting by stockholders. For
business to be properly brought before a meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder proposal to be presented at an
annual meeting shall be received at the Corporation's principal executive
offices not less than 60 calendar days nor more than 90 calendar days in advance
of the date that the Corporation's (or the Corporation's predecessors) proxy
statement was released to stockholders in connection with the previous year's
annual meeting of stockholders, except that if no annual meeting was held in the
previous year or the date of the annual meeting has been changed by more than 30
calendar days from the date contemplated at the time of the previous year's
proxy statement, or in the event of a special meeting, notice by the stockholder
to be timely must be received not later than the close of business on the tenth
day following the day on which such notice of the date of the meeting was mailed
or such public disclosure was made. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual or special meeting (a) a brief description of the business desired to be
brought before the annual or special meeting and the reasons for conducting such
business at the special meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.

        Notwithstanding the foregoing provisions of this Section 1.7, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section 1.7 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.

        Section 1.8 Proxies and Voting. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. No stockholder may
authorize more than one proxy for his shares.

        Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or required by law.

        All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as


                                                                             -3-


may be required under the procedure established for the meeting. Every vote
taken by ballots shall be counted by an inspector or inspectors appointed by the
chairman of the meeting.

        All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.

        Section 1.9 Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.

        The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.

                                   ARTICLE II

                               BOARD OF DIRECTORS

        Section 2.1 Number and Term of Office. The number of directors shall
initially be nine (9) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). A vacancy resulting from the
removal of a director by the stockholders as provided in Article II, Section 2.3
below may be filled at special meeting of the stockholders held for that
purpose. All directors shall hold office until the expiration of the term for
which elected and until their respective successors are elected, except in the
case of the death, resignation or removal of any director.

        Section 2.2 Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause (other than removal
from office by a vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the next annual meeting of
stockholders at which the term of office of the class to which they have been
elected expires. No decrease in the number of directors constituting the Board
of Directors shall shorten the term of any incumbent director.

        Section 2.3 Removal. Subject to the rights of holders of any series of
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any


                                                                             -4-


time, with cause, but only by the affirmative vote of the holders of at least a
majority of the voting power of all of the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class. Vacancies in the Board of
Directors resulting from such removal may be filled by a majority of the
directors then in office, though less than a quorum, or by the stockholders as
provided in Article II, Section 2.1 above. Directors so chosen shall hold office
until the new annual meeting of stockholders.

        Section 2.4 Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.

        Section 2.5 Special Meetings. Special meetings of the Board of Directors
may be called by one-third of the directors then in office (rounded up to the
nearest whole number) or by the Chairman of the Board of Directors, the Chief
Executive Officer, the President, any Vice President or the Secretary and shall
be held at such place, on such date, and at such time as they or he or she shall
fix. Notice of the place, date, and time of each such special meeting shall be
given each director by whom it is not waived personally or by telephone to each
director or sent by first-class mail, courier service or telegram, telecopy,
facsimile or other electronic or wireless means, charges prepaid, addressed to
each director at that director's address as it is shown on the records of the
corporation. If the notice is by mail, such notice shall be deposited in the
United States mail not fewer than five (5) days before the time of the holding
of the meeting. If the notice is by courier service, telegram, overnight mail,
telecopy, facsimile or other electronic or wireless means, such notice shall be
deemed adequately delivered when the notice is transmitted at least forty-eight
(48) hours prior to the time set for such meeting. If the notice is by telephone
or by hand delivery, such notice shall be deemed adequately delivered when the
notice is given at least forty-eight (48) hours prior to the time set for such
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.

        Section 2.6 Quorum. At any meeting of the Board of Directors, a majority
of the total number of authorized directors shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.

        Section 2.7 Participation in Meetings by Conference Telephone. Members
of the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.

        Section 2.8 Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all


                                                                             -5-


matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or requited by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.

        Section 2.9 Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:

                (1) To declare dividends from time to time in accordance with
law;

                (2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;

                (3) To authorize the creation, mailing and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;

                (4) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;

                (5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;

                (6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;

                (7) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and

                (8) To adopt from time to time regulations, not inconsistent
with these bylaws, for the management of the Corporation's business and affairs.

        Section 2.10 Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.

        Section 2.11 Nomination of Director Candidates. Subject to the rights of
holders of any class or series of Preferred Stock then outstanding, nominations
for the election of Directors may be made by the Board of Directors or a proxy
committee appointed by the Board of Directors or by any stockholder entitled to
vote in the election of Directors generally. However, any stockholder entitled


                                                                             -6-


to vote in the election of Directors generally may nominate one or more persons
for election as Directors at a meeting only if timely notice of such
stockholder's intent to make such nomination or nominations has been given in
writing to the Secretary of the Corporation. A stockholder nomination for
director to be elected at an annual meeting shall be received at the
Corporation's principal executive officers not less than 60 calendar days nor
more than 90 calendar days in advance of the date that the Corporation's (or the
Corporation's predecessors) proxy statement was released to stockholders in
connection with the previous year's annual meeting of stockholders, except that
if no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than 30 calendar days from the date
contemplated at the time the previous year's proxy statement, or in the event of
a special meeting, notice by the stockholder to be timely must be received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (b) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote for the election of Directors on the
date of such notice and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; (c) a description of
all arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (e) the consent of each
nominee to serve as a director of the Corporation if so elected.

        In the event that a person is validly designated as a nominee in
accordance with this Section 2.11 and shall thereafter become unable or
unwilling to stand for election to the Board of Directors, the Board of
Directors or the stockholder who proposed such nominee, as the case may be, may
designate a substitute nominee upon delivery, not fewer than five days prior to
the date of the meeting for the election of such nominee, of a written notice to
the Secretary setting forth such information regarding such substitute nominee
as would have been required to be delivered to the Secretary pursuant to this
Section 2.11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.

        If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.11,
such nomination shall be void.

                                   ARTICLE III

                                   COMMITTEES

        Section 3.1 Committees of the Board of Directors. The Board of
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such


                                                                             -7-


lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his place, the member or members of the committee present at the
meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.

        Section 3.2 Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings;
one-third of the authorized members shall constitute a quorum unless the
committee shall consist of one or two members, in which event one member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of such committee.

                                   ARTICLE IV

                                    OFFICERS

        Section 4.1 Generally. The officers of the Corporation shall consist of
a President, a Chief Executive Officer, a Chief Operating Officer, one or more
Vice Presidents, a Secretary and a Treasurer. The Corporation may also have, at
the discretion of the Board of Directors, a Chairman of the Board and such other
officers as may from time to time be appointed by the Board of Directors.
Officers shall be elected by the Board of Directors, which shall consider that
subject at its first meeting after every annual meeting of stockholders. Each
officer shall hold office until his or her successor is elected and qualified or
until his or her earlier resignation or removal. The Chairman of the Board, if
there shall be such an officer, and the President shall each be members of the
Board of Directors. Any number of offices may be held by the same person.

        Section 4.2 Chairman of the Board. The Chairman of the Board, if there
shall be such an officer, shall, if present, preside at all meetings of the
Board of Directors, and exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or prescribed by
these bylaws.

        Section 4.3 President. Subject to the provisions of these bylaws and to
the direction of the Board of Directors, the President shall have, in
coordination with the Chief Executive Officer and the Chief Operating Officer,
the responsibility for the general management and control of the


                                                                             -8-


business and affairs of the Corporation, and shall perform all duties and have
all powers which are commonly incident to the office of chief executive or which
are delegated to him or her by the Board of Directors. He or she shall have
power to sign all stock certificates, contracts and other instruments of the
Corporation which are authorized and shall have general supervision and
direction of all of the other officers (except for the Chief Executive Officer
and Chief Operating Officer), employees and agents of the Corporation.

        Section 4.4 Chief Executive Officer. Subject to the provisions of these
bylaws and to the direction of the Board of Directors, the Chief Executive
Officer shall have, in coordination with the President and the Chief Operating
Officer, the responsibility for the general management and control of the
business and affairs of the Corporation, and shall perform all duties and have
all powers which are commonly incident to the office of chief executive or which
are delegated to him or her by the Board of Directors. He or she shall have
power to sign all stock certificates, contracts and other instruments of the
Corporation which are authorized and shall have general supervision and
direction of all of the other officers (except for the President and Chief
Operating Officer), employees and agents of the Corporation.

        Section 4.5 Chief Operating Officer. Subject to the provisions of these
bylaws and to the direction of the Board of Directors, the Chief Operating
Officer shall have, in coordination with the Chief Executive Officer and the
President, the responsibility for the general management and control of the
business and affairs of the Corporation, and shall perform all duties and have
all powers which are commonly incident to the office of chief executive or which
are delegated to him or her by the Board of Directors. He or she shall have
power to sign all stock certificates, contracts and other instruments of the
Corporation which are authorized and shall have general supervision and
direction of all of the other officers (except for the Chief Executive Officer
and President), employees and agents of the Corporation.

        Section 4.6 Vice President. Each Vice President shall have such powers
and duties as may be delegated to him or her by the Board of Directors. One Vice
President shall be designated by the Board to perform the duties and exercise
the powers of the President in the event of the President's absence or
disability.

        Section 4.7 Treasurer. Unless otherwise designated by the Board of
Directors, the Chief Financial Officer of the Corporation shall be the
Treasurer. The Treasurer shall have the responsibility for maintaining the
financial records of the Corporation and shall have custody of all monies and
securities of the Corporation. He or she shall make such disbursements of the
funds of the Corporation as are authorized and shall render from time to time an
account of all such transactions and of the financial condition of the
Corporation. The Treasurer shall also perform such other duties as the Board of
Directors may from time to time prescribe.

        Section 4.8 Secretary. Secretary shall issue all authorized notices for,
and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.


                                                                             -9-


        Section 4.9 Delegation of Authority. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.

        Section 4.10 Removal. Any officer of the Corporation may be removed at
any time, with or without cause, by the Board of Directors.

        Section 4.11 Action With Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.

                                    ARTICLE V

                                      STOCK

        Section 5.1 Certificates of Stock. Each stockholder shall be entitled
to a certificate signed by, or in the name of the Corporation by, the President
or a Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer, certifying the number of shares owned by
him or her. Any of or all the signatures on the certificate may be facsimile.

        Section 5.2 Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 5.4
of these bylaws, an outstanding certificate for the number of shares involved
shall be surrendered for cancellation before a new certificate is issued
therefor.

        Section 5.3 Record Date. The Board of Directors may fix a record date,
which shall not be more than sixty (60) nor fewer than ten (10) days before the
date of any meeting of stockholders, nor more than sixty (60) days prior to the
time for the other action hereinafter described, as of which there shall be
determined the stockholders who are entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to receive payment of any
dividend or other distribution or allotment of any rights; or to exercise any
rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.

        Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.

        Section 5.5 Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.


                                                                            -10-


                                   ARTICLE VI

                                     NOTICES

        Section 6.1 Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid
telegram, mailgram, telecopy or commercial courier service. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.

        Section 6.2 Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.

                                   ARTICLE VII

                                  MISCELLANEOUS

        Section 7.1 Facsimile Signatures. In addition to the provisions for
use of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.

        Section 7.2 Corporate Seal. The Board of Directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.

        Section 7.3 Reliance Upon Books, Reports and Records. Each director,
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.

        Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the Board of Directors.


                                                                            -11-


        Section 7.5 Time Periods. In applying any provision of these bylaws
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.

                                  ARTICLE VIII

                    INDEMNIFICATION OF DIRECTORS AND OFFICERS

        Section 8.1 Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a Partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by Delaware Law, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said Law permitted the Corporation
to provide prior to such amendment) against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
amounts paid or to be paid in settlement and amounts expended in seeking
indemnification granted to such person under applicable law, this bylaw or any
agreement with the Corporation) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in Section 8.2 of this Article VIII, the Corporation
shall indemnify any such person seeking indemnity in connection with an action,
suit or proceeding (or part thereof) initiated by such person only if (a) such
indemnification is expressly required to be made by law, (b) the action, suit or
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation, (c) such indemnification is provided by the Corporation, in its
sole discretion, pursuant to the powers vested in the Corporation under the
Delaware General Corporation Law, or (d) the action, suit or proceeding (or part
thereof) is brought to establish or enforce a right to indemnification under an
indemnity agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law. Such right shall be a
contract right and shall include the right to be paid by the Corporation
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, unless the Delaware General Corporation
Law then so prohibits, the payment of such expenses incurred by a director or
officer of the Corporation in his or her capacity as a director or officer (and
not in any other capacity in which service was or is tendered by such person
while a director or officer, including, without limitation. service to an
employee benefit plan) in advance of the final disposition of such proceeding,
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or


                                                                            -12-


officer, to repay an amounts so advanced if it should be determined ultimately
that such director or officer is not entitled to be indemnified under this
Section or otherwise.

        Section 8.2 Right of Claimant to Bring Suit. If a claim under Section
8.1 of this Article VIII is not paid in full by the Corporation within ninety
(90) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if such suit is not frivolous or
brought in bad faith, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The burden of proving such claim shall be on the
claimant. It shall be a defense to any such action (other then an action brought
to enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any, has been
tendered to this Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the Corporation (including its Board of Directors, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.

        Section 8.3 Non-Exclusivity of Rights. The rights conferred on any
person in Sections 8.1 and 8.2 of this Article VIII shall not be exclusive of
any other right which such persons may have or hereafter acquire under any
statute, provision of the Certificate of Incorporation, bylaw, agreement, vote
of stockholders or disinterested directors or otherwise.

        Section 8.4 Indemnification Contracts. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VIII.

        Section 8.5 Insurance. The Corporation shall maintain insurance to the
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.

        Section 8.6 Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VIII by the stockholders or the directors of
the Corporation shall not adversely affect any right or protection of a director
or officer of the Corporation existing at the time of such amendment, repeal or
modification.


                                                                            -13-


                                   ARTICLE IX

                                    AMENDMENT

        Section 9.1 Amendment of Bylaws. The Board of Directors is expressly
empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption,
amendment or repeal of Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any resolution providing for adoption, amendment or repeal is
presented to the Board). The stockholders shall also have power to adopt, amend
or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of
Bylaws of the Corporation by the stockholders shall require, in addition to any
vote of the holders of any class or series of stock of the Corporation required
by law or by this Certificate of Incorporation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.


                                                                            -14-

EX-99.1

                                                                    EXHIBIT 99.1



      CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


    I, Robert Schneider, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended September
30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Quarterly
Report on Form 10-Q fairly presents in all material respects the financial
condition and results of operations of SCM Microsystems, Inc.


                                        By:        /s/ ROBERT SCHNEIDER
                                            ------------------------------------
                                        Name:  Robert Schneider
                                        Title: Chief Executive Officer



    I, Andrew Warner, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended September
30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Quarterly
Report on Form 10-Q fairly presents in all material respects the financial
condition and results of operations of SCM Microsystems, Inc.


                                        By:        /s/ ANDREW WARNER
                                            ------------------------------------
                                        Name:  Andrew Warner
                                        Title: Vice President, Finance and Chief
                                               Financial Officer