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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, 2009


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

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.

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, 16,173,945 outstanding as of March 31, 2009.

SILICON MOUNTAIN HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated 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 4. Controls and Procedures			32

PART II OTHER INFORMATION

Item 1. Legal Proceedings			32

Item 1A. Risk Factors			33

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

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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


	March 31,			December 31,
	2009			2008

ASSETS
Current assets:
Cash and cash equivalents	$	12,780		$	13,699
Accounts receivable, net		890,282			1,080,618
Inventory, net		294,484			374,631
Prepaid and other current assets		10,707			96,141

Total current assets		1,208,253			1,565,089

Property and equipment, net		122,899			153,192
Note receivable		151,942			152,291
Deferred financing costs, net		2,908,257			3,858,825
Other intangible assets, net		73,340			87,065
Other assets		41,393			51,358

Total assets	$	4,506,084		$	5,867,820

LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
Current liabilities:
Accounts payable	$	1,391,338		$	1,579,507
Operating lease liability		1,418,381			1,418,381
Accrued expenses and other current liabilities		728,604			567,458
Note payable and accrued interest to related parties		204,688			199,762
Current portion of capital lease liability		8,958			8,666
Revolving credit facility		2,486,535			2,382,475
Current maturities of notes payable		4,149,294			4,121,070

Total current liabilities		10,387,798			10,277,319
Capital lease liability, net of current portion		15,165			17,540

Total liabilities		10,402,963			10,294,859

Commitments and contingencies
Stockholders’ (deficit):
Preferred stock, $.001 par value; 3,000,000 authorized, none issued or outstanding		—			—
Common stock, $.001 par value, 30,000,000 authorized; 16,173,945 and 14,532,938 shares issued, and outstanding, respectively		16,174			14,533
Additional paid-in capital		10,375,619			9,965,195
Accumulated deficit		(16,288,672	)		(14,406,767	)

Total stockholders’ (deficit)		(5,896,879	)		(4,427,039	)

Total liabilities and stockholders’ (deficit)	$	4,506,084		$	5,867,820

See accompanying notes to condensed consolidated financial statements.

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


	For the Three Months Ended
	March 31,
	2009			2008

Net sales	$	2,901,214		$	4,989,496
Cost of goods sold		2,420,917			4,334,634

Gross margin		480,297			654,862
Operating costs:
Selling expenses		371,989			654,761
General and administrative expenses		536,111			835,524
Restructuring charge		—			1,451,000
Depreciation and amortization		49,228			157,955

Total operating costs		957,328			3,099,240

Loss from operations		(477,031	)		(2,444,378	)

Other income (expense):
Other income		192,446			—
Interest expense, net		(1,596,470	)		(272,698	)

Total other income (expense)		(1,404,024	)		(272,698	)

Pre-tax loss		(1,881,055	)		(2,717,076	)
Income tax benefit (expense)		(850	)		53,567

Net loss	$	(1,881,905	)	$	(2,663,509	)

Net loss per common share — basic and diluted	$	(0.12	)	$	(0.24	)

Shares used in computing net loss per share — basic and diluted		15,686,482			11,098,350

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,
	2009			2008

Cash flows from operating activities:

Net loss	$	(1,881,905	)	$	(2,663,509	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		35,506			71,097
Amortization of loan origination costs		1,354,572			59,286
Amortization of intangibles		13,722			86,858
Amortization of debt discount		52,638			62,553
Stock based compensation expense		8,064			32,971
Gain on forgiveness of debt		(192,446	)		—
Bad debt expense (recovery)		(14,000	)		3,422
Inventory obsolescence		(43,000	)		(9,000	)
Increase or decrease in assets and liabilities:
Accounts receivable		204,336			326,967
Inventories		123,147			116,711
Prepaid expenses and other current assets		95,745			(2,705	)
Accounts payable		4,277			468,520
Accrued expenses and other current liabilities		166,075			1,549,905

Net cash provided by (used in) operating activities		(73,269	)		103,076


Cash flows from investing activities:

Purchase of property and equipment		(5,213	)		(19,584	)

Net cash (used in) investing activities		(5,213	)		(19,584	)


Cash flows from financing activities:

Principal payments on notes payable		—			(150,000	)
Proceeds from line of credit		3,167,230			5,349,072
Repayments on line of credit		(3,087,584	)		(5,452,040	)
Repayments of capital leases		(2,083	)		(4,079	)
Proceeds from issuance of common stock		—			300,000

Net cash provided by financing activities		77,563			42,953

Increase (decrease) in cash and cash equivalents		(919	)		126,445
Cash and cash equivalents at beginning of period		13,699			21,933

Cash and cash equivalents at end of period	$	12,780		$	148,378

See accompanying notes to condensed consolidated financial statements.

Silicon Mountain Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Statements (Unaudited)

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Silicon Mountain Holdings, Inc. (“Silicon Mountain,” the “Company,” the “Registrant,” “SMH,” “we” or “us”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These financial statements include the accounts of Silicon Mountain Holdings, Inc. and all of its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and related notes contained in our 2008 Annual Report on Form 10-K. The comparative balance sheet and related disclosures at December 31, 2008 have been derived from the audited balance sheet and consolidated footnotes referred to above.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments of a recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of results to be expected for the full year.

The Company earns revenue from the sale of its custom servers, workstations, media center computing devices, storage devices, gaming machines and memory upgrades, but does not separate sales of different product lines into operating segments.

The Company disclosed in Note 3 to its audited financial statements for the year ended December 31, 2008, 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 Form 10-K filed with the SEC on April 16, 2009.

The preparation of our condensed consolidated 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. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise estimates.

2. Going Concern

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. However, there can be no assurance that we will be able to continue in the ordinary course of business due to our significant liquidity constraints, unprofitable operations and negative operating cash flows.

Management’s plans to continue operations in the ordinary course assume adequate financing initiatives. There can be no assurance that we will be successful in our efforts to achieve future profitable operations or generate sufficient cash from operations, or obtain additional funding in the event that our financial resources become insufficient. The accompanying condensed consolidated financial statements do not include any adjustments that might result from any outcome of this uncertainty.

3. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of Silicon Mountain Holdings, Inc. (“SMH”) and its wholly-owned subsidiary, Silicon Mountain Memory, Inc. (“SMM”) and its wholly- owned subsidiary, VCI Systems, Inc. (“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.

Accounts Receivable — Accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate reserve against losses resulting from collecting less than full payment on receivables. Overdue accounts are reviewed, and an additional allowance is recorded when determined necessary to state receivables at an estimated realizable value. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment, aging of the receivables, including assessing the probability of collection and the current creditworthiness of each customer. The Company considers all balances past due if unpaid 30 days after invoicing. The allowance for doubtful accounts totaled $20,000 and $34,000, respectively, as of March 31, 2009 and December 31, 2008.

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. We regularly evaluate the reliability of our inventory based on a combination of factors including the following: forecasted sales, new product introductions, product end-of-life dates, estimated current and future market values as well as other factors. If circumstances related to our inventories change, estimates of the reliability of inventory could materially change. 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 $217,000 and $260,000 as of March 31, 2009 and December 31, 2008, respectively.

Intangible Assets — Intangible assets are comprised of deferred loan costs and a brand name acquired in connection with the acquisition of WidowPC. Intangible assets are amortized over the estimated useful lives ranging from one to three years.

Deferred Financing Costs — Fees associated with debt issuances are recorded on the balance sheet when incurred. Deferred costs are amortized as interest expense over the life of the underlying debt.

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 a brand name.

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 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.

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 is 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 — A concentration of credit risk exists with respect to our trade receivables. We perform ongoing credit evaluations on a significant number of our customers and collateral from our customers is generally not required. Two customers accounted for 51% and 45% of our trade receivables as of March 31, 2009 and December 31, 2008, respectively. Approximately 47% and 43% of the Company’s sales were to its largest customer during the three months ended March 31, 2009 and 2008, respectively.

A concentration of risk exists with respect to our suppliers. We purchase certain products from single sources. If the supply of parts from a single-source supplier were interrupted or suspended, our ability to ship products in a timely manner will be adversely affected. In cases where alternative suppliers are available, the establishment and procurement from these alternative suppliers may result in delays and losses of sales, which will have an adverse effect on our operating results.

Warranty Reserve — The Company engages in extensive product quality programs and processes, which include 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.

Research and Development Costs — Research and development costs are expensed as incurred in accordance with SFAS No. 2, Accounting for Research and Development Costs. Research and development costs primarily include contractor fees directly related to research and development projects.

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 not 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, 2009, 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, 2009 and December 31, 2008.

The tax years 2004 through 2007 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. We adopted the provisions of this statement effective January 1, 2009. The adoption of SFAS No. 160 did not have a material impact on the Company’s financial position or 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 adopted the provisions of SFAS No. 161 effective January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on the Company’s financial position or results of operations.

In April 2008, the FASB issued EITF 07-05, Determining whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, (EITF 07-05). EITF 07-05 provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in paragraph 11(a) of FAS 133. EITF 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. The adoption of EITF 07-05 did not have an impact on our consolidated financial statements, as the fair value of our financial instruments and related conversion features is not significant.

4. 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 recorded an impairment charge of $2,624,421 related to its intangible assets during fiscal 2008.

Intangible assets recognized in the Company’s acquisitions and asset purchases are being amortized over their estimated lives ranging from 1 to 3 years. The Company capitalized $404,001 in financing fees associated with the SMM warrants issued to Laurus during the three months ended March 31, 2009. The following table provides information relating to the Company’s intangible assets as of March 31, 2009 and December 31, 2008:


	March 31, 2009							December 31, 2008
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net
Widow PC tradename	$	165,000	$	(91,660	)	$	73,340	$	165,000	$	(77,935	)	$	87,065
Deferred financing costs and other miscellaneous		6,610,100		(3,701,843	)		2,908,257		6,206,099		(2,347,274	)		3,858,825

Total	$	6,775,100	$	(3,793,503	)	$	2,981,597	$	6,371,099	$	(2,425,209	)	$	3,945,890

The estimated amortization of intangible assets for each of the next two years is as follows:


Remainder of 2009	$	2,949,504
2010		32,093

Total	$	2,981,597

5. 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, 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 Note 6 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 at the inception of the Loan was 8.25%. On March 31, 2009, the Lender’s prime rate was 3.25%.

Revolving Note

On and after April 1, 2008, 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 five percent (5%) but not less than eleven percent (11%). On and after February 24, 2009, the first $200,000 of the Overadvances outstanding bear interest at twenty percent (20%). 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 on the first $200,000 of the overadvance attributable to eight percent (8%) of the applicable interest rate may be paid in common stock, and (ii) not more than that portion of the monthly interest payment due on the remaining overadvance attributable to three percent (3%) of the applicable interest rate may be paid in common stock, and (iii) 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.

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. On October 14, 2008, the Borrowers and Laurus entered into a Second Amended and Restated Overadvance Side Letter, pursuant to which Laurus agreed to extend to the Companies an additional $792,850 in excess of the amount then permissible under the Revolving Note, as modified by the Amended Side Letter, for an aggregate excess amount equal to $1,842,850. On February 24, 2009, the Borrowers and Laurus entered into a Third Amended and Restated Overadvance Side Letter Agreement (the “Third Amended Side Letter”), pursuant to which Laurus agreed to extend to the Companies an additional $200,000 in excess of the amount then permissible under the Revolving Note, as modified by the Original Side Letter, the Amended Side Letter and the Second Amended Side Letter, for an aggregate excess amount equal to $2,042,850.

Convertible Note

On and after April 1, 2008, 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 five percent (5%) but not less than eleven percent (11%). 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 were then 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.

Pursuant to the Omnibus Amendment dated as of October 10, 2008 between the Borrowers and the Holders (the “Omnibus Amendment”), $33,825 of the principal portion of each monthly payment due under the Convertible Note for the months of August 2008, September 2008, and October 2008 were converted into 162,360 shares of our common stock.

Pursuant to the Omnibus Amendment dated as of February 24, 2009 between the Borrowers and the Holders (the “Amendment”), the principal and interest portion of each monthly payment due under the Convertible Note for the period October 1, 2008 through March 31, 2009 are deferred until September 25, 2009.

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 $1.85 as adjusted. Pursuant to the Omnibus Amendment, the Convertible Note currently provides for a conversion price per share of $1.85 as adjusted, except that the conversion price was $.50 per share with respect to the first $200,000 of principal amount converted under the Convertible Note. 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 $.50. 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 was deemed to be paid and satisfied. Immediately upon the effectiveness of the Omnibus Amendment dated October 10, 2008, the Holders converted $101,471 in the aggregate of the outstanding principal balance of the Convertible Note at the fixed per share conversion price of $.625. 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 August 2008, September 2008 and October 2008 was deemed to be paid and satisfied.

Term Note

On or after April 1, 2008, 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 five percent (5%) but not less than eleven percent (11%). 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 as of November 5, 2007 (“the Amendment”). As a result, we were then required to repay the principal amount 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 dated as of March 18, 2008 between Borrowers and the Holders (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 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.

Pursuant to the Omnibus Amendment dated as of October 10, 2008 between the Borrowers and the Holders (the “Omnibus Amendment”), $33,825 of the principal portion of each monthly payment due under the Term Note for the months of August 2008, September 2008, and October 2008 were converted into 162,360 shares of our common stock.

Pursuant to the Omnibus Amendment dated as of February 24, 2009 between the Borrowers and the Holders (the “Amendment”), the principal and interest portion of each monthly payment due under the Term Note for the period October 1, 2008 through March 31, 2009 are deferred until September 25, 2009.

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 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. 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. Between April 1, 2009 and September 30, 2009, we are obligated to pay $4,197,058 in aggregate principal payments. Neither the Company’s cash currently on hand ($12,780 at March 31, 2009) 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 secure such, 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 Rudolph (Tré) A. Cates III, CEO. In addition, all cash of the Company 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 take certain actions, 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 nature the Companies’ 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 our 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 obligations 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 any 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).

At March 31, 2009, we were not in compliance with the loan convenant requiring us to list the shares underlying the convertible note and warrants on a trading exchange. On April 14, 2009, we obtained a waiver giving us until August 15, 2009, to register the shares. The waiver also waived all penalties retroactive to the date of the registration rights agreement.

At March 31, 2009, we were not in compliance with the loan covenant requiring us to timely file all tax related filings. The Company has not filed tax returns for the 2007 or 2008 tax years. We believe we have no income tax liability for those years due to taxable losses incurred. Lender has the right to hold us in violation of the covenant and require immediate repayment of all debt outstanding. All debt is reflected as a current liability on the balance sheets at March 31, 2009 and December 31, 2008, respectively.

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 the 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 3,980,000 shares of our common stock at $.005 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 36,624 shares of our common stock at $.005 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, 210,202 shares of our common stock, (ii) in respect to Valens Offshore, 17,272 shares of our common stock, (iii) in respect to Valens U.S., 11,174 shares of our common stock, and (iv) in respect to PSource, 111,354 shares of our common stock, for an aggregate of 350,002 shares of our common stock. Each warrant is exercisable at $.005 per share. The Holders have agreed they will not exercise that portion of the warrants which would cause the Holders to beneficially own more than 9.99% of our common stock at any time unless the Holders give 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 subsequently agreed 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. More recently, Laurus agreed that we should withdraw the registration statement and that it would further extend the deadline for having the registration statement declared effective. It is not clear whether Laurus believes that definitive terms of these extensions have 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 that the Company will be subject to liquidated damages under this agreement. On August 5, 2008, with the consent of Laurus, we filed a request with the SEC to withdraw our Registration Statement on Form S-1, and on August 6, 2008, we received notice from the SEC that our request was granted.

On March 14, 2008, as a condition to the Holders entering into the Amendment and Side Letter, we sold an aggregate of 600,000 shares of our common stock and warrants to purchase an aggregate 600,000 shares of our common stock to three individual accredited investors pursuant to Subscription Agreements. For each $.50 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 $.005 per share and expire within 7 years from the date of issuance. RayneMark Investments LLC, of which Mark Crossen, who at the time was 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 33% based on a formula (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 our Form 10-KSB/A filed on May 19, 2008. 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 Eexhibit 10.24 to our Form 10-KSB/A filed on May 15, 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, 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) is 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.

Pursuant to the Second Amended Side Letter described above, Laurus was issued a warrant to purchase up to approximately 14% based on a formula (on a fully diluted basis) of the outstanding shares of common stock of SMM with an exercise price of $0.01 per share and a warrant to purchase up to 2,145,743 shares of common stock of SMH with an exercise price of $0.01 per share.

Pursuant to the Third Amended Side Letter described above, Holder was issued warrants to purchase 400,001 shares of common of SMH with an exercise price of $0.001.

Schedules detailing the Company’s lines of credit, notes payable and related party debt are presented below.

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


	March 31, 2009		December 31, 2008
Revolving line of credit with Laurus Master Fund, Ltd., dated September 26, 2006. Maximum loan amount of $3,500,000. This line of credit has a maturity date of September 25, 2009.

Balance on line at March 31, 2009 and December 31, 2008 is shown net of unamortized debt discount of $48,818 and $73,232 respectively. This line of credit is collateralized by substantially all the assets of the Company.	$	2,486,535	$	2,382,475

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


	March 31, 2009		December 31, 2008
Note payable to Shareholder. Interest accrued at 10% with principal and accrued interest due on demand. Accrued interest payable was $104,688 and $99,762 at March 31, 2009 and December 31, 2008, 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. has been repaid or after written approval by Laurus.

Notes Payable —


	March 31, 2009			December 31, 2008
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 11%, net of unamortized discount of $23,882 and $37,994 at March 31, 2009 and December 31, 2008, respectively.	$	1,974,647		$	1,960,535
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 11%, net of unamortized discount of $23,882 and $37,994 at March 31, 2009 and December 31, 2008, respectively		2,174,647			2,160,535

Total long-term debt		4,149,294			4,121,070
Less current maturities		(4,149,294	)		(4,121,070	)

	$	-0-		$	-0-

6. 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 following table shows the weighted average assumptions used for grants during the twelve months ended December 31, 2007. Note: We have not issued any options under the 2003 Equity Incentive Plan since 2007:


	December 31,
	2007
Volatility		81	%
Expected option term (in years)		5.9
Risk-free interest rate		4.96	%
Expected dividend yield		0	%

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, 2009 and 2008 was $8,064 and $32,971, 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, 2009		3,141,799		$	0.24
Granted
Exercised		(1,908,852	)		0.13
Canceled or forfeited		(358,792	)		0.60

Options outstanding at March 31, 2009		874,155			0.28

Options exercisable at March 31, 2009		802,516		$	0.23

7. 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, 2009 and 2008 excludes 9,622,489 and 8,120,438 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.

8. Restructuring

In the quarter ending March 31, 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. This liability is recorded as an accrued expense on the consolidated balance sheet.


Balance at December 31, 2007	$	-0-
Additions-future lease payments		1,451,000
Reductions-payments on lease		(32,619	)

Balance at December 31, 2008		1,418,381
Additions-future lease payments		-0-
Reductions-payments on lease		-0-

Balance at March 31, 2009	$	1,418,381

At December 31, 2008 and March 31, 2009, the Company was in default with the payment terms of this lease, therefore, the entire liability is recorded on the respective balance sheets as a current liability.

9. Commitments and Contingencies

Officer and Director Indemnification — As permitted or required under Colorado law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. These indemnification obligations are valid as long as the officer or director acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations has no stated limit in the indemnification provisions of the articles or bylaws of the Company; however, the Company has a director and officer insurance policy that mitigates the Company’s exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification obligations is minimal.

Litigation — The Company is engaged from time to time in routine litigation that arises in the ordinary course of our business. In January 2009, our subsidiary, VCI Systems, Inc., was named in a lawsuit for breach of lease relating to our facility in Chandler, Arizona. The lawsuit includes a request for relief of $80,018 for past due rent, property taxes, insurance and legal fees.

10. Related Party Transactions

Sale of Z-Axis LLC — Z-Axis, transferred all of its assets and liabilities to Z-Axis LLC, its then wholly-owned subsidiary. Concurrent with the closing of the 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 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, 66,914 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. The terms of the note require quarterly interest payments calculated at prime plus 2% with the principal balance due on August 28, 2010.

Fees paid to Board Members —During the three months ended March 31, 2009 and 2008, the Company paid consulting fees to a former Board member of $9,000 and $27,000, respectively. The Company paid additional fees to board members of $0 and $11,375 during the three months ended March 31, 2009 and 2008, 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, 2009 and December 31, 2008, the note payable including accrued interest was $204,688 and $199,762, respectively.

11. Equity Transactions

On January 22, 2009, our Chief Operating Officer tendered 129,231 shares of his stock to the Company at a price of $.78 per share. The proceeds were used to exercise 799,054 stock options at an exercise price of $.1262 each. This transaction was treated as a cashless exercise.

On January 30, 2009, our Chief Executive Officer tendered 138,614 shares of his stock to the Company at a price of $1.01 per share. The proceeds were used to exercise 1,109,798 stock options at an exercise price of $.1262 each. This transaction was treated as a cashless exercise.

On February 24, 2009, the Companies and Laurus entered into an Omnibus Agreement amending certain terms of the Convertible Term Note, Term Note and Revolving Note. The terms of the Agreement defer certain principal and interest payments due on the Notes between October 1, 2008 and March 31, 2009. Silicon Mountain Holdings, Inc. issued warrants to Valens Offshore Fund, Valens US Fund and PSource Fund for the purchase of up to 172,081, 113,128 and 114,792 shares, respectively, of our common stock with an exercise price of $0.001 per share.

On February 24, 2009, SMH entered into a Third Amended and Restated Overadvance Side Letter Agreement (the “Third Amended Side Letter”) with Laurus Master Fund, Ltd. (“Laurus”), Valens U.S. SPV I, LLC (“Valens U.S.”), LV Administrative Services, Inc. as agent (“Agent”), Valens Offshore SPV I, Ltd. (“Valens Offshore”) and PSource Structured Debt Limited (“PSource”, and, together with Laurus, Valens U.S., Agent and Valens Offshore, referred to as the “Holders”), to be effective February 24, 2009.

Pursuant to the Third Amended Side Letter, Laurus has agreed to extend to the Companies an additional $200,000 in excess of the amount currently permissible under the Revolving Note (as defined below), as modified by the Original Side Letter, the Amended Side Letter and the Third Amended Side Letter (as defined below), for an aggregate excess amount equal to $2,042,850.

The Third Amended Side Letter amends and restates the Second Amended and Restated Overadvance Side Letter Agreement dated as of October 16, 2008 (the “Second A&R Letter”) each between the Companies and the Holders. Pursuant to the Original Side Letter, Laurus had agreed to extend to the Companies $300,000 in excess of the amount then permissible under the Secured Revolving Note dated September 25, 2006 (the “Revolving Note”) and pursuant to the Amended Side Letter, Laurus had agreed to extend to the Companies an additional $750,000 and pursuant to the Second Amended Side Letter, Laurus had agreed to extend to the Companies an additional $792,850. A copy of the Original Side Letter was included as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 20, 2008. A copy of the Amended Side Letter was included as Exhibit 10.22 to the Company’s Amendment No. 1 to its Annual Report on Form 10-KSB filed on May 19, 2008. A copy of the Revolving Note was included as Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on September 4, 2007. A copy of the Second Amended Side Letter was included as Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2008.

12. Subsequent Events

None.

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

This Quarterly Report on Form 10-Q contains forward-looking statements that 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;

	•		results of operations;

	•		operating costs and other expenses;

	•		cash flow and anticipated liquidity;

	•		sufficiency of capital resources to fund our operation requirements; or

	•		any other statements which are other than statements of historical fact.

Although we believe the assumptions which our forward-looking statements are based currently to be reasonable, our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors. These factors include, but are not limited to:

	•		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;

	•		vendor management;

	•		threatened and pending litigation;

	•		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 are a holding company, our subsidiaries 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. Our subsidiaries also 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 DRAM 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

Two-For-One Forward Split

On August 12, 2008, our Board of Directors declared a two-for-one stock forward split for shareholders of record on August 29, 2008 effective September 1, 2008. All per share amounts disclosed in this quarterly report and related notes have been adjusted to show the effects of this forward split and the one-for-nine reverse split disclosed later in the executive summary.

Purchase of Vision Computer, Inc.

On September 26, 2006, our subsidiary, Silicon Mountain Memory, Inc., 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 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, SMM recorded a purchase price adjustment resulting in a net purchase price of $3,237,058.

Widow PC

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. Subsequently, the parties agreed that the amount of any earnout could be adjusted downward to account for certain unanticipated liabilities of WidowPC.

SMM Acquisition

On August 28, 2007, we consummated a stock exchange with SMM pursuant to which we issued an aggregate of 10,131,020 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 7,650,000 shares to 850,000 post-split shares.

Changes In Authorized Capital and Creation of a Class of 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 sales returns and maintain 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 method 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 compare 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.

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.

The Company is engaged from time to time in routine litigation that arises in the ordinary course of our business. In January 2009, our subsidiary, VCI Systems, Inc., was named in a lawsuit for breach of lease relating to our facility in Chandler, Arizona. The lawsuit includes a request for relief of $80,018 for past due rent, property taxes, insurance and legal fees.

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, 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,
	2009			2008
Sales		100.0	%		100.0	%
Cost of Goods Sold		83.4			86.9
Gross Margin		16.6			13.1
Operating Costs:
Selling Expenses		12.8			13.1
General & Administrative		18.5			16.7
Restructuring Charge					29.1
Depreciation & Amortization		1.7			3.2
Loss from Operations		(16.4	)		(49.0	)
Other Expense, Net		(48.4	)		(5.5	)
Pre-Tax Loss		(64.8	)		(54.5	)
Income Tax Benefit		(.0	)		1.1
Net Loss		(64.9	)%		(53.4	)%


(1)		Columns may not add due to rounding.

Sales for the three months ended March 31, 2009 were $2.9 million compared to $5.0 million for the three months ended March 31, 2008. The decrease in sales for the three months ended March 31, 2009 is primarily related to lower system sales and the continued decline in overall economic conditions.

Cost of Goods Sold was $2.4 million for the three months ended March 31, 2009, or 83.4% of sales, compared to $4.3 million, or 86.9% of sales for the three months ended March 31, 2008. The decrease in cost of goods sold during the three months ended March 31, 2009 was primarily due to lower sales, and the decrease in cost of goods sold as a percentage of sales was primarily due to higher margins on sales, and decreased employee related, and freight charges, compared to the same periods in 2008.

Selling, general and administrative, and depreciation and amortization expenses were $1.0 million for the three months ended March 31, 2009 compared to $3.1 million for the three months ended March 31, 2008. The decrease is due to booking of the $1.5 million restructuring accrual in the first quarter of 2008, decreased legal and professional fees, and decreased employee related expense.

Total other expense, net, for the three months ended March 31, 2009, was $1.4 million compared to $.3 million for the three months ended March 31, 2008. The increase in other expense was primarily related to amortization of deferred loan financing fees.

The Company recorded income tax expense of $850 during the three months ended March 31, 2009 compared to an income tax benefit of $53,567 for the three months ended March 31, 2008.

Liquidity and Capital Resources

Our principal source of liquidity is borrowings under our credit facility. Our principal use of cash is working capital requirements, including funding of losses from operations.

Going Concern

For the year ended December 31, 2008, our accountants have expressed doubt about our ability to continue as a going concern as a result of our continued net losses and working capital deficit. 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 $1.9 million for the three months ended March 31, 2009 and had a working capital deficit of $9.2 million at March 31, 2009. Our working capital at March 31, 2009 is not sufficient to meet our objectives.

Management recognizes that the Company must generate additional cash and potential 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 attempt to 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

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. On October 14, 2008, the Borrowers and Laurus entered into a Second Amended and Restated Overadvance Side Letter, pursuant to which Laurus agreed to extend to the Companies an additional $792,850 in excess of the amount then permissible under the Revolving Note, as modified by the Amended Side Letter, for an aggregate excess amount equal to $1,842,850. On February 24, 2009, the Borrowers and Laurus entered into a Third Amended and Restated Overadvance Side Letter Agreement (the “Third Amended Side Letter”), pursuant to which Laurus agreed to extend to the Companies an additional $200,000 in excess of the amount then permissible under the Revolving Note, as modified by the Original Side Letter, the Amended Side Letter and the Second Amended Side Letterfor an aggregate excess amount equal to $2,042,850.

Convertible Note

On or after April 1, 2008, 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 five percent (5%) but not less than eleven percent (11%). 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.

Term Note

Pursuant to the Omnibus Amendment dated as of October 10, 2008 between the Borrowers and the Holders (the “Omnibus Amendment”), $33,825 of the principal portion of each monthly payment due under the Term Note for the months of August 2008, September 2008, and October 2008 were converted into 162,360 shares of our common stock.

Pursuant to the Omnibus Amendment dated as of February 24, 2009 between the Borrowers and the Holders (the “Amendment”), the principal and interest portion of each monthly payment due under the Term Note for the period October 1, 2008 through March 31, 2009 are deferred until September 25, 2009.

General Terms of the Loan

•

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

•

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

•

Attachments or levies or judgments against any 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

•

At March 31, 2009, we were not in compliance with the loan covenant requiring us to list the shares underlying the convertible note and warrants on a trading exchange. On April 14, 2009, we obtained a waiver giving us until August 15, 2009, to register the shares. The waiver also waived all penalties retroactive to the date of the registration rights agreement.

Issuance of Securities as Part of Debt Facility

	•		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) is 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.

Pursuant to the Third Amended Side Letter described above, Holder was issued warrants to purchase 400,001 shares of common of SMH with an exercise price of $0.001.

Cash Flows

Cash Flows from Operating Activities. Net cash used by operating activities was $0.1 million during the three months ended March 31, 2009 as compared to $0.1 million of cash provided by operating activities during the three months ended March 31, 2008.

Cash Flows from Investing Activities. Net cash flows used in investing activities was $5,213 during the three months ended March 31, 2009 as compared to $19,584 during the three months ended March 31, 2008. The decrease in cash used in investing activities in 2009 was related to lower equipment purchases.

Cash Flows from Financing Activities. Net cash flows provided by financing activities during the three months ended March 31, 2009 was $.08 million as compared to $.04 million during the three months ended March 31, 2008.

Capital Expenditures

Capital expenditures for the three months ended March 31, 2009 were $5,213 as compared to $19,584 for the three months ended March 31, 2008. As of March 31, 2009, 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 maintain; 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 cover operating losses, 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. We adopted the provisions of this statement effective January 1, 2009. The adoption of SFAS No. 160 did not have a material impact on the Company’s financial position or 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. The Company adopted the provisions of SFAS No. 161 effective January 1, 2009. The adoption did not have a material impact on the Company’s financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including our chief executive and chief financial officers have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2009. Based on that evaluation, the Company’s management, including our chief executive officers, concluded that as of March 31, 2009, our disclosure controls and procedures were not effective to ensure that information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company intends to focus its efforts on stabilizing the business as a going concern first, and secondly, designing and installing effective controls as soon as cash flow and funding to do so become available, and staffing constraints can be overcome without compromising the business’ viability.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2009, we have not made any changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Not applicable.

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

None.

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)
	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)
	10.25	Subscription Agreement with MemoryTen, Inc., dated August 12, 2008 (7)
	10.26	Second Amended and Restated Overadvance Side Letter Agreement dated October 14, 2008 (8)
	10.27	Third Amended and Restated Overadvance Side Letter Agreement dated February 24, 2009 (9)


Exhibit Number		Description
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (10)
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (10)
	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 (10)


(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)		Incorporated by reference from our Current Report on Form 8-K filed on August 15, 2008 (File No. 000-11284).

(8)		Incorporated by reference from our Current Report on Form 8-K filed on November 14, 2008 (File No. 000-11284).

(9)		Incorporated by reference from our Current Report on Form 8-K filed on March 3, 2009 (File No. 000-11284).

(10)		Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Boulder, State of Colorado, on this 15th day of May 2009.


SILICON MOUNTAIN HOLDINGS, INC.

By:		/s/ Rudolph (Tré) A. Cates III Rudolph (Tré) A. Cates III, President, Chief Executive Officer, Secretary and Director

Pursuant to the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant in the capacities and on the date stated.


By:		/s/ Rudolph (Tré) A. Cates III Rudolph (Tré) A. Cates III,
		President, Chief Executive Officer, Secretary and Director
		Date: May 15, 2009

By:		/s/ Dennis Clark Dennis Clark
		Chief Financial Officer and Treasurer
		Date: May 15, 2009

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)
	10.25	Subscription Agreement with MemoryTen, Inc., dated August 12, 2008 (7)
	10.26	Second Amended and Restated Overadvance Side Letter Agreement dated October 14, 2008 (8)
	10.27	Third Amended and Restated Overadvance Side Letter Agreement dated February 24, 2009 (9)
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (10)
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (10)
	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 (10)


(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)		Incorporated by reference from our Current Report on Form 8-K filed on August 15, 2008 (File No. 000-11284).

(8)		Incorporated by reference from our Current Report on Form 8-K filed on November 14, 2008 (File No. 000-11284).

(9)		Incorporated by reference from our Current Report on Form 8-K filed on March 3, 2009 (File No. 000-11284).

(10)		Filed herewith.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

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Silicon Mountain Holdings, Inc. 10-Q