e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended March 31, 2008


o		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 000-11284

Silicon Mountain Holdings, Inc.

(Exact name of registrant as specified in its charter)


Colorado		84-0910490
(State or other jurisdiction		(IRS Employer
of incorporation)		Identification No.)

4755 Walnut Street, Boulder Colorado 80301

(Address of principal executive offices)

(303) 938-1155

(Registrant’s telephone number)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.001 par value, 5,961,263 outstanding as of May 20, 2008.

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Silicon Mountain Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)


	March 31,			December 31,
	2008			2007
	(Unaudited)			(Unaudited)

ASSETS
Current Assets
Cash	$	148,378		$	21,993
Accounts receivable, net		1,567,935			1,898,324
Inventory, net		729,375			837,086
Prepaid and other current assets		167,887			161,623

Total current assets		2,613,575			2,919,026
Property and equipment, net		378,388			429,900
Note receivable		153,796			155,050
Intangible Assets, net		3,091,809			3,237,953
Goodwill		191,775			191,775
Other assets		33,238			35,486

Total Assets	$	6,462,581		$	6,969,190

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable	$	2,396,057		$	1,927,538
Accrued expenses and other current liabilities		2,507,146			961,767
Note payable to related parties		186,083			181,557
Current portion of capital leases liability		9,391			11,390
Current maturities of notes payable		691,176			1,073,529

Total current liabilities		5,789,853			4,155,781
Capital lease liability, less current portion		24,210			26,290
Revolving credit facility		1,231,439			1,309,995
Long-term debt, less current maturities		3,530,979			3,460,486

Total Liabilities		10,576,481			8,952,552
Commitments and Contingencies
Stockholders’ Equity (Deficit)
Preferred stock, $.001 par value; 3,000,000 authorized		—			—
Common stock, $.001 par value, respectively; 30,000,000 authorized; 5,961,263 and 5,461,263 shares issued, and outstanding, respectively		5,961			5,461
Additional Paid-in Capital		2,223,041			1,690,570
Accumulated Deficit		(6,342,902	)		(3,679,393	)

Total Stockholders’ Equity (Deficit)		(4,113,900	)		(1,983,362	)

Total Liabilities and Stockholders’ Equity (Deficit)	$	6,462,581		$	6,969,190

See accompanying notes to condensed consolidated financial statements.

Silicon Mountain Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)


	For the Three Months Ended
	March 31,
	2008			2007
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(2,663,509	)	$	(186,924	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		71,097			71,450
Amortization of loan origination		59,286			59,286
Amortization of intangibles		86,858			118,407
Amortization of debt discount		62,553			66,368
Stock based compensation expense options		32,971			30,633
Bad debt expense		3,422			599
Inventory obsolescence		(9,000	)		8,500
Changes in operating assets and liabilities:
Accounts receivables		326,967			(521,826	)
Inventories		116,711			140,988
Prepaid expenses and other current assets		(2,705	)		(27,779	)
Accounts payable		468,520			57,323
Accrued expenses and other current liabilities		1,549,905			(188,374	)


Net cash provided by (used in) operating activities		103,076			(371,349	)


Cash flows from investing activities:
Purchase of property and equipment		(19,584	)		(82,861	)

Net cash (used in) investing activities		(19,584	)		(82,861	)


Cash flows from financing activities:
Principal payments on notes payable		(150,000	)		—
Proceeds from line of credit		5,349,072			7,501,167
Repayments on line of credit		(5,452,040	)		(7,225,876	)
Repayments of capital leases		(4,079	)		(8,858	)
Proceeds from issuance of common stock		300,000			—

Net cash provided by (used in) financing activities		42,953			266,433


Increase (decrease) in cash and cash equivalents		126,445			(187,777	)

Cash and cash equivalents at beginning of period		21,933			356,311


Cash and cash equivalents at end of period	$	148,378		$	168,534


Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	150,129		$	222,873

Cash paid (received) for income taxes	$	(51,367	)	$	0


Supplemental Schedule of Non-Cash Financing Activities:
Conversion of note payable to common stock	$	200,000		$	0

See accompanying notes to condensed consolidated financial statements.

1. Basis of Presentation

The accompanying condensed consolidated financial statements of Silicon Mountain Holdings, Inc. (“Silicon Mountain,” the “Company,” the “Registrant,” “SMH,” “we” or “us”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company earns revenue from the sale of its custom servers, workstations and storage devices, but does not separate sales of different product lines into operating segments. The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and disclosures normally included in financial statements have been omitted under SEC regulations. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s amended 10-K/A for the year ended December 31, 2007 which was filed with the SEC on May 19, 2008. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.

The Company disclosed in Note 1 to its audited financial statements for the year ended December 31, 2007, those accounting policies that it considers to be significant in determining its results of operations and financial position. There have been no material changes to or application of the accounting policies previously identified and described in the Company’s audited financial statements set forth in our amended 10-K/A filed with the SEC on May 19, 2008.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.

On August 28, 2007, when the Company name was Z-Axis Corporation, the Company acquired all the outstanding stock of Silicon Mountain Memory, Inc. in exchange for 5,065,510 shares of our common stock. Immediately following the transaction, the former stockholders of Silicon Mountain Memory owned more than 90% of outstanding common stock and the Company changed its name to Silicon Mountain Holdings, Inc. The financial statements referred to in this release for comparison of the prior year’s results are the financial statements of Silicon Mountain Memory, Inc. Following the transaction, the Company’s fiscal year end changed from March 31 to December 31.

Liquidity — The accompanying condensed consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and extinguishment of liabilities in the normal course of business. The Company has incurred net losses of $2,663,509 and $2,909,474 for the three months ended March 31, 2008 and the year ended December 31, 2007, and has a working capital deficit of approximately $3,176,278 as of March 31, 2008. These factors, among others, may indicate that the Company may be unable to continue as a going concern. The Company’s financial statements do not include adjustments related to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The Company’s ability to establish itself as a going concern is dependent upon its ability to obtain additional financing to fund planned operations and to ultimately achieve profitable operations. Management believes that the expected cashflows from operations and the availability on our Line of Credit together will provide the necessary liquidity to support operations and any payments coming due in the next twelve months. Management has also been actively engaged in seeking alternative financing if cash flow from operations and its Line of Credit are not sufficient to support operations for the next twelve months. As of the time of this filing, we have not been able to secure the necessary financing.

2. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of SMH and its wholly-owned subsidiaries, Silicon Mountain Memory, Inc. (“SMM”), and VCI. All significant intercompany transactions and balances have been eliminated in consolidation.

Reclassifications — Certain prior year amounts have been reclassified to conform with current year presentation. Such reclassifications had no effect on net income or loss.

Cash and Cash Equivalents — Cash and cash equivalents are defined as cash on hand and cash in bank accounts.

Inventory — Inventory consists of wholesale goods held for resale. Inventory is stated at the lower of cost or market, as calculated using the first in — first out method. The Company records provisions for slow-moving inventory to the extent the cost of inventory exceeds estimated net realizable value. The Company recorded an allowance of $127,000 and $136,000 as of March 31, 2008 and December 31, 2007, respectively.

Intangible Assets — Intangible assets are comprised of loan fees, customer lists, business processes, trademarks, domain and brand names acquired in connection with the acquisitions of Super PC Memory, Inc., in January 2004 and VCI Vision Computers, Inc., in September 2006. Intangible assets are amortized over the estimated useful lives ranging from three to fifteen years.

Goodwill — In connection with the acquisition of VCI Vision Computers in September 2006, the Company recorded goodwill, resulting from the excess of the consideration paid over the fair value of assets and liabilities assumed. In accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), the Company does not amortize goodwill, but performs periodic reviews for impairment. No impairments were recorded for the periods presented.

Impairment of Long-Lived Assets — SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that an asset be evaluated for impairment when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows of the asset. In accordance with the provisions of SFAS No. 144, the Company reviews the carrying values of its long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable or at least annually in the fourth quarter. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The fair value of impaired assets is determined based on the present values of expected future cash flows using discount rates commensurate with the risks involved in the asset group. The long-lived assets of the Company, which are subject to evaluation, consist primarily of trademarks, customer lists, and reseller relationships. The Company has not recorded an impairment loss on its intangible assets for the three months ended March 31, 2008 and 2007, respectively.

Accrued Expenses — In the first quarter of 2008, the Company’s management decided to consolidate its Arizona operations into the California facilities. As a result, in accordance with FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company recorded significant acquisition-related restructuring charges, in connection with our abandonment of certain leased facilities through our office consolidations. The lease abandonment costs were estimated to include remaining lease liabilities. The Company recorded $1,451,000 in restructuring charges in the first quarter of 2008. The consolidation of Arizona is expected to result, subsequent to its completion, in annual cost savings of between $0.6 million to $0.8 million from the elimination of redundant facilities and related expenses and employee reductions. We currently anticipate that Arizona will continue operations until June 2008 to service customer requirements.

Share-Based Payments — Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards (including stock options) made to employees and directors based on estimated fair value. Compensation expense for equity-classified awards are measured at the grant date based on the fair value of the award and is recognized as an expense in earnings over the requisite service period.

Revenue Recognition — The Company accounts for its revenues under the provisions of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements (SAB No. 104).

Under the provisions of SAB No. 104, the Company recognizes revenues from sales of products, when persuasive evidence of an arrangement exists, shipment has occurred and title has transferred, the sales price is fixed and determinable, collection of the resulting receivable is reasonably assured, and all significant obligations have been met. Generally, this occurs at the time of shipment when risk of loss and title has passed to the customer. Estimated sales returns and warranty costs, based on historical experience, changes in customer demand, and other factors, are recorded at the time product revenue is recognized in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists and SFAS No. 5, Accounting for Contingencies, respectively.

Use of Estimates — The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

Credit Risk and Concentrations — The Company sells products and extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company reviews trade receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. The Company has an allowance for doubtful accounts of $56,758 and $74,591 as of March 31, 2008 and December 31, 2007, respectively. The Company recorded bad debt expense of $3,412 and $599 for the three months ended March 31, 2008 and 2007, respectively. The Company does not charge interest on past due balances. The Company considers all balances past due if unpaid after 30 days after invoicing.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. Accounts receivable from largest customer accounted for 53% and 53% of total accounts receivable at March 31, 2008 and December 31, 2007, respectively.

Approximately 43% and 32% of the Company’s sales were to its largest customer during the three months ended March 31, 2008 and 2007, respectively.

Warranty Reserve — The Company engages in extensive product quality programs and processes, which includes monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the extent of the market affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. The adequacy of the reserve for warranty costs is determined by considering the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While management believes the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires.

Income Taxes — The Company accounts for income taxes using an asset and liability approach. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company is subject to potential income tax audits in all of the jurisdictions in which it operates and, as a result, must also assess exposures to any potential issues arising from current or future audits of its tax filings. Accordingly, the Company must assess such potential exposure and, where necessary, provide a reserve to cover any expected loss. To the extent that the Company establishes a reserve, its provision for income taxes would be increased. If the Company ultimately determines that payment of these amounts is unnecessary, it reverses the liability and recognizes a tax benefit during the period in which it determines that the liability is no longer necessary. It is more likely than not that the Company is going to realize its deferred tax assets and therefore has a valuation allowance against them.

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.

Upon the adoption of FIN 48, we had no unrecognized tax positions. During the three months ended March 31, 2008, we recognized no adjustments for uncertain tax positions.

We recognize interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties related to uncertain tax positions were accrued at March 31, 2008 and December 31, 2007.

The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions in which we operate. We expect no material changes to unrecognized tax positions within the next twelve months.

Recent Accounting Pronouncements — In December 2007, the FASB issued SFAS No. 141 (revised December 2007), “Business Combinations” (“SFAS 141R”), which replaces FASB Statement No. 141, “Business Combinations.” This statement requires an acquirer to recognize identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their full fair values at that date, with limited exceptions. Assets and liabilities assumed that arise from contractual contingencies as of the acquisition date must also be measured at their acquisition-date full fair values. SFAS 141R requires the acquirer to recognize goodwill as of the acquisition date, and in the case of a bargain purchase business combination, the acquirer shall recognize a gain. Acquisition-related costs are to be expensed in the periods in which the costs are incurred and the services are received. Additional presentation and disclosure requirements have also been established to enable financial statement users to evaluate and understand the nature and financial effects of business combinations. SFAS 141R is to be applied prospectively for acquisition dates on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In December 2007, the FASB issued SFAS No.160, Non-controlling Interests in Consolidated Financial Statements, including an amendment of ARB No. 51 (“SFAS No. 160”) which established accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The effective date of SFAS No. 160 is for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: (“SFAS No. 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 will be effective for us on January 1, 2008. The implementation of this statement had no material impact on our financial position, cash flows and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not provide for any new fair value measurements and applies to existing pronouncements that require fair value measurement. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007, which for the Company is 2008. The adoption of SFAS 157 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related

hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161.

3. Z-Axis Acquisition of Silicon Mountain Memory, Inc.

The Stock Exchange

On August 28, 2007, the Company consummated a stock exchange (the “Exchange”) with SMM pursuant to the Stock Exchange Agreement, dated May 7, 2006. Pursuant to the Exchange, the Company acquired all of the issued and outstanding capital stock of SMM, and in exchange the Company issued 5,065,510 shares of common stock, par value $.001 per share, to the former SMM stockholders. In the Exchange, SMM stockholders received approximately 1.1098 shares of post-split common stock for each share of SMM common stock owned by them. The Company also exchanged warrants with the existing SMM warrant holders. Upon the consummation of the Exchange and as further described below, the board and management of SMM became the board and management of the Company.

As a result, immediately after the Exchange, the former SMM stockholders held approximately 93% of the issued and outstanding stock of the Company. Additionally, as a result of the Exchange, SMM became a wholly-owned subsidiary of the Company. Copies of the Exchange Agreement and other agreements entered into in conjunction with the Exchange Agreement were filed as annexes to the Proxy on Schedule 14A filed by the Company with the SEC on July 24, 2007.

Immediately prior to the Exchange, the Company conducted a one-for-nine reverse split of its outstanding common stock, which resulted in the outstanding common stock being reduced from 3,825,000 shares to 425,000 post-split shares. As part of the Exchange, the Company issued common stock purchase warrants including the warrants described above (the “Company Warrants”) in exchange for all of SMM’s outstanding common stock purchase warrants (the “SMM Warrants”). The holder of each SMM Warrant to purchase one share of SMM’s common stock tendered for exchange, received Company Warrants to purchase approximately 1.1098 shares of common stock for the duration of the original exercise period of the SMM Warrant at an equivalent exercise price.

As part of the Stock Exchange, the Company assumed SMM’s existing 2003 Equity Incentive Plan and all the outstanding vested and unvested stock options of SMM issued pursuant to the plan, as more fully described in the Proxy on Schedule 14A filed with the SEC on July 24, 2007. The number of outstanding stock options was adjusted using the same exchange ratio as described above.

Holders of 93% of SMM’s common stock prior to the Exchange and certain holders of common stock entered into lockup agreements pursuant to which they agreed, subject to certain exceptions, not to sell, sell short, grant an option to buy, or otherwise dispose of any shares of common stock for a period of twelve months following the closing of the Stock Exchange.

The LLC Sale

Prior to the closing of the Exchange, the Company’s principal business was to develop and produce video, computer-generated graphics and multimedia presentations used principally in litigation support services. Immediately prior to the Exchange, Z-Axis LLC, a Colorado limited liability company and a wholly-owned subsidiary, held all of the Company’s assets, subject to all of the Company’s liabilities. Concurrent with the closing of the Stock Exchange, the Company sold all of the 1,000 outstanding membership interests in Z-Axis LLC to a limited liability company formed by Mr. Alan Treibitz, Ms. Stephanie S. Kelso and Mr. Raymond Hauschel (the “Purchasing LLC”) pursuant to the LLC Interest Sale Agreement dated as of June 30, 2006, between the Company and the Purchasing LLC. Mr. Treibitz and Ms. Kelso were members of the Company’s Board of Directors prior to the closing of the Exchange, and were the chief executive officer and president, respectively, prior to the closing of the Exchange. The purchase price paid by the Purchasing LLC for the Z-Axis LLC membership interests was $300,000 payable in a combination of $60,000 cash, 33,457 post-split shares of stock of the Company that were redeemed from members of the Purchasing LLC, and a promissory note in the face amount of $150,000. As of March 31, 2008 the collectibility of the note receivable is reasonably assured.

As a result of the LLC sale, the Company no longer owns or operates a litigation support services business, and instead solely owns and operates SMM’s business.

Accounting Treatment

The Company’s transaction with SMM was accounted for as a reverse acquisition and purchase accounting was applied to the acquired assets and assumed liabilities of SMM. In form, Z-Axis was the legal acquirer in the transaction and the continuing registrant for SEC reporting purposes. However, due to the majority ownership in the

combined entity held by SMM shareholders, SMM was designated the acquirer for accounting purposes and, effective on the transaction date, the historical financial statements of SMM became the historical financial statements of the continuing registrant for all periods prior to the transaction. The per share common stock of SMM was restated retroactively to reflect the change of the par value of the common stock from $0.01 to $0.001 per share. Immediately following the Stock Exchange, the Company changed its name from Z-Axis Corporation to Silicon Mountain Holdings, Inc.

4. Acquisitions

On September 26, 2006, the Company acquired substantially all the assets and certain liabilities of VCI, an Arizona-based company that manufactures custom tower and rackmount servers, office and graphic workstations, and network attached storage servers. VCI was acquired to diversify product offerings. Before the VCI acquisition, the majority of the Company’s sales were in the memory sector. Pursuant to the SFAS No. 141, Business Combinations (“SFAS 141”), the transaction is being accounted for using the purchase method of accounting. The total consideration for the acquisition was $3,205,415, comprised of $3 million in cash and $0.2 million for legal expenses. Subsequently, the Company recorded a purchase price adjustment of $92,441, resulting in a net purchase price of $3,237,058. The Company retained an independent appraiser to assist with the assigning of the fair values to the identifiable intangibles acquired from Visionman Computers, Inc. The acquisition generated goodwill, trademark and reseller relationship intangible assets acquired of $0.3 million, $1.6 million and $0.6 million, respectively. The useful lives of the trademark and the reseller relationship intangible assets are ten years.

The total adjusted purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. An independent appraiser assigned values to the identifiable intangible assets acquired. The following table summarizes the fair value of the assets acquired and the liabilities assumed at the date of the acquisition:


Accounts Receivable	$	318,894
Inventory		353,630
Note Receivable		205,415
Fixed Assets		105,750
Trademark		1,565,000
Reseller Relationship		647,750
Goodwill		191,775
Sales and warranty reserves		(112,000	)
Accounts Payable		(39,156	)

	$	3,237,058

On August 14, 2007, SMM purchased the assets of Widow PC, Inc., a small company previously involved in marketing and selling gaming laptops and desktop computers. The purchase price for the assets was $165,000 paid at closing and a potential 24-month cash earnout of up to an additional $458,000, depending upon gross margins for sales of the gaming computers during that period.

5. Goodwill and Intangible Assets

In accordance with SFAS 142, the Company does not amortize goodwill derived from purchase business combinations. SFAS 142 requires that goodwill be tested annually for impairment and more frequently if events or changes in circumstances indicate assets might be impaired. A significant decline in our stock price, projected revenue, projected earnings growth or projected cash flows are examples of such circumstances. The impairment test involves the use of estimates related to the fair value of the reporting units with which the goodwill is associated. The estimate of fair value requires significant judgment, including future cash flows and discount rates. The Company did not record an impairment of its intangible assets for the three months ended March 31, 1008 and 2007, respectively.

Intangible assets recognized in the Company’s acquisitions and asset purchases are being amortized over their estimated lives ranging from 3 to 15 years. The following table provides information relating to the Company’s intangible assets as of March 31, 2008 and December 31, 2007:


	March 31, 2008							December 31, 2007
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net

Super PC acquisition:
Customer list	$	1,067,616		($296,404	)	$	771,212	$	1,067,616		($278,714	)	$	788,902
Widow PC tradename		165,000		(36,664	)		128,336		165,000		(22,915	)		142,085
VCI acquisition:
Trademarks		1,565,000		(234,856	)		1,330,144		1,565,000		(195,630	)		1,369,370
Customer list		647,750		(97,164	)		550,586		647,750		(80,970	)		566,780

		3,445,366		(665,088	)		3,091,809		3,445,366		(578,229	)		2,867,137
Loan fees and other miscellaneous		667,310		(355,779	)		311,531		667,310		(296,494	)		370,816

Total	$	4,112,676		($1,020,867	)	$	3,091,809	$	4,112,676		($874,723	)	$	3,257,953

During the three months ended March 31, 2008 and 2007, amortization expense was $146,144 and $177,692, respectively. The estimated amortization of intangible assets for each of the next five year periods is as follows:


Remainder of 2008	$	438,449
2009		481,120
2010		324,545
2011		292,452
2012		292,452
Thereafter		1,262,791

Total	$	3,091,809

6. LONG-TERM DEBT AND SHORT-TERM BORROWINGS

On September 25, 2006, SMM entered into a security and purchase agreement among SMM, VCI Systems and Laurus Master Fund, Ltd., an institutional accredited investor (the “Lender”) (as amended from time to time, the “Security and Purchase Agreement”) pursuant to which the Lender agreed to loan up to $8,500,000 to SMM and VCI Systems (the “Loan”). On August 28, 2007, following the SMM Acquisition more fully described above, we entered into a Master Security Agreement, a Joinder Agreement, a Registration Rights Agreement, and Guaranty, which are included as Exhibits to our Current Report on Form 8-K filed on September 4, 2007, among other documents (the “Loan Documents”), with Lender and certain affiliates. Pursuant to the Loan Documents, we agreed to become a party to the Security and Purchase Agreement and Stock Pledge Agreement, which were included as Exhibits to the same Current Report on Form 8-K, and certain of the debt financing documents that our wholly-owned subsidiary, SMM, had entered into with the Lender in September 2006. As a result, the Company, SMM and VCI Systems are jointly and severally liable for the amounts due under the Loan and are referred to in this “Debt Financing” section as the “Borrowers.” Silicon Mountain, SMM and VCI Systems also may be referred to as the “Companies.”

The proceeds of the Loan were used to consummate the acquisition of certain assets of VCI Vision Computers, Inc., to repay certain existing indebtedness including SMM’s credit facility existing prior to the closing of the Loan, and for general working capital purposes. All SMM debt outstanding as of the closing of the Loan and remaining outstanding following the closing of the Loan is subordinated to the Loan.

The Loan consists of a $3,500,000 secured revolving credit facility (the “Revolving Note”), a $2,500,000 secured nonconvertible term note (the “Term Note”) and a $2,500,000 secured convertible term note (the “Convertible Note”). The Revolving Note, the Term Note and the Convertible Note are referred to collectively as the “Notes.” Each of the Notes matures on September 25, 2009. The following describes the material terms of each Note and of the Loan. The Lender’s prime rate the inception of the Loan was 8.25%. On May 15, 2008, the Lender’s prime rate was 5%.

Revolving Note

The Revolving Note bears interest at a rate per annum equal to the “prime rate” published in The Wall Street Journal from time to time plus (i) during the period commencing on the initial issuance date of the Revolving Note through and including March 31, 2008, two percent (2%), and (ii) on and after April 1, 2008, five percent (5%). The Companies may elect to make interest payments due under the Revolving Note in cash or common stock, or a combination of both, so long as (i) not more than that portion of the monthly interest payment attributable to three percent (3%) of the applicable interest rate may be paid in common stock, and (ii) common stock may not be issued as an interest payment if such issuance would result in the Laurus’ beneficial ownership exceeding 9.99% of the then outstanding shares of common stock.

The Revolving Note provides for credit advances based on 90% of certain accounts receivable and 50% of inventory (with a $1,000,000 maximum credit availability based solely on inventory). The Borrowers and Laurus entered into an Overadvance Side Letter Agreement dated as of March 14, 2008 (the “Original Side Letter”) pursuant to which Laurus agreed to extend to the Companies $300,000 in excess of the amount then permissible under the Revolving Note. On April 16, 2008, the Borrowers and Laurus entered into an Amended and Restated Overadvance Side Letter Agreement (the “Amended Side Letter”) to be effective April 15, 2008, pursuant to which Laurus agreed to extend to the Companies an additional $750,000 in excess of the amount then permissible under the Revolving Note, as modified by the Original Side Letter, for an aggregate excess amount equal to $1,050,000.

Convertible Note

The Convertible Note bears interest at a rate per annum equal to the “prime rate” published in The Wall Street Journal from time to time plus (i) during the period commencing on the initial issuance date of the Convertible Note through and including March 31, 2008, three percent (3%), and (ii) on and after April 1, 2008, five percent (5%). The Companies may elect to make interest payments due under the Convertible Note in cash or shares of our common stock, or a combination of both, so long as not more than that portion of the monthly interest payment attributable to three percent (3%) of the applicable interest rate may be paid in our common stock.

We initially were required to repay the principal amount of the Convertible Note in accordance with the following schedule: (1) no amortization in the first year, (2) $50,000 per month during years two and three, and (3) $1,300,000 at maturity. The Convertible Note was amended pursuant to the Amendment to Amended and Restated Secured Convertible Term Note and Secured Term Note dated as of November 5, 2007 (the “Amendment”). As a result, we now are required to repay the principal amount of the Convertible Note in accordance with the following schedule: (1) during the period commencing November 1, 2007 and ending April 30, 2008, monthly payments of $25,000, (2) during the period commencing May 1, 2008 until maturity, monthly payments of $58,823, and (3) $1,300,000 at maturity. Pursuant to the Omnibus Amendment dated as of March 18, 2008 between the Borrowers and the Holders (the “Omnibus Amendment”), $25,000 of the principal portion of each monthly payment due under the Convertible Note for the months of August 2008, September 2008, October 2008, November 2008 and December 2008, has been deferred until the Convertible Note matures on September 25, 2009, and as a result, the monthly principal payments owed by the Companies under the Convertible Note during those months are equal to $33,825.

If we intend to redeem the Convertible Note, we must provide the Lender 10 days notice and the Lender will have the right to convert the Convertible Note into our common stock prior to the redemption. We will have the right to force the Lender to convert the Convertible Note into our common stock if (i) a registration statement is effective covering the shares to be received upon conversion, (ii) the daily volume weighted average trading price of our common stock is at least 175% of the conversion price for at least 20 of the 30 days immediately preceding the forced conversion, and (iii) the number of shares issued pursuant to the forced conversion does not exceed 20% of the total volume of our common stock traded during the 30 trading days immediately preceding the forced conversion.

The Convertible Note originally provided for a conversion price per share of $3.69 as adjusted. Pursuant to the Omnibus Amendment, the Convertible Note currently provides for a conversion price per share of $3.69 as adjusted, except that the conversion price is $1.00 per share with respect to the first $200,000 of principal amount converted under the Convertible Note on or after March 14, 2008. Immediately upon the effectiveness of the Omnibus Amendment, the Holders converted $200,000 in the aggregate of the outstanding principal balance of the Convertible Note at the fixed per share conversion price of $1.00. As a result, upon receipt by the Holders of the common stock issuable in respect to this conversion, the principal portion of the monthly payments due and owing under the Convertible Note in the months of April 2008, May 2008, June 2008 and July 2008 will be deemed to be paid and satisfied.

Term Note

The Term Note bears interest at a rate per annum equal to the “prime rate” published in The Wall Street Journal from time to time plus (i) during the period commencing on the initial issuance date of the Term Note through and including March 31, 2008, three percent (3%), and (ii) on and after April 1, 2008, five percent (5%). The Companies may elect to make interest payments due under the Term Note in cash or our common stock, or a combination of both, so long as (i) not more than that portion of the monthly interest payment attributable to three percent (3%) of the applicable interest rate may be paid in common stock, and (ii) common stock may not be issued as an interest payment if such issuance would result in Laurus’ beneficial ownership exceeding 9.99% of the then outstanding shares of common stock.

We initially were required to repay the principal amount of the Term Note in accordance with the following schedule: (1) no amortization in the first year, (2) $50,000 per month during years two and three, and (3) $1,300,000 at maturity. The Term Note was amended pursuant to the Amendment. As a result, we now are required to repay the principal amount of each of the Term Note in accordance with the following schedule: (1) during the period commencing November 1, 2007 and ending April 30, 2008, monthly payments of $25,000, (2) during the period commencing May 1, 2008 until maturity, monthly payments of $58,823 and (3) $1,300,000 at maturity. Pursuant to the Omnibus Amendment, the principal portion of each monthly payment due under the Term Note in the months of April 2008, May 2008, June 2008 and July 2008 has been deferred until the Term Note matures on September 25, 2009. In addition, $25,000 of the principal amount portion of each monthly payment due under the Term Note for the months of August 2008, September 2008, October 2008, November 2008 and December 2008, has been deferred until the Term Note matures on September 25, 2009, and as a result, the monthly principal payments owed by the Companies under the Term Note during those months are equal to $33,825.

General Terms of the Loan

Each Note contains early redemption penalties. Under the Notes, following and during an event of default and written notice by the Lender, the Companies are obligated to pay additional interest on the Notes at an annual rate of 12% and may be required by the Lender to repay the Notes with a default payment equal to 110% of the outstanding principal amounts under the Notes, plus accrued and unpaid interest.

The interest payments, loan fees, liquidated damages, default penalties and fees to Stanford Investment Group, our investment banker, related to our loans with Laurus are detailed below:


Interest payments from April 1, 2008 through September 25, 2009	$	760,335
Loan fees — Laurus		337,500
Loan fees — Stanford Investment Group		174,000
Possible Maximum Liquidated damages(A)		250,000
Possible Maximum Loan default penalties(B)		2,645,000

	$	4,168,835


(A)		The maximum amount of liquidated damages for failure of the registration statement to become effective in the prescribed time period is 10% of the initial principal amount of the Convertible Note.

(B)		The maximum penalty for default under the Convertible Note is 115% of the outstanding principal of the Convertible Note.

The Company intends to make all the payments related to its Laurus convertible and non-convertible debt. We are obligated to pay $760,335 in aggregate interest payments from April 1, 2008 through September 30, 2009. In addition, between April 1, 2008 and September 30, 2009, we are obligated to pay $4,400,000 in aggregate principal payments. Neither the Company’s cash currently on hand ($148,378 at March 31, 2007) nor the Company’s current operations are sufficient to pay this debt. Although the Company currently has no commitments from any outside source, and there is no assurance that it will be able to do so, the Company believes that it will be able to obtain equity or debt financing from third parties and/or additional debt financing from its existing lender. We cannot be assured that any financing arrangements will be available in amounts or on terms acceptable to us in the future.

The amounts outstanding under the Loan are secured by a first priority lien on all the assets of the Companies and a pledge of all of SMM’s equity interests in VCI Systems and are guaranteed by a personal guaranty of Tré Cates, our CEO. In addition, all cash of the Companies is required to be deposited into blocked collateral accounts subject to security interests to secure obligations in connection with the Loan. Funds are to be swept by the Lender from such accounts on a daily basis in accordance with the terms of the Loan.

The Borrowers have agreed to certain covenants made in conjunction with the Loan that remain in effect during the term of the Loan that, among others, limit the Companies’ ability to and/or obligate the Companies as described below. The Loan documents contain certain customary obligations, covenants and events of default in addition to those identified below. Following and during an event of default and following written notice by Lender, Lender may accelerate the Loan, terminate the Security and Purchase Agreement and certain ancillary documents and may take possession of and foreclose on the collateral, which includes the Borrowers’ assets, intellectual property and pledged stock. In addition:

•

Under the Loan documents, we (and SMM and VCI Systems in some cases) agreed to:

List the shares underlying the Convertible Note and warrants issued to the Holders following the SMM Acquisition on the principal trading exchange or market for Silicon Mountain’s common stock;

Consummate the SMM Acquisition within 180 days of the closing of the Loan ( which subsequently was extended to August 31, 2007); and

Obtain the approval of the Lender of certain corporate actions including, but not limited to, incurring and canceling certain debt, assuming certain contingent liabilities, declaring and paying dividends, acquiring any stock of another entity, making certain loans to certain persons, prepaying certain indebtedness, entering into a merger, consolidation, acquisition or other reorganization with another company, materially changing the Companies’ nature of their businesses, changing the Companies’ fiscal years, selling or disposing of any of its assets with certain exceptions, and during the period prior to the closing of the SMM Acquisition, issue or sell shares of common stock (other than shares issued under a stock option plan or certain plans approved by the board), change the jurisdiction of incorporation of SMM, change SMM’s fiscal year or amend SMM’s articles of incorporation or bylaws in a manner that adversely affects the Lender.

•

In addition to certain customary events of default, the Security and Purchase Agreement contains the following events of default:

The occurrence of any default on other indebtedness or obligation of the Companies which exceeds $50,000 in the aggregate, relating to any indebtedness or contingent obligation of the Companies beyond the grace period (if any) that results in the acceleration of the indebtedness or obligation;

Attachments or levies or judgments against either of the Companies in excess of $200,000;

Any person or group becomes a beneficial owner, directly or indirectly, of 40% of more of the voting equity interest of SMM on a fully diluted basis; and

The board of directors of SMM ceases to consist of a majority of the board in office on the closing of the Loan (or directors appointed by a majority of the board in effect immediately prior to such appointment).

The Companies have agreed to indemnify the Lender for certain losses resulting from Lender’s extending of the Loan and other related actions under the Security and Purchase Agreement. Lender has agreed to indemnify Companies and each of their officers, directors and certain other individuals for losses incurred as a result of any misrepresentation by Lender and for any breach or default by Lender.

Lender has also granted to us an irrevocable proxy, which continues until the Loan is paid in full, to allow us to vote all shares of common stock of Silicon Mountain owned by Lender.

The Security and Purchase Agreement was amended on March 19, 2006 to amend the date by which SMM was required to consummate the SMM Acquisition from March 31, 2007 to July 31, 2007. Subsequently, SMM and Lender agreed to extend such date from July 31, 2007 to August 31, 2007.

Issuance of Securities as Part of Debt Facility

Pursuant to the Loan Documents and as a result of the SMM Acquisition, we issued to the Lender two warrants to purchase shares of our common stock in exchange for two warrants previously issued by SMM to the Lender. We issued to the Lender one warrant exercisable for 1,990,000 shares of our common stock at $.01 per share, which is equivalent to approximately 20% of our outstanding stock on a fully diluted basis. The Lender has agreed that it will not exercise that portion of either warrant which would cause the Lender to beneficially own more than 9.99% of our common stock at any time unless the Lender gives a 61-day notice to waive this restriction or unless there is an event of default under the financing documents by any of the Borrowers. The shares received by the Lender on exercise of either warrant and in connection with the financing cannot be sold, unless there is an event of default as contemplated by the Loan Documents, until August 27, 2008, the one year anniversary of the SMM Acquisition (more fully described below). Thereafter, during any month, sales of these shares cannot exceed 25% of the trailing monthly dollar volume of the stock. The Lender also is prohibited from entering into short sales of our stock or warrants while any amount under any Note remains outstanding. The second warrant is exercisable for 18,312 shares of our common stock at $.01 per share on substantially the same terms as the first warrant.

In conjunction with the Amendment, the Company issued a warrant to each Holder to purchase (i) in respect to Laurus, 101 shares of our common stock, (ii) in respect to Valens Offshore, 8,636 shares of our common stock, (iii) in respect to Valens U.S., 5,587 shares of our common stock, and (iv) in respect to PSource, 55,677 shares of our common stock, for an aggregate of 175,001 shares of our common stock, which is equivalent to approximately 1.6% of our outstanding common stock on a fully diluted basis. Each warrant is exercisable at $.01 per share. The Lender has agreed it will not exercise that portion of either warrant which would cause the Lender to beneficially own more than 9.99% of our common stock at any time unless the Lender gives a 61-day notice to waive (which waiver may not be utilized in certain circumstances) this restriction or unless there is an event of default under the financing documents by any of the Companies. The shares received by a holder of one of the foregoing warrants on exercise of its warrant cannot be sold, unless there is an event of default as contemplated by the warrant, until August 27, 2008, and thereafter during any month sales of these shares cannot exceed 25% of the trailing monthly dollar volume of the stock.

Pursuant to the terms of the Registration Rights Agreement within 60 days after the closing of the SMM Acquisition, we were required to file a registration statement with the SEC to register the resale of the stock issuable upon conversion of the Convertible Note and the resale of the stock issuable upon exercise of the warrants and to have the registration statement declared effective within 180 days of the closing of the SMM Acquisition. Laurus has informed us that it will agree to extend the deadline for having the registration statement declared effective to 45 days following the date we receive a report from our independent auditors regarding our financial statements for the fiscal year ended December 31, 2007. The definitive terms of this extension have not been finalized. We are subject to liquidated damage fees of 0.5% of the original principal amount of the Convertible Note per month for each month that the filing or effectiveness of the registration statement is late in addition to certain other events. The maximum allowable amount of such damages is 10% of the original principal amount of the Convertible Note. FASB Staff Position (“FSB”) on EITF Issue 00-19-2 “Accounting for Registration Payment Arrangements “specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5 “Accounting for Contingencies”. At this time, management does not believe they will be subject to liquidated damages under this agreement.

On March 14, 2008, as a condition to the Holders entering into the Amendment and Side Letter, we sold an aggregate of 300,000 shares of our common stock and warrants to purchase an aggregate 300,000 shares of our common stock to three individual accredited investors pursuant to Subscription Agreements. For each $1.00 of consideration paid, the investors received one share of our common stock and a warrant to acquire one share of our common stock. The warrants have an exercise price of $.01 per share and expire within 7 years from the date of issuance. RayneMark Investments LLC, of which Mark Crossen, a member of our Board of Directors, is the executive director and majority owner, invested $250,000, and Mickey Fain, who at the time was a member of our Board of Directors, invested $25,000. The third investor, also an accredited investor, invested $25,000.

Pursuant to the Amended Side Letter described above, Laurus was issued a warrant to purchase up to 25% (on a fully diluted basis) of the outstanding shares of common stock of SMM with an exercise price of $0.01 per share. In addition, pursuant to the Tag-Along Rights Side Letter Agreement between us, SMM and Laurus dated as of April 24, 2008, Laurus is entitled to certain tag-along rights, which, among other things, give Laurus the right to include the sale of Laurus’ shares of SMM in any sale of our shares or of shares of SMM. Laurus may exercise the warrant only in the event:

•

of any sale or transfer of SMM’s common stock or the common stock of the Company, or any merger, consolidation, share exchange, or combination of SMM or the Company with or into another entity, which in each case results in the holders of the voting securities of SMM or of the Company outstanding immediately prior thereto owning immediately thereafter less than a majority of the voting securities of SMM, the Company or the surviving entity, as the case may be, outstanding immediately after such sale, transfer, merger, consolidation, share exchange, or combination;

•

of a sale of all or substantially all of the assets of SMM or the Company, including, without limitation, equity in subsidiaries held by SMM and/or the Company; or

•

of either of the following, which respectively constitute an “Event of Default” arising under Section 19(a) and 19(i) of the Security and Purchase Agreement dated as of September 25, 2006 by and among the Companies and Laurus:

any of the Companies fails to make payment of any obligation owed to Laurus (or any corporation that directly or indirectly controls or is controlled by or is under common control with Laurus), and the failure continues for a period of five (5) business days following the date upon which any such payment is due; or

any of the Companies (i) applies for, consents to or suffers to exist the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) makes a general assignment for the benefit of creditors, (iii) commences a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) files a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesces to, without challenge within ten (10) days of the filing thereof, or fails to have dismissed, within ninety (90) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) takes any action for the purpose of effecting any of the foregoing.

Schedules detailing the Company’s lines of credit, long-term and related party debt are presented below.

Lines of Credit — The Company has the following line of credit outstanding at:


	March 31, 2008		December 31, 2007
Revolving line of credit with Laurus Master Fund, Ltd., dated September 26, 2006. Maximum loan amount of $3,500,000. The Company is obligated to make monthly interest payments calculated at prime plus 2% subject to a minimum interest rate of 8%, and a maturity date of September 25, 2009. Balance on line at March 31, 2008 and December 31, 2007 is shown net of unamortized debt discount of $146,474 and $170,888 respectively. This line of credit is collateralized by substantially all the assets of the Company	$	1,231,439	$	1,309,995

Total lines of credit	$	1,231,439	$	1,309,995

Note Payable to Related Party — Notes payable to related parties consist of the following at:


	March 31, 2008		December 31, 2007
Note payable to Shareholder. Interest accrued at 10% with principal and accrued interest due on demand. Accrued interest payable was $86,083 and $81,557 at March 31, 2008 and December 31, 2007, respectively. The note payable is guaranteed by certain officers of the Company and is collateralized by those officers’ stock, in addition to the general assets of the Company.	$	100,000	$	100,000

All related party notes are subordinated to the line of credit and notes payable to Laurus Master Fund, Ltd. Payments on related party notes can only be made after the debt at Laurus Master Fund, Ltd. have been repaid or after written approval by the bank.

Notes Payable —


	March 31, 2008			December 31, 2007
Convertible note payable to Laurus Master Fund, Ltd. maturing on September 25, 2009, with an interest rate of prime plus 3% subject to a minimum of 9%, net of unamortized discount of $88,923 and $107,992 at March 31, 2008 and December 31, 2007, respectively.	$	2,011,078		$	2,267,008
Non-convertible note payable to Laurus Master Fund, Ltd. maturing on September 25, 2009, with an interest rate of prime plus 3% subject to a minimum of 9%, net of unamortized discount of $88,923 and $107,992 at March 31, 2008 and December 31, 2007, respectively		2,211,077			2,267,007

Total long-term debt		4,222,155			4,534,015
Less current maturities		(691,176	)		(1,073,529	)

Total lines of credit	$	3,530,979		$	3,460,486

The schedule of future minimum principal payments on long-term debt after March 31, 2008 is as follows:


	Line of Credit			Notes Payable			Total
Remainder of 2008		—		$	691,176		$	691,176
2009		1,377,913			3,502,350			4,880,263
Less debt discount		(146,474	)		(177,846	)		(324,320	)

Total	$	1,231,439		$	4,015,680		$	5,247,119

7. Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair value.

The Company did not grant stock options during the three months ended March 31, 2008. The following table shows the weighted average assumptions used for grants during the three months ended March 31, 2007:


	March 31,
	2007

Volatility		81	%
Expected option term		6.64	%
Risk-free interest rate		4.96	%
Expected dividend yield		—

Stock compensation expense for stock options is recognized on a graded vesting schedule over the vesting period of the award. The Company accounts for stock options as equity awards, and all options outstanding and granted during the periods presented are only dependent on service conditions. Stock compensation expense for the three months ended March 31, 2008 and 2007 was $32,971 and $30,635, respectively. Stock compensation expense was recorded as a component of operating expenses during each period presented.

Stock option activity was as follows:


				Weighted
	Number of			Average
	Shares			Exercise Price

Options outstanding at January 1, 2008(1)		2,527,124		$	0.48
Granted
Exercised
Canceled or Forfeited		(59,928	)		0.78

Options outstanding at March 31, 2008		2,467,196			0.48

Options exercisable at March 31, 2008		2,120,184		$	0.33


(1)		A conversion factor of 1.109798602 was applied to all SMM stock options due to the Z-Axis transaction (see Note 3).

8. Loss per Share

Net loss per common share (“EPS”) is calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Under the provisions of SFAS No. 128, basic EPS is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options were exercised, resulting in the issuance of common stock that would share in the earnings of the Company. Potential dilution of the stock options exercisable into common stock is computed using the treasury stock method based on the average fair market value of the stock. As the Company has a net loss, the effect of all common stock equivalents is excluded from the computation of diluted EPS since its effect would decrease the loss per share. The diluted weighted average common shares calculation for the three months ended March 31, 2008 and 2007 excludes 4,060,219 and 2,803,710 options, warrants and unvested restricted stock awards, respectively, to purchase common stock because their effect would have been anti-dilutive under the treasury stock method.

9. Restructuring

In the first quarter of 2008, the Company’s management decided to consolidate its Arizona operations into the California facilities. As a result, in accordance with FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company recorded significant acquisition-related restructuring charges, in connection with our abandonment of certain leased facilities through our office consolidations. The lease abandonment costs were estimated to include remaining lease liabilities. The Company recorded $1,451,000 in restructuring charges in the first quarter of 2008. The elimination of Arizona operations is expected to result, subsequent to its completion, in annual cost savings of $0.6 million to $0.8 million from the elimination of redundant facilities and related expenses and employee reductions. We currently anticipate that Arizona will continue operations until June 2008 to service customer requirements.

10. Related Party Transactions

Sale of Z-Axis LLC — As stated in note 3, Z-Axis, transferred all of its assets and liabilities to Z-Axis LLC, its then wholly-owned subsidiary. Concurrent with the closing of the Stock Exchange, Z-Axis sold Z-Axis LLC to a limited liability company owned by Mr. Alan Treibitz, Ms. Stephanie S. Kelso and Mr. Raymond Hauschel (the “Purchasing LLC”). Mr. Treibitz and Ms. Kelso were members of Z-Axis’ board of directors, and were the chief executive officer and president, respectively, of Z-Axis prior to the closing of the Stock Exchange. The purchase price paid by the Purchasing LLC for the Z-Axis LLC membership interests was $300,000, payable in a combination of $60,000 cash, 33,457 post-split shares of stock of the Company that were redeemed from members of the Purchasing LLC, and a promissory note in the face amount of $150,000. As a result, Z-Axis no longer owns or operates a litigation support services business. As of March 31, 2008 the collectibility of the note receivable is reasonably assured.

Fees paid to Board Members — Beginning in 2007, the Company entered into a consulting agreement with one of the board members. The Company paid $27,000 and $13,090 to the board member for the three months ended March 31, 2008 and 2007, respectively. The Company additional fees to board members of $11,375 and $2,000 during the three months ending March 31, 2008 and 2007, respectively.

Note payable to board member — The Company has a note payable to one of its board members that accrues interest at a rate of 10% with principal and accrued interest due on demand. Therefore it is classified as a current liability on the balance sheet. Interest is compounded annually on the note. The note payable is guaranteed by the chief executive officer of the Company and is collateralized by his stock, in addition to the general assets of the Company. The note payable is subordinated to the Revolving Credit Facility, Term Loan, and Convertible Term Loan payable to Laurus. Payment on the related party note can only be made after the notes payable to Laurus have been repaid or after written approval by Laurus. As of March 31, 2008 and December 31, 2007, the note payable including accrued interest was $186,083 and $181,557, respectively.

11. Stock Issuances

On March 14, 2008, as a condition to the Holders entering into the Amendment and Side Letter, we sold an aggregate of 300,000 shares of our common stock and warrants to purchase an aggregate 300,000 shares of our common stock to three individual accredited investors pursuant to Subscription Agreements, the form of which was included as Exhibit 10.5 to our Current Report on Form 8-K filed on March 20, 2008. For each $1.00 of consideration paid, the investors received one share of our common stock and a warrant to acquire one share of our common stock. The warrants have an exercise price of $.01 per share and expire within 7 years from the date of issuance. RayneMark Investments LLC, of which Mark Crossen, a member of our Board of Directors, is the executive director and majority owner, invested $250,000, and Mickey Fain, who at the time was a member of our Board of Directors, invested $25,000. The third investor, also an accredited investor, invested $25,000. A copy of the warrants granted in these transactions was included as Exhibit 10.4 to our Current Report on Form 8-K filed on March 20, 2008.

12. Subsequent Events

On April 25, 2008, SMH issued 89,284 shares of common stock to settle a trade payable in the amount of $89,284 owed to MemoryTen, Inc. MemoryTen, Inc. also received a warrant to purchase an additional 89,284 shares of SMH common stock for $.01 per share. The warrant expires on April 25, 2010.

On May 9, 2008, each of Messrs. John M. Blackman, Mickey Fain and Eric A. Wittenberg resigned from the Board of Directors of the Company and any of its subsidiaries for which they were directors. Mr. Blackman had served on the Board of SMM since December 1999, and Messrs. Fain and Wittenberg had served on the Board of SMM since February 2006. Each of them had served on the Board of the Company since the date of the SMM Acquisition in August 2007. None of Messrs. Blackman, Fain and Wittenberg has had any disagreements with management of the Company on any matters relating to the Company’s operations, policies or practices and none of them will receive any severance compensation. The Company Board of Directors is not currently looking for replacement candidates.

Item 2. Management’s Discussion and Analysis or Plan of Operation

This Quarterly Report on Form 10-QSB contains forward-looking statements that may be affected by matters outside our control that could cause materially different results.

Some of the information in this Quarterly Report contains forward-looking statements. These statements express, or are based on, our expectations about future events. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as, “may”, “will”, “expect”, “intend”, “project”, “estimate”, “anticipate”, “believe” or “continue” or the negative thereof or similar terminology. They include statements regarding our:

	•		financial position;

	•		business strategy;

	•		budgets;

	•		amount, nature and timing of capital expenditures;

	•		acquisition risks;

	•		operating costs and other expenses; and

	•		cash flow and anticipated liquidity.

Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ materially from expected results include:

	•		our ability to generate sufficient cash flows to operate;

	•		availability of capital;

	•		general economic conditions;

	•		currency exchange volatility;

	•		the risks associated with acquiring and integrating new businesses;

	•		demand for our products;

	•		labor and other costs of producing and selling our products;

	•		the strength and financial resources of our competitors;

	•		regulatory risks and developments;

	•		our ability to find and retain skilled personnel; and

	•		the lack of liquidity of our common stock.

Any of the factors listed above and other factors contained in this Quarterly Report could cause our actual results to differ materially from the results implied by these or any other forward-looking statements made by us or on our behalf. We cannot assure you that our future results will meet our expectations.

When you consider these forward-looking statements, you should keep in mind these risk factors and the other cautionary statements in this Quarterly Report. Our forward-looking statements speak only as of the date made.

The following is provided to supplement, and should be read in conjunction with, our financial statements and the accompanying notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements.

Overview

We develop, assemble and market branded computer systems and peripherals direct to end-users and channel partners and specialize in developing branded computing solutions used in standard operating environments. As the applications that we serve expand, and as the complexity of these applications increases, the need for the customization of our products in these applications also increases. We develop and market memory solutions, based on FLASH and Dynamic Random Access Memory (DRAM) technologies, primarily direct to end-users. Specialization is focused on providing DRAM memory modules, FLASH drives and memory cards used in standard operating environments. Our products target niche computing applications including switches, routers, high-end servers, workstations, desktops and notebooks. Our primary customers range from the Fortune 1000 to individual consumers in the United States.

Executive Summary

Purchase of Vision Computer, Inc.

On September 26, 2006, the Company acquired substantially all the assets and certain liabilities of VCI, an Arizona based company that manufactures custom tower and rackmount servers, office and graphic workstations, and network attached storage servers. VCI was acquired to diversify product offerings. Pursuant to the SFAS No. 141, Business Combinations (“SFAS 141”), the transaction is being accounted for using the purchase method of accounting. The total consideration for the acquisition was $3,205,415, comprised of $3.0 million in cash and $0.2 million for legal expenses. Subsequently, the Company recorded a purchase price adjustment of $92,441, resulting in a net purchase price of $3,237,058.

Widow PC

SMM Acquisition

On August 28, 2007, we consummated a stock exchange with SMM pursuant to which we issued an aggregate of 5,065,510 post-split shares of our common stock for all of SMM’s outstanding common stock (other than shares as to which a stockholder validly exercised and perfected dissenters’ rights in compliance with Colorado law). As further explained in our proxy statement filed with the SEC and distributed to our stockholders on July 24, 2007, pursuant to the stock exchange, outstanding options to purchase shares of SMM’s common stock were converted into options to purchase shares of our common stock. Additionally, outstanding warrants to acquire shares of SMM’s common stock were converted into warrants to acquire shares of our common stock, SMM’s stock incentive plan became a stock incentive plan covering our common stock and options to purchase shares of our common stock, and SMM’s former convertible debt obligations, for which we now are also liable, now are convertible into shares of our common stock. This stock exchange transaction is referred to as the “SMM Acquisition.”

As a result of the SMM Acquisition, SMM became a wholly-owned subsidiary of Z-Axis.

Sale of Z-Axis’ Former Business

Prior to the closing of the SMM Acquisition, Z-Axis’ principal business was to develop and produce video, computer-generated graphics and multimedia presentations used principally in litigation support services. Also prior to the SMM Acquisition, Z-Axis transferred all of its assets and liabilities to Z-Axis LLC, its then wholly-owned subsidiary. Concurrent with the closing of the SMM Acquisition, Z-Axis sold Z-Axis LLC to a limited liability company owned by Mr. Alan Treibitz, Ms. Stephanie S. Kelso and Mr. Raymond Hauschel (the “Purchasing LLC”). Mr. Treibitz and Ms. Kelso were members of Z-Axis’ board of directors, and were the chief executive officer and president, respectively, of Z-Axis prior to the closing of the SMM Acquisition. As a result, Z-Axis no longer owns or operates a litigation support services business.

One-For-Nine Reverse Split

Immediately prior to the SMM Acquisition, we effected a one-for -nine reverse split of our outstanding common stock, which resulted in our outstanding common stock immediately prior to consummation of the SMM Acquisition being reduced from 3,825,000 shares to 425,000 post-split shares.

Changes In Authorized Capital and Creation of a Class Preferred Stock

Immediately following the SMM Acquisition, we increased our authorized common stock from 10,000,000 post-split shares to 30,000,000 post-split shares, and we created a new class of preferred stock consisting of 3,000,000 authorized shares, par value $0.001 per share.

Name Change to “Silicon Mountain Holdings, Inc.”

Immediately following the SMM Acquisition, we changed our name from Z-Axis Corporation to Silicon Mountain Holdings, Inc. (“SMH”).

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Revenue

Sales revenue is recognized when title passes upon shipment of goods to customers. Our revenue-earning activities involve delivering or producing goods. The following criteria are met before sales revenue is recognized: persuasive evidence of an arrangement exists, shipment has occurred, the selling price is fixed or determinable and collection of the receivable is reasonably assured. We do experience a minimal level of sales returns and maintains an allowance to which Silicon Mountain accrues a reserve at the time of sale in accordance with SFAS 48, “Revenue Recognition When Right of Return Exists.”

Share-Based Compensation

Effective January 1, 2006 the Company adopted SFAS 123R using the modified prospective transition method. Under this method, stock-based compensation expense is recognized using the fair-value based method for all awards granted on or after the date of adoption. Compensation expense for unvested stock options and awards that were outstanding on January 1, 2006 will be recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro forma disclosures under SFAS 123. The modified prospective transition methods allows that prior interim periods and fiscal years reported will not reflect restated amounts. The Company determined the fair value of these awards using the Black-Scholes option pricing model. The expected life selected for options granted represents the period of time that the options are expected to be outstanding based on historical data of option holder exercises and termination behavior. There have been few exercises of stock options in the past four years and consequently we have limited historical exercise data. As a result it is difficult to estimate the expected option term. Expected volatilities are based on implied volatilities from similar companies that operate within the same industry sector index. The risk-free interest rate was selected based on yields from U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options being valued. The Company historically has not paid dividends.

Reserves for inventory excess, obsolescence and lower of market values over costs

We purchase raw and assembled materials in quantities that we anticipate will be fully used in the near term. Changes in operating strategy, customer demand and unpredictable fluctuations in market values of these materials can limit our ability to effectively utilize all of the materials purchased and result in the Company carrying materials with above market carrying costs which may result in the Company incurring mark to market charges on its inventory. We regularly monitor potential excess, or obsolete, inventory by analyzing the length of time in stock and compares market values to cost. When necessary, we reduce the carrying amount of our inventory to our market value.

Allowances for doubtful accounts and price protection

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We review our allowance for doubtful accounts regularly and all past due balances over 90 days are reviewed for collectability.

Accrued Expenses

In the first quarter of 2008, the Company’s management decided to consolidate its Arizona operations into the California facilities. As a result, in accordance with FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company recorded significant acquisition-related restructuring charges, in connection with our abandonment of certain leased facilities through our office consolidations. The lease abandonment costs were estimated to include remaining lease liabilities. The Company recorded $1,451,000 in restructuring charges in the first quarter of 2008. The consolidation of Arizona is expected to result, subsequent to its completion, in annual cost savings of between $0.6 million to $0.8 million from the elimination of redundant facilities and related expenses and employee reductions. We currently anticipate that Arizona will continue operations until June 2008 to service customer requirements.

Income taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The process incorporates an assessment of the current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. Such differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent that recovery is not likely, we establish a valuation allowance. Increases in valuation allowances result in the recording of additional tax expense. Further, if our ultimate tax liability differs from the periodic tax provision reflected in the consolidated statements of operations, additional tax expense may be recorded.

Litigation and other contingencies

Management regularly evaluates our exposure to threatened or pending litigation and other business contingencies. Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses relating to such exposures requires significant judgment about the potential range of outcomes. As additional information about current or future litigation or other contingencies becomes available, our management will assess whether such information warrants the recording of additional expense relating to our contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We currently are recording no expense for litigation and other contingencies.

Valuation of long-lived assets

We assess the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Changes in our operating strategy can significantly reduce the estimated useful life of such assets.

Dependence on Material Suppliers

Our business depends on a limited number of material suppliers. The loss of a material supplier could have a significant adverse impact on our ability to obtain products that are then experiencing high customer demand. We have no long-term supply or similar arrangements with any of our suppliers. We believe that alternate sources of supply are available if a relationship with one of our suppliers were terminated. Supply disruptions could adversely impact our sales and operating results if alternate sources of supply are unavailable on short notice, if at all.

Corporate Information

Our principal executive office is located at 4755 Walnut Street, Boulder, Colorado 80301, and our telephone number is (303) 938-1155. Our websites are located at www.slcmholdings.com, wwww.slcmholdings.com, www.smmdirect.com, www.visionman.com and www.widowpc.com.

Results of Operations

The following table sets forth consolidated operating data expressed as a percentage of sales for the periods indicated:


	Three Months
	Ended March 31,
	2008			2007

Sales		100.0	%		100.0	%
Cost of Goods Sold		86.9			78.6
Gross Margin		13.1			24.1
Operating Costs:
Selling Expenses		13.1			8.9
General & Administrative		16.7			9.8
Depreciation & Amortization		4.4			3.2
Loss from Operations		(21.1	)		(0.6	)
Other Expense, Net		(4.3	)		(3.3	)
Pre-Tax Loss		(25.4	)		(3.9	)
Income Tax Benefit		1.1			1.5
Net Loss		(24.3	)%		(2.4	)%


(1)		Columns may not add due to rounding.

Three Months Ended March 31, 2008 compared with Three Months Ended March 31, 2007

Sales for the three months ended March 31, 2008 were $5.0 million compared to $7.7 million for the three months ended March 31, 2007. The decrease in sales is primarily related to lower system sales and the continued decline in the memory market. The decrease in sales in the memory segment is primarily attributable to the decline in average selling price of memory over the last twelve months.

Cost of goods sold was $4.3 million for the three months ended March 31, 2008, or 86.9% of sales, compared to $6.0 million, or 78.6% of sales for the three months ended March 31, 2007. The decrease in cost of goods sold during the first quarter of 2008 was primarily due to lower sales, and the increase in cost of sales as a percentage of sales was primarily due to lower margins on systems sales, compared to the same period in 2007.

Selling, general and administrative, and depreciation and amortization expenses were $3.1 million for the three months ended March 31, 2008 compared to $1.7 million for the three months ended March 31, 2007. Increase related to booking of restructuring accrual.

Total other expense, net for the three months ended March 31, 2008 decreased to approximately $0.2 million compared to $0.3 million during the three months ended March 31, 2007. The decrease was the result of lower average balances on our line of credit.

The Company recorded income tax benefit of $53,567 during the three months ended March 31, 2008 compared to an income tax benefit for the three months ended March 31, 2007 of $113,000.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from operations and borrowings under our credit facility. Our principal uses of cash are debt service requirements, capital expenditures and working capital requirements.

Going Concern

For the quarter ended March 31, 2008, our accountants have expressed doubt about our ability to continue as a going concern as a result of our continued net losses. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to generate revenues and control our expense. Based upon current plans, we will incur operating losses in future periods because we may, from time to time, be incurring expenses but not generating sufficient revenues. We cannot guarantee that we will be successful in generating sufficient revenues or other funds in the future to cover these operating costs. We incurred a net loss of $2.7 million for the three months ended March 31, 2008 and had a working capital deficit of $1.7 million at March 31, 2008. Our working capital at March 31, 2008 will not be sufficient to meet its objectives.

Management recognizes that the Company must generate additional cash and plans include the sale of additional equity or debt securities, alliances or other partnerships with entities interested in and resources to support the Company’s objectives as well as other business transactions to assure continuation of Silicon Mountain Holdings’ development and operations.

We are not adequately capitalized. Because we are only minimally capitalized, we expect to experience a lack of liquidity for the foreseeable future in our ongoing operations. We will adjust our expenses as necessary to prevent cash flow or liquidity problems. However, we expect we will need additional financing, to fully develop our operations. We expect to rely principally upon our ability to raise additional financing, the success of which cannot be guaranteed. We will look at both equity and debt financing. To the extent that we experience a substantial lack of liquidity, our development in accordance with our proposed plan may be delayed or indefinitely postponed, our operations could be impaired, we may never become profitable, fail as an organization, and our investors could lose some or all of their investment.

Debt Financing

Revolving Note

A copy of the Original Side Letter was included as Exhibit 10.3 to our Current Report on Form 8-K filed on March 20, 2008.

Convertible Note

Pursuant to the Omnibus Amendment dated as of March 18, 2008 between the Borrowers and the Holders (the “Omnibus Amendment”), a copy of which was included as Exhibit 10.1 to our Current Report on Form 8-K filed on March 20, 2008, $25,000 of the principal portion of each monthly payment due under the Convertible Note for the months of August 2008, September 2008, October 2008, November 2008 and December 2008, has been deferred until the Convertible Note matures on September 25, 2009, and as a result, the monthly principal payments owed by the Companies under the Convertible Note during those months are equal to $33,825.

Term Note

General Terms of the Loan

The interest payments, loan fees, liquidated damages, default penalties and fees to Stanford Investment Group, our investment banker, related to our loans with Laurus are detailed below:


Interest payments from March 31, 2008 through September 25, 2009	$	760,335
Loan fees — Laurus		337,500
Loan fees — Stanford Investment Group		174,000
Possible Maximum Liquidated damages(A)		250,000
Possible Maximum Loan default penalties(B)		2,645,000
	$	4,168,835


(A)		The maximum amount of liquidated damages for failure of the registration statement to become effective in the prescribed time period is 10% of the initial principal amount of the Convertible Note.

(B)		The maximum penalty for default under the Convertible Note is 115% of the outstanding principal of the Convertible Note.

The Company intends to make all the payments related to its Laurus convertible and non-convertible debt. We are obligated to pay $760,335 in aggregate interest payments from March 31, 2008 through September 30, 2009. In addition, between January 1, 2008 and September 30, 2009, we are obligated to pay $4,400,000 in aggregate principal payments. Neither the Company’s cash currently on hand ($148,378 at March 31, 2008) nor the Company’s current operations are sufficient to pay this debt. Although the Company currently has no commitments from any outside source, and there is no assurance that it will be able to do so, the Company believes that it will be able to obtain equity or debt financing from third parties and/or additional debt financing from its existing lender. We cannot be assured that any financing arrangements will be available in amounts or on terms acceptable to us in the future.

Agreement and certain ancillary documents and may take possession of and foreclose on the collateral, which includes the Borrowers’ assets, intellectual property and pledged stock. In addition:

•

Under the Loan documents, we (and SMM and VCI Systems in some cases) agreed to:

	•		List the shares underlying the Convertible Note and warrants issued to the Holders following the SMM Acquisition on the principal trading exchange or market for Silicon Mountain’s common stock;

	•		Consummate the SMM Acquisition within 180 days of the closing of the Loan ( which subsequently was extended to August 31, 2007); and

	•		Obtain the approval of the Lender of certain corporate actions including, but not limited to, incurring and canceling certain debt, assuming certain contingent liabilities, declaring and paying dividends, acquiring any stock of another entity, making certain loans to certain persons, prepaying certain indebtedness, entering into a merger, consolidation, acquisition or other reorganization with another company, materially changing the Companies’ nature of their businesses, changing the Companies’ fiscal years, selling or disposing of any of its assets with certain exceptions, and during the period prior to the closing of the SMM Acquisition, issue or sell shares of common stock (other than shares issued under a stock option plan or certain plans approved by the board), change the jurisdiction of incorporation of SMM, change SMM’s fiscal year or amend SMM’s articles of incorporation or bylaws in a manner that adversely affects the Lender.

•

In addition to certain customary events of default, the Security and Purchase Agreement contains the following events of default:

	•		The occurrence of any default on other indebtedness or obligation of the Companies which exceeds $50,000 in the aggregate, relating to any indebtedness or contingent obligation of the Companies beyond the grace period (if any) that results in the acceleration of the indebtedness or obligation;

	•		Attachments or levies or judgments against either of the Companies in excess of $200,000;

	•		Any person or group becomes a beneficial owner, directly or indirectly, of 40% of more of the voting equity interest of SMM on a fully diluted basis; and

	•		The board of directors of SMM ceases to consist of a majority of the board in office on the closing of the Loan (or directors appointed by a majority of the board in effect immediately prior to such appointment).

Lender has also granted to us an irrevocable proxy, which continues until the Loan is paid in full, to allow us to vote all shares of common stock of Silicon Mountain owned by Lender. The Security and Purchase Agreement was amended on March 19, 2006 to amend the date by which SMM was required to consummate the SMM Acquisition from March 31, 2007 to July 31, 2007. Subsequently, SMM and Lender agreed to extend such date from July 31, 2007 to August 31, 2007.

Issuance of Securities as Part of Debt Facility

In conjunction with the Amendment, the Company issued a warrant to each Holder to purchase (i) in respect to Laurus, 101 shares of our common stock, (ii) in respect to Valens Offshore, 8,636 shares of our common stock, (iii) in respect to Valens U.S., 5,587 shares of our common stock, and (iv) in respect to PSource, 55,677 shares of our common stock, for an aggregate of 175,001 shares of our common stock, which is equivalent to approximately 1.6% of our outstanding common stock on a fully diluted basis. Each warrant is exercisable at $.01 per share. A form of warrant was included as Exhibit 10.2 to our Form 8-K filed on March 20, 2008. The Lender has agreed it will not exercise that portion of either warrant which would cause the Lender to beneficially own more than 9.99% of our common stock at any time unless the Lender gives a 61-day notice to waive (which waiver may not be utilized in certain circumstances) this restriction or unless there is an event of default under the financing documents by any of the Companies. The shares received by a holder of one of the foregoing warrants on exercise of its warrant cannot be sold, unless there is an event of default as contemplated by the warrant, until August 27, 2008, and thereafter during any month sales of these shares cannot exceed 25% of the trailing monthly dollar volume of the stock.

Pursuant to the terms of the Registration Rights Agreement, which was included as an Exhibit to our Current Report on Form 8-K filed on September 4, 2007, within 60 days after the closing of the SMM Acquisition, we were required to file a registration statement with the SEC to register the resale of the stock issuable upon conversion of the Convertible Note and the resale of the stock issuable upon exercise of the warrants and to have the registration statement declared effective within 180 days of the closing of the SMM Acquisition. Laurus has informed us that it will agree to extend the deadline for having the registration statement declared effective to 45 days following the date we receive a report from our independent auditors regarding our financial statements for the fiscal year ended December 31, 2007. The definitive terms of this extension have not been finalized. We are subject to liquidated damage fees of 0.5% of the original principal amount of the Convertible Note per month for each month that the filing or effectiveness of the registration statement is late in addition to certain other events. The maximum allowable amount of such damages is 10% of the original principal amount of the Convertible Note.

On March 14, 2008, as a condition to the Holders entering into the Amendment and Side Letter, we sold an aggregate of 300,000 shares of our common stock and warrants to purchase an aggregate 300,000 shares of our common stock to three individual accredited investors pursuant to Subscription Agreements, the form of which was included as Exhibit 10.5 to our Current Report on Form 8-K filed on March 20, 2008. For each $1.00 of consideration paid, the investors received one share of our common stock and a warrant to acquire one share of our common stock. The warrants have an exercise price of $.01 per share and expire within 7 years from the date of issuance. RayneMark Investments LLC, of which Mark Crossen, a member of our Board of Directors, is the executive director and majority owner, invested $250,000, and Mickey Fain, who at the time was a member of our Board of Directors, invested $25,000. The third investor, also an accredited investor, invested $25,000. A copy of the warrants granted in these transactions was included as Exhibit 10.4 to our Current Report on Form 8-K filed on March 20, 2008.

Pursuant to the Amended Side Letter described above, Laurus was issued a warrant to purchase up to 25% (on a fully diluted basis) of the outstanding shares of common stock of SMM with an exercise price of $0.01 per share. A form of the warrant is included as Exhibit 10.23 to this Amendment No. 1. In addition, pursuant to the Tag-Along Rights Side Letter Agreement between us, SMM and Laurus dated as of April 24, 2008 and included as Exhibit 10.24 to this Amendment No. 1, Laurus is entitled to certain tag-along rights, which, among other things, give Laurus the right to include the sale of Laurus’ shares of SMM in any sale of our shares or of shares of SMM. Laurus may exercise the warrant only in the event:

•		of any sale or transfer of SMM’s common stock or the common stock of the Company, or any merger, consolidation, share exchange, or combination of SMM or the Company with or into another entity, which in each case results in the holders of the voting securities of SMM or of the Company outstanding immediately prior thereto owning immediately thereafter less than a majority of the voting securities of SMM, the Company or the surviving entity, as the case may be, outstanding immediately after such sale, transfer, merger, consolidation, share exchange, or combination;

•		of a sale of all or substantially all of the assets of SMM or the Company, including, without limitation, equity in subsidiaries held by SMM and/or the Company; or

•		of either of the following, which respectively constitute an “Event of Default” arising under Section 19(a) and 19(i) of the Security and Purchase Agreement dated as of September 25, 2006 by and among the Companies and Laurus, a copy of which was included as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on September 4, 2007:

	•		any of the Companies fails to make payment of any obligation owed to Laurus (or any corporation that directly or indirectly controls or is controlled by or is under common control with Laurus), and the failure continues for a period of five (5) business days following the date upon which any such payment is due; or

	•		any of the Companies (i) applies for, consents to or suffers to exist the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) makes a general assignment for the benefit of creditors, (iii) commences a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) files a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesces to, without challenge within ten (10) days of the filing thereof, or fails to have dismissed, within ninety (90) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) takes any action for the purpose of effecting any of the foregoing.

Agreement with MemoryTen, Inc.

Effective as of April 25, 2008, we entered into a Release and Settlement Agreement with MemoryTen, Inc., a California corporation (“MemoryTen”), and Kenneth P. Olsen. MemoryTen sells certain computer memory products and devices to us periodically. Pursuant to the Release and Settlement Agreement, we agreed to pay to MemoryTen 89,284 shares of our common stock, together with a warrant to purchase 89,284 shares of our common stock at an exercise price of $.01 per share exercisable on or before April 24, 2010, in exchange for MemoryTen’s release of any and all claims MemoryTen or its affiliates may have against the Company and its affiliates arising from certain invoices in the aggregate amount of $89,284 for products and devices delivered to the Company by MemoryTen. At the request of MemoryTen, the warrant and 89,284 shares of our common stock were issued to Kenneth P. Olsen.

Cash Flows

Cash Flows from Operating Activities. Net cash provided by operating activities was $0.1 million during the three months ended March 31, 2008 as compared to $0.4 million of cash flows used in operating activities during the three months ended March 31, 2007. The increase in cash used by operations is primarily related to an increase in accounts receivable collection and an increase in accounts payable and accrued liabilities balances.

Cash Flows from Investing Activities. Net cash flows used in investing activities was $19,534 during the three months ended March 31, 2008 as compared to $82,861 during the three months ended March 31, 2007. The decrease in cash used in investing activities in 2008 was related to lower equipment purchases in the first quarter of 2008 as compared to the first quarter of 2007.

Cash Flows from Financing Activities. SMM generated $42,593 of cash flows from financing activities during the three months ended March 31, 2008 as compared to $266,433 of cash flows from investing activities during the three months ended March 31, 2007. The decrease in net cash provided by financing activities was related to the increase in payments on the Company’s line of credit in 2008 and principal payments on the Company’s long term debt.

Capital Expenditures

Capital expenditures for the three months ended March 31, 2008 were $19,584 as compared to $82,861 for the three months ended March 31, 2007. The primary use of capital during the period ended March 31, 2008 and 2007 were for infrastructure-related equipment. As of March 31, 2008, contractual commitments for capital purchases were not material.

Our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:

	•		our relationships with suppliers and customers;

	•		the levels of promotion and advertising that will be required to sell new products and achieve and maintain a competitive position in the marketplace;

	•		expansion of our business, including the opening of offices and facilities in other locations;

	•		price discounts on products to our customers;

	•		our pursuit of strategic transactions, including acquisitions, joint ventures and capital investments;

	•		the levels of inventory and accounts receivable that we maintains; and

	•		our entrance into new markets.

Assessment of Future Liquidity

Our current cash resources will not be sufficient to meet our requirements for the next 12 months. We will need to raise additional capital to support working capital expansion, to develop new or enhanced applications, services and product offerings, to respond to competitive pressures, to acquire complementary businesses or technologies or to take advantage of unanticipated opportunities. We will need to raise the additional funds by selling debt or equity securities, by entering into strategic relationships or through other arrangements. There is no assurance that we will be able to raise the needed amounts on reasonable terms, or at all.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised December 2007), “Business Combinations” (“SFAS 141R”), which replaces FASB Statement No. 141, “Business Combinations.” This statement requires an acquirer to recognize identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their full fair values at that date, with limited exceptions. Assets and liabilities assumed that arise from contractual contingencies as of the acquisition date must also be measured at their acquisition-date full fair values. SFAS 141R requires the acquirer to recognize goodwill as of the acquisition date, and in the case of a bargain purchase business combination, the acquirer shall recognize a gain. Acquisition-related costs are to be expensed in the periods in which the costs are incurred and the services are received. Additional presentation and disclosure requirements have also been established to enable financial statement users to evaluate and understand the nature and financial effects of business combinations. SFAS 141R is to be applied prospectively for acquisition dates on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In December 2007, the FASB issued SFAS No.160, Non-controlling Interests in Consolidated Financial Statements, including an amendment of ARB No. 51 (“SFAS No, 160) which established accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The effective date of SFAS No. 160 is for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. We are still evaluating the effects that SFAS No. 160 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: (“SFAS No. 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 was effective for us on January 1, 2008. The implementation of this statement had no material impact on our financial position, cash flows and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosure about fair value measurements. This pronouncement applies under the other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The implementation of this statement had no material impact on our financial position, cash flows and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161.

Item 3. Quantitative and Qualitative Disclosures About market Risk.

Not applicable.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive and chief financial officers have evaluated our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2008. These officers have concluded that our disclosure controls and procedures were not effective as of March 31, 2008 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company intends to design and install effective controls in the third quarter of 2008.

Management’s Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is defined to mean a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

On May 16, 2008, the audit committee of our Board of Directors received a letter from our independent auditors identifying the following significant deficiencies to be material weaknesses: “Based on our observations and discussions with Company personnel, it does not appear that there is an adequate level of accounting staffing to allow sufficient time for the accounting department to (i) perform a review, (ii) to adequately prepare for our annual audit, (iii) research all applicable accounting pronouncements as it relates to the Company’s financial statements and the underlying disclosures, and (iv) to timely prepare its 10-KSB along with its financial statement disclosure schedules. Inadequate levels of accounting personnel have caused the Company difficulty in filing its 10-KSB within the required time frame.”

The auditors also advised the Company of certain control deficiencies with are “less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.” The Company, through its audit committee and management, intends to analyze and address the deficiencies identified.

Management has not assessed, in accordance with the requirements of Exchange Act Rules 13a-15(c) and 15d-15(c), the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 because not all of the internal control processes that management has identified have been fully documented and tested due to the cost and time involved with completing the documentation and testing.

This Quarterly Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Quarterly Report.

Pursuant to Item 308T(a) of Regulation S-K under the Exchange Act, the information in this Item 4T is being furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section. Accordingly, the information in this Item 4T will not be incorporated by reference into any filing by the Company under the Securities Act, or the Exchange Act, unless specifically identified therein as being incorporated by reference.

Changes in Internal Control Over Financial Reporting

Subsequent to the date of their evaluation, as described in the previous section, there were no changes made in our internal controls over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not party to any legal proceedings.

Item 1A. Risk Factors

There has been no material change to the risk factor disclosure in our Amendment No. 1 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

Except for the transactions reported in the Company’s Form 8-K filed on March 20, 2008, the Company had no unregistered sales of equity securities during the quarter ended March 31, 2008.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits

(a) Exhibit Index. The following exhibits are included herein:


Exhibit Number		Description
2.1		LLC Interest Sale Agreement, dated as of June 30, 2006, between Z-Axis Corporation and HTK, LLC ⁽¹⁾
2.2		Stock Exchange Agreement, dated as of May 7, 2006⁽¹⁾
2.3		Amendment No. 1 to Stock Exchange Agreement dated June 30, 2006⁽¹⁾
2.4		Amendment No. 2 to Stock Exchange Agreement dated December 31, 2006⁽¹⁾
3.1		Amended and Restated Articles of Incorporation ⁽²⁾
3.2		Amended and Restated Bylaws ⁽³⁾
10.1		Master Security Agreement, dated August 28, 2007 ⁽²⁾
10.2		Joinder Agreement, dated August 28, 2007 ⁽²⁾
10.3		Registration Rights Agreement, dated August 28, 2007 ⁽²⁾
10.4		Guaranty, dated August 28, 2007 ⁽²⁾
10.5		Security and Purchase Agreement, dated September 25, 2006 ⁽²⁾
10.6		Stock Pledge Agreement, dated September 25, 2006 ⁽²⁾
10.7		Amended and Restated Secured Convertible Term Note, dated August 28, 2007 ⁽²⁾
10.8		Secured Term Note, dated September 25, 2006 ⁽²⁾
10.9		Secured Revolving Note, dated September 25, 2006 ⁽²⁾


Exhibit Number		Description
10.10		Common Stock Purchase Warrant, dated August 30, 2007 ⁽²⁾
10.11		Silicon Mountain Memory, Incorporated 2003 Equity Incentive Plan ⁽²⁾
10.12		Form of Stock Option Agreement of Silicon Mountain Memory, Incorporated 2003 Equity Incentive Plan⁽²⁾
10.13		Side Letter Agreement, dated August 30, 2007 ⁽²⁾
10.14		Amendment to Amended and Restated Secured Convertible Term Note and Secured Term Note dated as of November 5, 2007⁽⁴⁾
10.15		Omnibus Amendment dated as of March 18, 2008⁽⁵⁾
10.16		Form of Common Stock Purchase Warrant⁽⁵⁾
10.17		Overadvance Side Letter Agreement dated as of March 14, 2008⁽⁵⁾
10.18		Form of Common Stock Purchase Warrant⁽⁵⁾
10.19		Form of Subscription Agreement⁽⁵⁾
10.20		Settlement and Release Agreement dated as of April 25, 2008⁽⁶⁾
10.21		Form of Common Stock Purchase Warrant⁽⁶⁾
10.22		Amended and Restated Overadvance Side Letter Agreement effective as of April 15, 2008⁽⁶⁾
10.23		Form of Common Stock Purchase Warrant⁽⁶⁾
10.24		Tag-Along Rights Side Letter Agreement dated April 24, 2008⁽⁶⁾
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ⁽⁷⁾
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ⁽⁷⁾
32.1		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 ⁽⁷⁾


(1)		Incorporated by reference from our Definitive Joint Proxy Statement on Schedule 14A filed on July 24, 2007 (File No. 000-11284).

(2)		Incorporated by reference from our Current Report on Form 8-K filed on September 4, 2007 (File No. 000-11284).

(3)		Incorporated by reference from our Current Report on Form 8-K filed on October 3, 2007 (File No. 000-11284).

(4)		Incorporated by reference from our Current Report on Form 8-K filed on November 30, 2007 (File No. 000-11284).

(5)		Incorporated by reference from our Current Report on Form 8-K filed on March 20, 2008 (File No. 000-11284).

(6)		Incorporated by reference from our Amendment No. 1 to our Annual Report on Form 10-KSB filed on May 19, 2009 (File No. 000-11284).

(7)		Filed herewith.

EXHIBIT INDEX


Exhibit Number		Description
2.1		LLC Interest Sale Agreement, dated as of June 30, 2006, between Z-Axis Corporation and HTK, LLC ⁽¹⁾
2.2		Stock Exchange Agreement, dated as of May 7, 2006⁽¹⁾
2.3		Amendment No. 1 to Stock Exchange Agreement dated June 30, 2006⁽¹⁾
2.4		Amendment No. 2 to Stock Exchange Agreement dated December 31, 2006⁽¹⁾
3.1		Amended and Restated Articles of Incorporation ⁽²⁾
3.2		Amended and Restated Bylaws ⁽³⁾
10.1		Master Security Agreement, dated August 28, 2007 ⁽²⁾
10.2		Joinder Agreement, dated August 28, 2007 ⁽²⁾
10.3		Registration Rights Agreement, dated August 28, 2007 ⁽²⁾
10.4		Guaranty, dated August 28, 2007 ⁽²⁾
10.5		Security and Purchase Agreement, dated September 25, 2006 ⁽²⁾
10.6		Stock Pledge Agreement, dated September 25, 2006 ⁽²⁾
10.7		Amended and Restated Secured Convertible Term Note, dated August 28, 2007 ⁽²⁾
10.8		Secured Term Note, dated September 25, 2006 ⁽²⁾
10.9		Secured Revolving Note, dated September 25, 2006 ⁽²⁾
10.10		Common Stock Purchase Warrant, dated August 30, 2007 ⁽²⁾
10.11		Silicon Mountain Memory, Incorporated 2003 Equity Incentive Plan ⁽²⁾
10.12		Form of Stock Option Agreement of Silicon Mountain Memory, Incorporated 2003 Equity Incentive Plan⁽²⁾
10.13		Side Letter Agreement, dated August 30, 2007 ⁽²⁾
10.14		Amendment to Amended and Restated Secured Convertible Term Note and Secured Term Note dated as of November 5, 2007⁽⁴⁾
10.15		Omnibus Amendment dated as of March 18, 2008⁽⁵⁾
10.16		Form of Common Stock Purchase Warrant⁽⁵⁾
10.17		Overadvance Side Letter Agreement dated as of March 14, 2008⁽⁵⁾
10.18		Form of Common Stock Purchase Warrant⁽⁵⁾
10.19		Form of Subscription Agreement⁽⁵⁾
10.20		Settlement and Release Agreement dated as of April 25, 2008⁽⁶⁾
10.21		Form of Common Stock Purchase Warrant⁽⁶⁾
10.22		Amended and Restated Overadvance Side Letter Agreement effective as of April 15, 2008⁽⁶⁾
10.23		Form of Common Stock Purchase Warrant⁽⁶⁾
10.24		Tag-Along Rights Side Letter Agreement dated April 24, 2008⁽⁶⁾
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ⁽⁷⁾
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ⁽⁷⁾
32.1		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 ⁽⁷⁾


(1)		Incorporated by reference from our Definitive Joint Proxy Statement on Schedule 14A filed on July 24, 2007 (File No. 000-11284).

(2)		Incorporated by reference from our Current Report on Form 8-K filed on September 4, 2007 (File No. 000-11284).

(3)		Incorporated by reference from our Current Report on Form 8-K filed on October 3, 2007 (File No. 000-11284).

(4)		Incorporated by reference from our Current Report on Form 8-K filed on November 30, 2007 (File No. 000-11284).

(5)		Incorporated by reference from our Current Report on Form 8-K filed on March 20, 2008 (File No. 000-11284).

(6)		Incorporated by reference from our Amendment No. 1 to our Annual Report on Form 10-KSB filed on May 19, 2009 (File No. 000-11284).

(7)		Filed herewith.


	For the Three Months Ended
	March 31,			March 31,
	2008			2007
	(Unaudited)			(Unaudited)

Net sales	$	4,989,496		$	7,694,889
Cost of goods sold		4,334,634			6,047,881

Gross margin		654,862			1,647,008
Operating costs:
Selling expenses		654,761			684,808
General and administrative expenses		2,286,524			756,265
Depreciation and amortization		217,241			249,143

Total operating costs		3,158,526			1,690,216

Loss from operations		(2,503,664	)		(43,208	)

Other income (expense)
Other expense					(25,892	)
Interest expense, net		(213,412	)		(230,824	)

Total other expense		(213,412	)		(256,716	)

Pre-tax loss		(2,717,076	)		(299,924	)
Income tax benefit (expense)		53,567			113,000

Net loss	$	(2,663,509	)	$	(186,924	)

Basic and diluted net loss per share	$	(0.48	)	$	(0.04	)

Weighted average shares — basic and diluted		5,549,175			5,037,123


	SILICON MOUNTAIN HOLDINGS, INC.
	By:	/s/ Rudolph (Tré) A. Cates III
		Rudolph (Tré) A. Cates III,
		President, Chief Executive Officer and Director


	By:	/s/ Juan C. Perez
		Juan C. Perez,
		Chief Financial Officer and Treasurer

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PART I FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4T.	Controls and Procedures	32
PART II OTHER INFORMATION		33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
SIGNATURES		35
Certification of Chief Executive Officer Pursuant to Section 302
Certification of Chief Financial Officer Pursuant to Section 302
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906