**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended April 29, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                       to                       .**

**CommissionFile Number 0-21488**

----

**Catalyst Semiconductor, Inc.**

(Exact name of Registrantas specified in its charter)

| **Delaware**                                                    |   | **77-0083129**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S.Employer  Identification No.) |

 

**2975 Stender Way, SantaClara California 95054**

(Address of PrincipalExecutive Offices)

Registrant’s telephonenumber, including area code: **(408) 542-1000**

Securities registeredpursuant to Section 12(b) of the Act:

| Title of each class:                | ** ** | **Name of each exchange on which registered:** |
|-------------------------------------|------------|------------------------------------------------|
| **Common  Stock, $0.001 par value** |       | **The  NASDAQ Global Market LLC**              |
| ** **                          |       | **(The  NASDAQ-GM)**                           |

 

Securities registered pursuant to Section 12(g) ofthe Act:

**NONE**

Indicate by check markwhether the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o  No x

Indicate by check markwhether the registrant is not required to file reports pursuant to Section 13or 15(d) of the Act. Yes o  No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K, or anyamendment to this Form 10-K. x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, ornon-accelerated filer (as defined in Exchange Act Rule 12b-2).

| Large accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated  filer  x |
|--------------------------------------|--------|--------------------------------|--------|-------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-5of the Act). Yes o  No x

The aggregate market valueof voting stock held by non-affiliates of the registrant as of October 29,2006, the last day of the registrant’s most recently completed second quarter,was approximately $29,895,914 based upon the last sales price reported for suchdate on the NASDAQ Global Market. For purposes of disclosure, shares of commonstock held by persons who hold more than 5% of the outstanding shares of commonstock and shares held by executive officers and directors of the registranthave been excluded in that such persons may be deemed to be affiliates. Thisdetermination is not necessarily conclusive.

The number of shares ofRegistrant’s Common Stock outstanding as of June 30, 2007 was 16,350,912.

**DOCUMENTS INCORPORATED BYREFERENCE**

Items 10, 11, 12, 13, and 14 of Part III ofthis Form 10-K incorporate information by reference from portions ofthe registrant’s 2007 Definitive Proxy Statement to be filed not later than 120days after the close of the fiscal year ended April 29, 2007.

 

----

**CATALYST SEMICONDUCTOR, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED APRIL 29, 2007INDEX**
|                                            | ** **                                                                                                            | ** ** | **Page** |
|--------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**                            |                                                                                                                  |       |
| Item 1.                                    | Business                                                                                                              |       | 3        |
| Item 1A.                                   | Risk Factors                                                                                                          |       | 15       |
| Item 1B.                                   | Unresolved Staff Comments                                                                                             |       | 25       |
| Item 2.                                    | Properties                                                                                                            |       | 26       |
| Item 3.                                    | Legal Proceedings                                                                                                     |       | 26       |
| Item  4.                                   | Submission of Matters to a Vote of Security Holders                                                                   |       | 26       |
| **PART II**                           |                                                                                                                  |       |
| Item  5.                                   | Market for Registrant’s Common Equity and Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 27       |
| Item 6.                                    | Selected Financial Data                                                                                               |       | 29       |
| Item  7.                                   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                           |       | 30       |
| Item  7A.                                  | Quantitative and Qualitative Disclosures About Market  Risk                                                           |       | 41       |
| Item  8.                                   | Financial Statements and Supplementary Data                                                                           |       | 41       |
| Item  9.                                   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                 |       | 41       |
| Item 9A.                                   | Controls and Procedures                                                                                               |       | 42       |
| Item 9B.                                   | Other Information                                                                                                     |       | 42       |
| **PART III**                          |                                                                                                                  |       |
| Item  10.                                  | Directors, Executive Officers and Corporate Governance                                                                |       | 43       |
| Item 11.                                   | Executive Compensation                                                                                                |       | 43       |
| Item  12.                                  | Security Ownership of Certain Beneficial Owners and Management  and Related Stockholder Matters                       |       | 43       |
| Item  13.                                  | Certain Relationships and Related Transactions, and  Director Independence                                            |       | 43       |
| Item  14.                                  | Principal Accountant Fees and Services                                                                                |       | 43       |
| **PART IV**                           |                                                                                                                  |       |
| Item  15.                                  | Exhibits and Financial Statement Schedules                                                                            |       | 43       |
| Signatures                                 |                                                                                                                  | 47         |
| Index to Consolidated Financial Statements |                                                                                                                  | F-1        |

 

2

----

**CATALYSTSEMICONDUCTOR, INC.**

**EXPLANATORY NOTE**

*This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended  and Section 21E of the SecuritiesExchange Act of 1934, as amended. Words such as “projected,” “expects,” “believes,”“intends” and “assumes” and similar expressions are used to identifyforward-looking statements. These statements are made based upon currentexpectations and projections about our business and the semiconductor industry,and assumptions made by our management are not guarantees of futureperformance, nor do we assume any obligation to update such forward-lookingstatements after the date this report is filed. Forward-looking statementscontained in this Annual Report include, among others, statements regardingexpanding our focus in the analog/mixed-signal market, providing the mostcomprehensive lines of serial and parallel EEPROM products in the industry, theability to take advantage of growth and market opportunities in the industrieswe provide our products, continued investment in research and development toimprove our memory and analog/mixed-signal products, the successfulimplementation of new strategies to meet our long-term strategic goals, thecontinued ability to competitively and reliably provide non-volatile memoryproducts, the sufficiency of our current cash, cash equivalents andavailable-for-sale securities, our ability to retain and attract employees, ourinternal controls, the adequacy of our facilities to meet our customers’ needs,and the effects of new accounting rules. Actual results may differ materiallyfrom those projected in the forward-looking statements as a result of variousfactors. Factors that could cause actual results to differ materially fromthose included herein include, but are not limited to: the informationcontained under the captions “Part I, Item 1. Business,” “Part I,Item 1A. Risk Factors” and “Part II, Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”*

**PART I**

**Item 1.   *Business***

**Overview**

We design, develop and market a broad line ofreprogrammable non-volatile memory products and analog/mixed-signalsemiconductor products. Our products are used by manufacturers of electronicproducts in a wide range of consumer, computing, communications, industrial andautomotive applications. We generally target high volume markets for our costeffective, high quality products. Through periods of tight manufacturingcapacity and cyclical downturns, we have demonstrated long-term commitment tothe memory products market.

The market for our non-volatile memory is highlycompetitive and market participants have relatively weak pricing power. Averageselling prices of our non-volatile memory products have declined over time andprices are sensitive to conditions in our original equipment manufacturer (“OEM”)customers’ target markets. In fiscal 2007, we experienced an increase in totalunit volume sold to end customers, driven by strong demand particularly for ourelectrically erasable programmable read-only memory (“EEPROM”) andanalog/mixed-signal products. However, this increase in unit volume was partlyoffset by an overall decrease in average selling prices. In general, we expectthe average selling price for a given memory product to decline in the future,primarily due to market competition, product availability and manufacturingcapacity. In response to that trend, we continue to work with our foundries andother vendors to increase the manufacturing efficiency of our products.

Our business is less capital intensive thantraditional semiconductor companies because we outsource the manufacturing,assembling and a significant portion of the testing of our products to thirdparties. We strive to maintain long-term relationships with our suppliers toensure stability in our supply of products at a competitive cost. In addition,in an effort to alleviate any potential wafer capacity constraints, we maintaina supply of wafers in a die bank for most products.

3

----

We market and sell our products through our directsales force and sales representatives to OEMs and indirectly throughdistributors and resellers who sell to their end customers. Indirect sales werea majority of our total sales in fiscal 2007, 2006 and 2005. Our totalcustomer base, including OEMs and end-customers of our distributors andresellers, has been relatively diverse and during fiscal 2007 consisted of morethan 3,000 end customers. We have approximately 49 distributors and resellers.

We are leveraging our extensive experience in highvolume, reprogrammable memory products to develop complementaryanalog/mixed-signal products that offer our customers a more complete systemsolution. In fiscal 2003, we strengthened and expanded the expertise of our researchand development team by establishing our own development center in Bucharest,Romania and by hiring additional engineers in Romania and in our Californiaheadquarters. In fiscal 2005, we purchased a new building in Bucharest for ourRomanian product development team and in fiscal 2006, we purchased a newbuilding in Santa Clara, California for our headquarters and U.S developmentteam. We continue to make substantial investments in research and developmentto advance our non-volatile memory products, as well as develop broadersolutions with our line of analog/mixed signal products.

We incorporated in California in October 1985. InMay 1993, we reincorporated in Delaware. Our principal executive officesare currently located at 2975 Stender Way, Santa Clara, CA 95054, our telephonenumber is (408) 542-1000 and our website is *www.catsemi.com*. Information contained on or accessiblethrough our website does not constitute a part of this report.

Our fiscal year ends onthe Sunday closest to April 30 of each year. We refer to the fiscal yearended April 27, 2003 as fiscal 2003, the fiscal year ended May 2,2004 as fiscal 2004, the fiscal year ended May 1, 2005 asfiscal 2005, the fiscal year ended April 30, 2006 as fiscal 2006 andthe fiscal year ended April 29, 2007 as fiscal 2007.

**Industry Background**

Semiconductor devices maybe divided into three broad categories: analog, digital and mixed-signal. Analogproducts monitor and manipulate real world signals such as sound, light,pressure, motion, temperature and electrical current. Digital circuits, such asmicroprocessors, use threshold voltages which function as on and off switches,which are expressed in binary code as ones and zeros. The digital componentsprocess and manipulate the data while the analog components condition theinputs or signals. Mixed-signal devices incorporate both analog and digitalfunctions into a single semiconductor device. In most cases, these mixed-signaldevices convert analog signals to digital signals or vice versa, or these devicesmay be used to improve the performance of the specific analog application. Non-volatilememory devices require certain building blocks that have analog characteristicsincluded within them in order to perform their memory functions.

***Non-Volatile Memory Products***

The principal distinguishing characteristic ofnon-volatile memory is that it does not require a continuous application ofpower to retain data while volatile memory, such as dynamic random accessmemory, or DRAM, requires continuous power. While non-volatile memory productsare often considered digital semiconductor devices, these non-volatile memorydevices incorporate certain high performance analog blocks. Electronic systemsprimarily use non-volatile memory to store critical data when the power to thesystem is turned off. Virtually all electronic systems that use a digitalprocessor or controller, including personal computers, printers, cellularhandsets, digital cameras, optical networks, wireless local area networks,digital set-top boxes and automotive systems, incorporate non-volatile memoryproducts such as EEPROM and/or flash memory. Many electronic systems utilize acombination of volatile and non-volatile memory.

4

----

System manufacturers generally prefer non-volatilememory devices that can be reprogrammed efficiently in the system in order toachieve several important advantages in comparison to non-volatile memorydevices that are not reprogrammable or which require physical removal forreprogramming. With reprogrammable memory, manufacturers can cost effectivelychange program codes in response to accelerated product cycles and changingmarket specifications. Reprogrammable memory greatly simplifies inventorymanagement and manufacturing processes and allows the manufacturer toreconfigure or update a system either locally or remotely through a networkconnection. In addition, consumers use non-volatile memory devices that can beprogrammed and reprogrammed to store user selected system configurations inconsumer electronics devices, such as phone numbers in mobile telephones. Majornon-volatile memory classifications include EEPROM and flash memory.

EEPROM provides significant programming flexibility tosystem designers. This non-volatile memory can be erased and reprogrammedelectrically within the system hundreds of thousands to millions of times andcan be altered one byte or several bytes at a time. In an EEPROM device, eachcell, which is the discrete area on the device in which one bit is stored,consists of two transistors, one to store data and one to permit the cell to beselected when erasing data. Serial EEPROM transmits data through a singleinput-output port while parallel EEPROM transmits data through multipleinput-output ports concurrently.

Flash memory provides significant programmingflexibility to system designers at a higher density than EEPROM. Although flashmemory can be reprogrammed electrically within the system, the number ofreprogramming cycles is generally less than EEPROM and only a memory block canbe rewritten, not an individual byte. In flash memory, a block consists of anarray of memory cells. Flash memory products can be manufactured with storagedensities, transfer rates and data alterability comparable to DRAM and canachieve a relatively low manufacturing cost at higher densities. Forlow-density memory used in high volume applications, flash memory is not costeffective relative to EEPROM. Because of its limitations and cost at lowdensities, flash memory is not used in certain system critical applications.

The EEPROM market ischaracterized by high unit volumes sold at relatively low per unit prices. TheEEPROM market has a limited number of vendors. Each participant in the EEPROMmarket has relatively weak pricing power because of interchangeability ofavailable vendors’ parts. EEPROM prices are largely a function of the demandfor electronic devices in which they are incorporated, available memorymanufacturing capacity, product availability and memory density. In light ofthese competitive dynamics, some suppliers have exited the EEPROM market,leaving fewer alternatives for OEM customers. Manufacturers customarily useflash memory and EEPROM to address different needs within the same electronicsystem. Since most consumer and industrial electronic devices continue to useEEPROM either separately or in conjunction with other memory, OEM customerswant to develop relationships with memory vendors who are likely to belong-term vendors of EEPROM and those vendors which are developing andsupplying a broad range of products.

***Analog/Mixed-Signal Products***

Theanalog/mixed-signal market is generally divided into two major productcategories depending on how the devices are used by system designers:

·       generalpurpose analog/mixed-signal products for standard designs; and

·       analog/mixed-signalapplication specific standard products, or ASSPs, for customized designs.

General purpose analog/mixed-signal products perform astandard function that can usually be sourced from a number of suppliers. Somegeneral purpose products command premium prices due to the additionalperformance they provide in certain applications. Popular high performancedevices generally attract competition and become commoditized over time. Similarly,in the memory market, most 

5

----

non-volatile memorycomponents are general purpose or industry standard parts and areinterchangeable with parts from other suppliers.

General purpose analog/mixed-signal products includepower management products, which control and regulate the amount of powerdelivered to an electronic system. Power management products are critical tooverall system performance and cost. These products include direct current todirect current, or DC to DC, converters, switching regulators, low dropoutvoltage regulators and voltage references. Suppliers of power managementproducts are increasingly integrating discrete power management components intomulti-function devices to reduce design time and lower system costs byconsuming less board space and power.

ASSPs are a superior solution for systems that havespecial requirements, such as portability, size constraints or functionality. Therelationship between customer and supplier tends to be more dynamic andintertwined in this market with greater reliance on each other. On one hand,the customer has to have enough trust in the supplier to take the risk ofcommitting its supply chain to a single vendor. On the other hand, the supplierfaces the risk of investing significant research and development resources todesign and develop a customized solution with the uncertainty of the marketacceptance of the customer’s end product. Suppliers servicing the ASSP markettypically have greater pricing power and receive higher margins.

The analog/mixed-signalmarket is highly fragmented into many segments with numerous vendors servingone or more of the various segments. The general purpose analog/mixed-signalsemiconductor market is characterized by long product cycles with a broad,diverse base of customers. As a result, general purpose analog/mixed-signalproduct prices tend to be more stable than those for non-volatile memoryproducts.

**Our CompetitiveStrengths**

We have two decades of experience in the design,testing and sale of reprogrammable non-volatile memory products, includingEEPROM and low-density flash memory. We believe we have established a brandname that our OEM and distribution customers associate with cost effective,high quality and high value products supported by excellent customer service. Thesestrengths have helped us grow in the competitive non-volatile memory market. Weintend to leverage our OEM customer base and the design and operationalexpertise developed in our non-volatile memory products to increase our revenuesfrom our non-volatile memory and analog/mixed-signal product offerings.

We believe the following are our key competitivestrengths:

*HighQuality Design.**  *Wehave invested and intend to continue to invest substantial resources inresearch and development to improve our memory and analog/mixed-signal products.To complement our California engineering capabilities, in 2003, we establishedour own design and development center in Bucharest, Romania. We previously usedcontract personnel in Romania but now have an integrated design organization,which as of April 29, 2007 included a worldwide total of 79 engineers. Throughthe development of our EEPROM products, we also routinely design and develophigh performance analog and mixed-signal functions for use in our non-volatilememory products. As a result, our design personnel have extensive experience indesigning analog blocks, which we believe will enable us to expand our focus toinclude the complementary analog/mixed-signal product market.

*Expertisein High Volume, Efficient Manufacturing.**  *The markets for our non-volatilememory products are characterized by high unit volumes sold at competitiveprices. To reduce cost, we are developing successive generations of our memoryproducts scaled to smaller process geometries which is intended to result inreduced die sizes and lower cost per unit. We conduct the majority of our wafertesting operations in our Santa Clara, California headquarters and take othersteps to maintain and 

6

----

improve the quality of ourproducts. These efforts have improved the yield on our products. We use thirdparty contractors for a majority of our manufacturing, packaging, testing andshipping activities in order to control our costs and to be able to respondquickly to customer requests.

*Long-Term,Established Foundry Relationships.**  *We have worked with OKISemiconductor, Inc., our primary foundry that is located in Japan, formore than 20 years. This long standing foundry relationship has enabled us tooptimize our designs for its high volume and high yield processes. To reduceour reliance on a single wafer foundry, we also developed our processes so thatdifferent fabrication facilities could replicate them. We purchase volumeshipments of our analog/mixed-signal products from a United States-basedfoundry. This facility can act as a second fabrication facility for some of ournon-volatile memory products. We also purchase volume shipments fromfabrication facilities in Taiwan and China, and regularly evaluate otherfoundries that may support the production of high performanceanalog/mixed-signal products for us.

*ComprehensiveEEPROM Product Line.**  *Webelieve that we offer one of the most comprehensive lines of serial andparallel EEPROM products in the industry. Our EEPROM products support industryrequirements and are available in a broad selection of densities and voltages. OurEEPROM product line includes a wide array of performance characteristics thatelectronic system manufacturers need, such as interfaces, memory densities,voltages and bus speeds.

*SystemsFocused Analog/Mixed-signal Product Line.**  *We have concentrated our analog/mixed-signal productdevelopment and systems understanding on specific applications such as whitelight emitting diodes, or LED, backlight drivers for liquid crystal display, orLCD, screens and modules; multi-colored LCD applications such as automotive andaircraft interior lighting and instrumentation clusters; and on the portablepower management functions that complement the LED driver applications. Webelieve that this focus enables us to achieve the necessary systems insightmore rapidly in order to gain the confidence of, and secure the business of,major OEMs.

*Intellectualproperty.**  *We havea patent portfolio that includes fabrication process and product-related IP. ThisIP portfolio includes proprietary charge-pump architecture that has beenembedded in our line of Quad-ModeTM LEDs drivers.

*DiverseEnd Markets and Applications.**  *Through direct and indirect saleschannels, we sell our products in a variety of end markets, including consumer,computing, communications, industrial and automotive. Our solutions are used ina broad array of applications within each of these markets, such as automotivesystems, cordless telephones, digital cameras, digital video players, digitalset-top boxes, mobile phones, optical networks, personal computers and wirelesslocal area networks. Due to the diversity of our markets and applications, weare not dependent on any individual industry or end user product. In addition,we believe we have the opportunity to take advantage of the markets and growthin any of the industries we serve.

*Strong Customer Base.**  *We are one of the largest suppliersof EEPROM in the world and we have relationships with many customers includinglarge OEMs through direct sales, distributors and resellers. Duringfiscal 2007, we served more than 3,000 end customers. Through ourcollaborations with OEM customers in an interactive product design anddevelopment process, we have established durable relationships, solidified ourcustomer base and defined the next generation of our products. Consequently, webelieve that we are well positioned to continue to sell our existing and futureanalog/mixed-signal products to these customers, which could use many of theseproducts in conjunction with our memory products.

7

----

**Our Strategy**

We intend to continue to provide our customers with areliable source of industry standard non-volatile memory products. We alsointend to further improve our non-volatile memory products and become a systemsknowledgeable partner to our customers by providing a broad range of standardand custom analog/mixed-signal products. Our strategy includes the following:

*StrengthenEEPROM Product Offering.**  *We intend to continue to develop high performanceEEPROM products and reduce our costs by continuing to migrate to smallerprocess geometries. We intend to continue to provide high quality,competitively priced products with a broad range of densities and voltages. Asa result, we intend to strengthen our position in the EEPROM market.

*BroadenStandard Analog/Mixed-signal Product Offerings.**  *We have developed a range ofindustry standard analog/mixed-signal products that serve high volume markets. Leveragingour large OEM customer base and efficient, high volume manufacturing process,we intend to become a reliable, high volume, cost effective supplier ofstandard analog/mixed-signal products to existing and new OEM customers. We intendto continue to introduce additional industry standard analog/mixed-signalproducts to increase net revenues, address new applications and increase ourportfolio of analog building blocks for internal reuse in other products, suchas application specific analog/mixed-signal products. We reuse proven designblocks, which enables us to reduce the design and manufacturing risksassociated with new products and assists us in reducing development times andin achieving higher reliability and manufacturing yields.

*ExpandProprietary Analog/Mixed-signal Product Offerings.**  *We have introduced a range ofproprietary analog/mixed-signal products, which often integrate analog elementswith reprogrammable non-volatile memory, such as digital potentiometerproducts, or DPPs, and processor supervisors. We intend to continue to introduceadditional embedded memory products and to leverage our non-volatile memory andanalog design expertise. We also plan to continue to have these products builtfor us by our foundry suppliers using our proprietary process technology andopen source technology, which supports both analog and non-volatile memoryelements in a single manufacturing process. We are working with selectedcustomers to develop next generation high value added products. We aretargeting selected applications in large segments, such as solid stateillumination, which is lighting for displays, consumer electronic devices,automotive and other purposes.

We intend toimplement our strategies by:

·       leveragingour design portfolio and ongoing research and development activities;

·       expandingengineering resources in low cost areas, such as our Bucharest, Romaniaengineering center;

·       expandingour design portfolio and making selective acquisitions of complementarycompanies or technologies;

·       usingthird party foundries to provide wafer fabrication for our products;

·       developingour processes in a manner that permits the manufacture of our products in thefabrication facilities of different semiconductor foundries; and

·       taking advantage of theflexible capacity and lower fixed costs of the outsourced manufacturing model.

8

----

**Products**

We use our expertise innon-volatile memory to develop and maintain a broad range of EEPROM productsand selected flash memory products. In addition, we have expanded our focus toinclude analog/mixed-signal products.

***Parallel and Serial EEPROM***

We offer a broad range of serial EEPROM productscompatible with the three popular industry standard bus interface protocols:the inter-integrated circuit, or I2C, bus interface of Philips ElectronicsN.V., the Microwire interface protocol and the serial peripheral interface, orSPI, bus protocol of Motorola, Inc. We offer products in a wide variety ofdensities from 1 kilobit, or Kbit, to 256 Kbit, and voltage ranges from 1.8volts to 6.0 volts. Serial EEPROM products are used in many applications tostore user reconfigurable data. Some of the more common applications aredigital cameras, cell phones, digital video recorders, cordless phones, laserprinters, memory modules for computers, disk drives, remote controls and variousautomotive applications.

We offer both standard 5.0volt and 3.3 volt parallel EEPROM, the latter of which meets most batteryoperated application requirements. We offer products with a broad range ofdensities, from 16 Kbit to 512 Kbit. Parallel EEPROM provides faster transferrates than serial EEPROM, which transfers data through a single port. Becauseof the higher number of drivers and packaging, parallel EEPROM is larger andmore costly to manufacture than serial EEPROM and, accordingly, is used primarilyin high performance applications. Parallel EEPROM is primarily used inapplications such as point of sale terminals, industrial controllers, localarea network adapters and telecommunication switches.

***Flash Memory***

We currently offer flashmemory in a small number of densities. We offer Intel licensed flash memorydevices in densities ranging from 512 Kbit to 2 megabit, or Mb. This familyincludes Intel licensed boot block and bulk erase technologies available in1 Mb and 2 Mb densities.

***Analog and Mixed-Signal***

Although analog/mixed-signal products currentlyconstitute a relatively small portion of our net revenues, we believe thatthere is a substantial market opportunity for analog/mixed-signal products andhave continued leveraging our design, development and sales skills to expandthese product lines. Because applications for non-volatile memory incorporatemicrocontrollers or microprocessors, many of the products interface with thecontrollers in various applications such as power management, systemssupervision and interface support.

*SupervisoryProducts with EEPROM.**  *Wehave a family of microcontroller supervisory products, which combine serialEEPROM with the reset and watchdog functions required by many microcontrollersto ensure safe sustained operation and allow systems to recover moreefficiently from power disruptions. These products integrate two functions inthe same package to provide savings in printed circuit board space andcomponent costs. Currently, we offer 1 Kbit, 2 Kbit, 4 Kbit, 8Kbit,16 Kbit, 32 Kbit and 64 Kbit of EEPROM with embedded supervisoryfunctions.

*SupervisoryProducts without Memory.**  *We also have a family of multi-industry generalpurpose supervisory products without EEPROM memory.

*DigitallyProgrammable Potentiometers (DPPTM).**  *We have a number of solid-state DPPproducts, which replace mechanical potentiometers used to fine tune and trimelectronic circuitry in a variety of applications. DPP products are built usingthe same processes as our EEPROM products. Our DPP products have been includedin interactive game consoles, digital cameras and optical transceivers.

9

----

*WhiteLED Drivers.**  *Wehave a range of products intended to drive the white LEDs used as backlights inmulti-colored LCD screens incell phones, digital cameras, MP3 music players, portable gaming consoles,personal digital assistants, industrial instrumentation, automotive instrumentclusters and home appliances. Color displays require more specialized LEDdrivers than monochrome displays. Our products tightly regulate the current tothe LEDs to ensure the uniform brightness and color purity necessary for theclarity in viewing the color displays.

*DC toDC Converters.**  *Convertingone direct current voltage to another within an electronic system is a commonrequirement, particularly in battery powered applications where the poweravailable from the batteries will decline over time and use. Our designs allowsmooth regulated operation of a system throughout the battery life. Our firstgeneration of DC to DC converters are pin compatible with industry standardcircuits.

*LDORegulators.**  *Lowdrop-out (“LDO”) regulators are a type of linear DC to DC converter. LDOregulators allow the source voltage to approach that of the regulated outputvoltage, which can improve efficiency in some systems and extend the useablebattery life in most battery power equipment. Our first generation of LDOregulators are compatible with industry standard devices.

*I/OExpanders.**  *Our lineof input/output (“I/O”) expanders are used to connect the digital control busin embedded systems to the external user interface. They can be configured toaccept inputs, for example buttons on a control panel, or they can beconfigured to drive outputs, for example lights in a display. They are popularin systems that utilize low-cost microcontrollers with a limited number of I/Opins, where they expand the number of inputs or outputs the system can support.Our I/O expanders are direct alternatives to existing popular products.

All of the productsdescribed above are available in environmentally friendly packages, generallyreferred to as “green” packages.

**Sales and Marketing**

The majority of our customers order our productsthrough our manufacturers’ representatives, distributors and resellers. Thesemanufacturers’ representatives, distributors and resellers also create demandfor our products, generally focusing on OEM customers who are not directlyserved by our internal sales managers. For example, our distributors sell toOEM customers or to contract manufacturers for the OEMs.

In addition to our sales and marketing organizationlocated in our Santa Clara, California headquarters facility, we have salesoperations in East Dundee, Illinois; Shanghai and Shenzhen, China; Oxford,United Kingdom; Munich, Germany; Yokohama, Japan; Singapore; Seoul, SouthKorea; and Taipei, Taiwan. Our sales offices support OEMs and manufacturers’representatives, distributors and resellers. In addition, our Japanese operationworks closely with our Japanese foundry partner, OEM customers and theircontract manufacturers, as well as our Japanese manufacturers’ representatives,distributors and resellers.

Currently, we have three distributors and one resellerin North and South America, three distributors and 13 resellers in Europe andAfrica, and a network of 10 distributors and 19 resellers throughout Asia tosupport our international business. These firms work with our regional salesmanagers in developing new opportunities, providing technical support and othervalue-added services.

Distributors and resellers have accounted for asignificant portion of our net revenues in the past. For fiscal 2007 and 2006,Avnet, Inc. represented 10.3% and 11.8%, respectively, of our net revenues.For fiscal 2005, none of our direct or indirect customers represented 10.0% ormore of our net revenues.

10

----

We often seek to develop strategic relationships withmajor OEMs and other customers by providing a high level of customer supportand rapid problem solving. Our product knowledge includes a broad range ofnon-volatile memory and analog and mixed-signal technology compatible with thecommon industry standards. We also seek to work closely with our customers toprovide solutions to address an individual customer’s needs.

Our marketingactivities consist of several key components:

·       settingproduct strategy by identifying attractive markets that are a good fit with thecompany’s competencies, developing roadmaps and defining products to meet theneeds of those markets;

·       interactingdirectly with customers, sales representatives and distributors to promoteexisting products and to gain knowledge to be applied in the definition offuture devices;

·       providingtraining and supporting collateral necessary to enable the sales force toeffectively promote and sell products;

·       securingpress coverage in trade, technical and business publications through pressreleases, editorial meetings and submitted articles;

·       conductingonline promotions on our website;

·       publishingapplication notes and journal articles to support the design-in of products;and

·       developing dedicateddemonstration and evaluation boards to assist customer designers in evaluatingour products in their systems.

**Research andDevelopment**

We have made and expect to continue to makesubstantial investments in research and development and to participate in thedevelopment of new and existing industry standards. As of April 29, 2007,our research and development staff consisted of 32 engineers working in SantaClara, California and 47 in Bucharest, Romania.

For fiscal years 2007, 2006 and 2005, we had researchand development expenses of $7.8 million, $7.5 million and $7.9 millionrespectively.

Our memory engineeringgroup develops non-volatile memory products. Our analog/mixed-signaldevelopment group develops products with logic as well as analog circuitrycontents. We also routinely design and develop high performance analog andmixed-signal functions using EEPROM technology. Our technology developmentgroup develops advanced processes in cooperation with our foundries and alsosupports the design engineers with device modeling and characterization. Ourcomputer aided design engineering group supports the design tools used by ourdesign and layout engineers and converts the design data into mask shop usableformat. Our test engineering group develops test programs for validating theelectrical performance of our products in wafer and packaged form.

**IntellectualProperty**

We rely on a combination of patents, copyrights andtrade secrets to establish and protect our intellectual property rights. As of April 29,2007, we owned 26 U.S. patents and had 15 pending applications for additionalU.S. patents. The expiration dates of our patents range from January 2008to June 2025. As a result of the rapid changes in technology, the lives ofthese patents will likely last longer than the economic lives of thetechnologies they cover. We also have a number of trademarks. There can be noassurance that our pending patent or trademark applications will be allowed orthat the issued or pending patents will not be challenged or circumvented bycompetitors. We also protect our numerous original mask sets under U.S. andforeign copyright laws.

11

----

We also own a substantial body of proprietarytechniques and trade secrets. We seek to protect our trade secrets andproprietary technology, in part, through confidentiality agreements withemployees, consultants and other parties. There can be no assurance that theseagreements will not be breached, that we will have adequate remedies for anybreach or that our trade secrets will not otherwise become known to orindependently developed by others. In addition, the laws of some foreigncountries do not offer protection of our proprietary rights to the same extentas the laws of the United States, which is an increasing concern as most of ourproduction is located in foreign countries.

We may become involved inpatent or other intellectual property disputes or actions. From time to time,we receive letters alleging patent infringement or inviting us to take alicense to other parties’ patents. We evaluate these letters on a case by casebasis. Offers such as these may lead to litigation if we reject the opportunityto obtain the license or reject the other party’s demands. Adversedeterminations in any litigation could subject us to significant liabilities tothird parties, require us to seek licenses from third parties and preventus from manufacturing and selling our products. Any of these situations couldhave a material adverse effect on our business.

**Manufacturing**

We have established close relationships with ourfoundry suppliers for our wafer fabrication in an effort to ensure stability inour supply of products and focus our internal efforts on product design andsales. Most of our designs are manufactured utilizing processes developedjointly by us and our foundry partners. Our Japanese foundry supplier currentlymanufactures a majority of our high volume production. Our domestic foundrysupplier currently manufactures many of our analog/mixed-signal products aswell as some of our EEPROM products. Our other foundry partners in Taiwan andChina also manufacture analog/mixed-signal products for us. We endeavor todevelop our processes in a manner that permits the portability of ourmanufacturing processes. We currently purchase wafer supplies on a purchaseorder basis. We also maintain a die bank of wafers in order to be able torespond to customer orders quickly and to attempt to manage our exposure tochanges in manufacturing capacity and wafer costs.

We have wafer sortingoperations at our headquarters facility in Santa Clara, California to controlquality and improve yields and we also utilize a subcontractor in Japan for thispurpose. We perform circuit assembly and testing of packaged parts primarilythrough our subcontractors located in Southeast Asia. In the assembly process,the wafers are separated into individual die, which are then assembled intopackages. The packaged devices are further tested and inspected pursuant to ourquality assurance program prior to shipment to our customers. The majority ofour assembly and test services are provided by subcontractors located inThailand and in the Philippines and, to a lesser degree, we also utilizeassembly and test services provided by companies in Malaysia, Taiwan and China.We also subcontract certain production planning, test engineering, inventorymanagement, shipping and tape and reel activities to a subcontractor inThailand. In fiscal 2007, we began to conduct a portion of the subcontractedfunctions through our wholly owned subsidiary in Thailand.

**EnvironmentalMatters**

Federal, state and local regulations impose variousenvironmental controls on the storage, handling, discharge and disposal ofchemicals and gases used in our manufacturing processes. Our company qualitymanual requires all subcontractors and raw material suppliers to be ISO14001certified. State agencies require us to report usage of environmentally hazardousmaterials and we have retained the appropriate personnel to help ensurecompliance with all applicable environmental regulations. We actively manageand monitor compliance through our internal auditing program. We believe thatour activities conform to present environmental regulations; however,increasing public attention has been focused on the environmental impact ofsemiconductor operations and these regulations may require us to fund remedialaction regardless of fault.

12

----

In addition, the use and disposal of electronics isunder increasing scrutiny and various countries have begun to adopt regulationssuch as the European Union’s Waste Electrical and Electronic Equipment (“WEEE”)and the Reduction of the use of certain Hazardous Substances in electrical andelectronic equipment (“RoHS”) directives, which could require us to bothredesign our products to comply with the standards and develop complianceadministration systems. We expect additional countries and locations to adoptsimilar regulations in the future which may be more stringent than the currentregulations. Currently however, we believe the majority of our commercialproducts are compliant with these emerging regulations. Information for bothour facility and product compliance is available for download from our websiteat www.catsemi.com.

While we have notexperienced any materially adverse effects on our operations from environmentalregulations, there can be no assurance that changes in such regulations willnot impose the need for additional capital equipment or other requirements. Wehave already invested significant resources into developing compliance trackingsystems, and further investments may be required. Any failure by us toadequately restrict the discharge of hazardous substances could subject us tofuture liabilities or could cause our manufacturing operations to be suspended.

**Competition**

The semiconductor industry is highly competitive andhas been characterized by price competition, manufacturing capacity constraintsand product availability constraints at various times. We compete with majordomestic and international semiconductor companies, many of which havesubstantially greater financial, technical, marketing, distribution and otherresources.

Our non-volatile memory products, such as EEPROMdevices, compete on the basis of product performance, price, productavailability and customer service. We believe that we compete effectively withrespect to each of these competitive factors. Price competition is significantand is expected to continue. We believe our principal competitors for ourEEPROM products currently include Atmel Corporation, STMicroelectronics N.V.and Microchip Technology Incorporated.

We also manufacture low density flash memory products,which represent a small sub-segment of the flash memory market. Thissub-segment has been characterized by reduced demand for low density memory,which has resulted in lower product availability and higher cost, due to theshift by most customers to the larger flash memory sizes that we do not offer. Ourkey competitor for low density or similar flash memory products includesSilicon Storage Technology, Inc.

We currently compete inthe analog/mixed-signal product market on the basis of product performance,product availability, price and customer support. The analog and mixed-signalindustry is highly fragmented with competition varying within the applicablesegment and sub-segments, including: Fairchild Semiconductor International, Inc.,Intersil Corporation, Linear Technology Corporation, Maxim Integrated Products, Inc.,National Semiconductor and Texas Instruments Incorporated.

**Employees**

As of April 29, 2007,we had a total of 169 full-time employees worldwide, including 79 inresearch and development, 45 in sales and marketing and 45 in operations,executive and administrative functions. Our future success will depend on ourability to attract, train, retain and motivate highly qualified employees. Ouremployees are not represented by any collective bargaining organization orlabor unions. We have never experienced any work stoppage and believe thatour employee relations are favorable.

13

----

**Executive Officers**

Setforth below is certain information as of April 29, 2007, regarding each ofour executive officers who held positions as of the date we filed this report. Thereare no family relationships among any of our directors and executive officers.

| **Name**          | ** ** | ** ** | ** ** | **Age**                                                    | ** ** | **Principal Occupation** |
|-------------------|------------|------------|------------|------------------------------------------------------------|------------|--------------------------|
| Gelu Voicu        |       | 57         |       | President, Chief  Executive Officer and Director           |
| Sorin Georgescu   |       | 55         |       | Vice President of  Technology                              |
| Daniel Hauck      |       | 52         |       | Vice President of  Worldwide Sales                         |
| Irvin W. Kovalik  |       | 69         |       | Vice President of  Strategic Accounts                      |
| George Smarandoiu |       | 60         |       | Vice President of  Product Design                          |
| Scott Brown       |       | 40         |       | Vice President Marketing  for Analog/Mixed-Signal Products |

 

*M*r.* Voicu*is our President and Chief Executive Officer, a position he has held since October 2002.Other management positions held with us since his joining in 1993 includeExecutive Vice President and Chief Operating Officer, Vice President ofEngineering and Manufacturing, flash product line director and manager ofproduct engineering. Mr. Voicu also serves as one of our board members. Priorto joining us, Mr. Voicu was with Cypress Semiconductor, Inc. asemiconductor company, most recently as senior product engineer. Mr. Voicuholds an MS degree in Electrical Engineering from the Polytechnical Institute,Bucharest, Romania.

*Mr. Georgescu*is our Vice President of Technology,a position he has held since October 2001. Mr. Georgescu has over 20years of semiconductor device and process development experience at such firmsas Tripath Technology, Inc., SanDisk Corporation and Power Integrations, Inc.His experience includes CMOS, BiCMOS, HVIC (High-Voltage Integrated Circuits)and non-volatile memory technology, processes and architectures. He received aMSEE degree from Polytechnical Institute in Bucharest, Romania.

*Mr. Hauck* is our VicePresident of Worldwide Sales, a position he has held since joining the companyin January 2007. He has over 20 years of experience in the semiconductorindustry, including analog/mixed-signal supplier Leadis Technology, Inc.,where he held the position of Vice President of Worldwide Sales from 2004through 2007. He previously served as Vice President of Worldwide Sales atAmphion Semiconductor from 2002 through 2004. Mr. Hauck was Vice Presidentof Worldwide Sales at BOPS, Inc. and NeoMagic Corporation, and heldpositions in business development and sales at Cirrus Logic, Inc.Mr. Hauck holds a BSEE from the Ohio Institute of Technology.

*Mr. Kovalik* is our VicePresident of Strategic Accounts, a position he has held since January 2007. Hewas previously our Vice President of Worldwide Sales. Prior to joining us inNovember 1998, Mr. Kovalik held positions at Alliance Semiconductor, Inc., asemiconductor company, where he was Director of Strategic Sales; NovaWebTechnologies, Inc., a modem manufacturer, where he was Vice President of Sales;and Sequel, Inc., a semiconductor company, where he was Director of StrategicSales. In addition, from June 1992 to June 1995, Mr. Kovalik was our VicePresident of Sales. Mr. Kovalik holds a BS degree in Electrical Engineeringfrom the University of Illinois.

*Dr. Smarandoiu*isour Vice President of Design, a position he has held since he joined us in October 2002.He has over 20 years of analog, system-on-a-chip and non-volatile memoryintegrated circuit development experience. From 1992 to 2002, he was employedat Atmel Corporation, a semiconductor company, and served most recently asAtmel’s director of mixed-mode product development. From 1981 to 1992, he wasemployed by SEEQ Technology, a semiconductor company that was acquired in 1999by LSI Logic Corporation. At SEEQ he attained the position of director ofmemory design and was responsible 

14

----

for the development ofEEPROM and FLASH products. He received a Doctor of Engineering and Master ofEngineering from the University of California, Berkeley.

*Mr. Brown*is our Vice President of Marketing for analog/mixed-signal products, a positionhe has held since September 2005. From October 1997 to August 2005,he was Director of RF and mixed-signal products for Micrel Inc., asemiconductor manufacturer. From September 1989 to September 1997, hewas a product marketing manager for National Semiconductor, a semiconductormanufacturer. Mr. Brown holds a BSEE degree from Brunel University in theUnited Kingdom.

**Website Postings**

We file electronicallywith the Securities and Exchange Commission, or SEC, our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,and amendments to those Reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934. Those reports and statements (1) maybe read and copied at the SEC’s public reference room at 100 F Street, N.E.,Washington, DC 20549, (2) are available at the SEC’s internet site *(www.sec.gov)*, which contains reports, proxy and informationstatements and other information regarding issuers that file electronicallywith the SEC and (3) are available free of charge through our website *(www.catsemi.com)* as soon as reasonably practicable afterelectronic filing with, or furnishing to, the SEC. Information regarding theoperation of the SEC’s public reference room may be obtained by calling the SECat 1-800-SEC-0330. Copies of such documents may be requestedby contacting our Investor Relations Representative at (408) 542-1051 orby sending an e-mail through the Investor Relations page on our website. Wehave adopted a Code of Business Conduct and Ethics for our principal executiveofficer, principal financial officer, principal accounting officer orcontroller and persons performing similar functions. We have posted our Code ofBusiness Conduct and Ethics on our website. Any future amendments to, or waiverfrom, a provision of this code will also be posted to our website. Theinformation in or that can be accessed through our website is not part of thisAnnual Report on Form 10-K report.

**Item 1A.   *Risk Factors***

*An investment in our common stock is extremely risky. Weare subject to a number of risks and some of these risks are endemic to thehigh-technology and semiconductor industries. This section should be read inconjunction with the consolidated financial statements and the accompanyingnotes thereto, and the other parts of Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in this Annual Report onForm 10-K.*

***Risks related to our Business***

***Our quarterly operating results may fluctuate dueto many factors and are difficult to forecast, which may cause the tradingprice of our common stock to decline substantially.***

Our operatingresults have historically been and in the future may be adversely affected or otherwisefluctuate due to factors such as:

·       fluctuationsin customer demand for the electronic devices into which our products areincorporated;

·       volatilityin supply and demand affecting semiconductor prices generally, such as anincrease in the supply of competitive products and a significant decline inaverage selling prices;

·       establishmentof additional inventory reserves if sales of our inventory fall below ourexpected sales, or the anticipated selling prices of our products fall belowthe amounts paid to produce and sell certain parts;

15

----

·       changesin our product mix including product category, density, package type, leadcontent or voltage;

·       inadequatevisibility of future demand for our products;

·       timingof new product introductions and orders for our products;

·       increasesin expenses associated with new product introductions and promotions, processchanges and/or expansion of our sales channels;

·       increasesin wafer prices due to increased market demand and other factors;

·       increasesin prices charged by our suppliers due to increased costs, decreasedcompetition and other factors;

·       fluctuationsin manufacturing yields;

·       gainsor losses of significant OEM customers or indirect channel sellers, such asdistributors or resellers; and

·       generaleconomic conditions.

Our net revenues andoperating results are difficult to forecast. We base our expense levels, insignificant part, on our expectations of future net revenues and our expensesare therefore relatively fixed in the short term. If our net revenues fallbelow our forecasts, our operating results are likely to be disproportionatelyadversely affected because our costs are difficult to reduce significantly inthe short term.

***We may never realize a material portion of our netrevenues from our analog/mixed-signal products, despite our expenditure of adisproportionate amount of our research and development and marketing resourceson these products.***

Analog/mixed-signalproducts accounted for 8.9%, 7.6% and 4.7% of net revenues for fiscal 2007,2006 and 2005, respectively. We believe that the growth in ouranalog/mixed-signal product revenues has been limited due to the extendedproduct design cycles and production lead times and a sales force that is stillgaining experience selling these products. We continue to invest in and devoteresearch and development and marketing resources to analog/mixed-signalproducts with the expectation that our analog/mixed-signal products will beaccepted by many of our current customers and additional new customers. Competitionis intense and our ability to compete is impacted by our relatively limitedrange of products while our more established competitors are offering a muchbroader array of analog/mixed-signal products. Many customers favor a vendorthat offers a broad range of products. If we are unable to realize morerevenues from these products, our net revenues may not grow. In addition, if wedevote a disproportionate amount of our research and development resources toanalog/mixed-signal products, our development of new non-volatile memoryproducts may suffer and operating results may be harmed.

***We have in the past been unable and in the futurewe may be unable to obtain sufficient quantities of wafers from our currentfoundry suppliers to fulfill customer demand.***

We currentlypurchase a majority of our production wafers from two foundries. In addition,we do not presently have a wafer supply agreement with our foundry suppliersand instead purchase wafers on a purchase order and acceptance basis. Toaddress our wafer supply concerns, we plan to continue expanding our foundrycapability at our primary supplier by qualifying our products in multiplefabrication plants owned by a supplier and to expand our foundry capacity withother suppliers. As the need arises, from time to time, we may pursueadditional wafer sources. However, we cannot be certain that these efforts willprovide us with access to adequate capacity in the future at costs which willenable us to remain 

16

----

profitable.Even if such capacity is available from another manufacturer, the qualificationprocess and time required to make the foundry fully operational for us couldtake many months or longer and be subject to other factors described below andthe prices could be materially higher. Our business, financial condition andresults of operations could be materially adversely affected by:

·       inadequatewafer supplies to meet our production needs;

·       theloss of any of our current foundries as a supplier;

·       increasedprices charged by these independent foundries;

·       reducedcontrol over delivery schedules, manufacturing yields and costs;

·       ourinability to qualify our current foundry suppliers for additional products; and

·       any other problemsfoundries may have that cause a significant interruption in our supply ofsemiconductor wafers.

***We may forecast incorrectly and produce excess orinsufficient inventories of particular products, which may adversely affect ourresults of operations.***

Since we must order products and build inventorysubstantially in advance of product shipments, we may forecast incorrectly andproduce excess or insufficient inventories of particular products. The abilityof our customers to reschedule or cancel orders without significant penaltycould adversely affect our liquidity, as we may be unable to adjust ourpurchases from our wafer suppliers to match any customer changes andcancellations. As part of our business strategy, we maintain a substantialinventory of sorted wafers in a die bank but limit our investment in finishedgoods. We may have adequate wafer inventory to meet customer needs but may beunable to finish the manufacturing process prior to the delivery date specifiedby the customer. Demand for our products is volatile and customers often placeorders with short lead times. Our inventory may not be reduced by thefulfillment of customer orders and in the future we may produce excessquantities of our products.

It is our policy to fullywrite down all inventories that we do not expect to sell in a reasonable periodof time. During recent fiscal years, as a result of reductions in estimateddemand for our various products, we have taken charges for write down ofinventories for certain products, primarily our EEPROM products. For example,we recorded inventory write down charges of $2.2 million, $1.0 million and $1.1million for fiscal 2007, 2006 and 2005, respectively, which were partiallyoffset by benefits of $575,000, $794,000 and $1.0 million, respectively,relating to products that were written off in prior periods and sold duringthese periods. We may suffer reductions in values of our inventories in thefuture and we may be unable to liquidate our inventory at acceptable prices. Tothe extent we have excess inventories of particular products, our operatingresults could be adversely affected by charges to cost of revenues that wewould be required to recognize due to significant reductions in demand for ourproducts or rapid declines in the market value of inventory, resulting ininventory write downs or other related factors.

***We may be unable to fulfill all our customers’orders according to the schedule originally requested due to theconstraints in our wafer supply and processing time from die bank to finishedgoods, which could result in reduced revenues or higher expenses.***

Due to the lead timeconstraints in our wafer supply, foundry activities and other manufacturingprocesses, from time to time we have been unable to fulfill all our customers’orders on the schedule originally requested. Although we attempt to anticipatepending orders and maintain an adequate supply of wafers and communicate to ourcustomers delivery dates that we believe we can reasonably expect to meet, ourcustomers may not accept the alternative delivery date or may cancel theiroutstanding orders. Reductions in orders received or cancellation ofoutstanding orders would result in lower net 

17

----

revenuesand reduced operating results, excess inventories and increased inventoryreserves. We may also be required to pay substantially higher per wafer pricesto replenish our die bank, which could harm our gross margins. If we wererequested to pay rush charges to our manufacturing or foundry suppliers to meeta customer’s requested delivery date, our expenses would increase and possiblyharm our operating results.

***We rely on distributors and resellers for asubstantial portion of our net revenues and if our relationships with one ormore of those distributors or resellers were to terminate, our operatingresults may be harmed.***

We market and distribute our products primarilythrough independent distributors and resellers, which typically offer competingproducts. These distribution channels have been characterized by rapid change,including consolidations and financial difficulties.

Distributors and resellers have accounted for asignificant portion of our net revenues in the past. For fiscal 2007 and 2006,Avnet, Inc. represented 10.3% and 11.8%, respectively, of our net revenues.For fiscal 2005, none of our direct or indirect customers represented 10.0% ormore of our net revenues.

Our business depends on these third parties to sellour products. As a result, our operating results and financial condition couldbe materially adversely affected by the loss of one or more of our currentdistributors or resellers, additional volume pricing arrangements, ordercancellations, delay in shipment by one of our distributors or resellers, orthe failure of our distributors or sellers to successfully sell our products.

In addition, we haveexperienced and may continue to experience lower margins on sales to certaincustomers as a result of volume pricing arrangements. We also do not typicallyenter into long-term arrangements with our customers and we cannot be certainas to future order levels from our customers. When we do enter into long-termarrangements, the contracts are generally terminable at the convenience ofeither party and it may be difficult to replace that source of revenues in theshort-term upon cancellation.

***We face risks from failures in our manufacturingprocesses and the processes of our foundries and vendors.***

The fabrication ofsemiconductors, particularly EEPROM products, is a highly complex and preciseprocess. Most of our products are currently manufactured by two outsidefoundries and a number of other vendors participate in assembling, testing andother processing of our products. During manufacturing, each wafer is processedto provide numerous EEPROM, flash or analog/mixed-signal devices. We may rejector be unable to sell a substantial percentage of wafers or the components on agiven wafer because of:

·       minuteimpurities;

·       difficultiesin the fabrication process, such as failure of special equipment, operatorerror or power outages;

·       defectsin the masks used to imprint circuits on a wafer;

·       nonconformingelectrical and/or optical performance;

·       breakageof wafers; or

·       otherfactors.

We refer to the proportion of final components thathave been processed, assembled and tested relative to the gross number ofcomponents that could be constructed from the raw materials as ourmanufacturing yield. We have in the past experienced lower than expectedmanufacturing yields, which have delayed product shipments and negativelyimpacted our results of operations. We may experience difficulty achieving ormaintaining acceptable manufacturing yields in the future.

18

----

Inaddition, the maintenance of our outsourced fabrication, manufacturing andassembly model is subject to risks, including:

·       thedemands of managing and coordinating workflow between geographically separateproduction facilities;

·       disruptionof production in one facility as a result of a slowdown or shutdown in anotherfacility; and

·       higheroperating costs from managing geographically separate manufacturing facilities.

We depend on certainvendors for foundry services, materials and test and assembly services. Wemaintain stringent policies regarding qualification of these vendors. However,if these vendors’ processes vary in reliability or quality, they couldnegatively affect our products and our results of operations.

***We rely on third party subcontractors to sort,assemble, test and ship our products to customers, which reduces our controlover quality, delivery schedules and capacity.***

We outsource a significantportion of the production planning, assembly, test and finish work of ourproducts, as well as our inventory management function to subcontractors whoare primarily located in Thailand and the Philippines. We do not have long-termcontractual arrangements with these subcontractors. Our reliance on thirdparties subjects us to risks such as reduced control over delivery schedulesand quality, a potential lack of adequate capacity during periods when demandis high and potential increases in product costs due to factors outside ourcontrol such as capacity shortages and pricing changes. Our outsourcing modelcould lead to delays in product deliveries, lost sales and increased costswhich could harm our relationships with OEM customers and indirect saleschannels and result in lower operating results. Because we utilize the servicesof a group of assembly and test providers, this makes our operation highlycomplex, requiring a high degree of diligence in managing the costs ofproduction and overall logistics of our manufacturing operations.

***International sales comprise a significant portion ofour product sales, which exposes us to foreign political and economic risks.***

Forfiscal 2007, 2006 and 2005, sales outside the United States accounted forapproximately 92.1%, 88.2% and 88.0% of our net revenues, respectively. Weexpect that sales outside of the United States will continue to represent asignificant portion of our net revenues in the future. However, ourinternational operations may be adversely affected by the following factors:

·       greaterfluctuations in demand for our products due to the increased sensitivity topricing changes in certain markets, particularly Asia;

·       longerpayment cycles;

·       fluctuationsin exchange rates;

·       impositionof government controls;

·       difficultiesin staffing international operations;

·       political,socioeconomic and financial instability, such as the military actions inAfghanistan and Iraq;

·       traderestrictions;

·       theimpact of communicable diseases, such as severe acute respiratory syndrome andavian bird flu; and

·       changesin regulatory requirements.

19

----

Our business is also subject to other risks because ofour design center in Romania and our relationships with foreign subcontractorsincluding, but not limited to, foreign government regulations and political andfinancial unrest which may cause disruptions or delays in shipments to ourcustomers or access to our inventories. We do not currently hedge against anyforeign currency exchange rate risks.

Additionally, oursubcontracted presence in Thailand with Trio-Tech subjects us to additionalrisks associated with the value of the work-in-process and finished goodsinventory located there, as well as the test equipment utilized in theoperations at the Trio-Tech facility. In fiscal 2007, we formed CatalystSemiconductor (Thailand) Company Limited, a subsidiary in Bangkok, Thailand, tosupport our ongoing cost management efforts and increase manufacturingthroughput.

***Environmentalregulations such as the WEEE and RoHS directives may require us to redesign ourproducts and to develop compliance administration systems.***

Various countries havebegun to require companies selling a broad range of electrical equipment toconform to regulations such as the WEEE and RoHS directives and we expectadditional countries and locations to adopt similar regulations in the future. Newenvironmental standards such as these could require us to redesign our productsin order to comply with the standards, and require the development ofcompliance administration systems. We have already invested significantresources into developing compliance tracking systems, and further investmentsmay be required. Additionally, we may incur significant costs to redesign ourproducts and to develop compliance administration systems; however alternativedesigns may have an adverse effect on our gross profit margin. If we cannotdevelop compliant products timely or properly administer our complianceprograms, our revenues may also decline due to lower sales, which wouldadversely affect our operating results.

***While we believethat we currently have adequate internal control over financial reporting, weare exposed to risks from recent legislation requiring companies to evaluateinternal control over financial reporting and cannot be certain that ourinternal control over financial reporting will be effective or sufficient inthe future.***

Section 404 of the Sarbanes-Oxley Act of 2002requires our management to report on and our independent registered publicaccounting firm to attest to the effectiveness of our internal control overfinancial reporting. We have an ongoing program to perform the system andprocess evaluation and testing necessary to comply with these requirements.

As a result, we expect tocontinue to incur related expenses and to devote additional resources toSection 404 compliance. In addition, it is difficult for us to predict how longit will take to complete the assessment of the effectiveness of our internalcontrol over financial reporting each year and we may not be able to completethe process on a timely basis. For example, in fiscal 2006 we experiencedunanticipated delays in closing our books and completing our assessment of theeffectiveness of our internal control over financial reporting as required bythe Sarbanes-Oxley Act under Section 404. As such, we were not able to file ourAnnual Report on Form 10-K by the original due date without unreasonableexpense or effort. Our ability to manage our operations and growth will requireus to improve our operations, financial and management controls, as well as ourinternal control over financial reporting. In the event that our chiefexecutive officer, chief financial officer or independent registered publicaccounting firm determine that our internal control over financial reporting isnot effective as defined under Section 404, we cannot predict how regulatorswill react or how the market prices of our shares will be affected.

***Our ability tooperate successfully depends upon the continued service of certain keyemployees and the continued ability to attract and retain additional highlyqualified personnel.***

Our ability to operatesuccessfully will depend, to a large extent, upon the continued service ofcertain key employees and the continued ability to attract and retainadditional highly qualified personnel. In 

20

----

May 2007,our Chief Financial Officer resigned. While we are currently engaged in findinga replacement, a significant delay in finding a replacement could be disruptiveto our operations. We may also experience difficulty in integrating a new ChiefFinancial Officer into our management team, which may disrupt our ongoingbusiness and financial reporting process. Competition for personnel,particularly for highly skilled design, process and test engineers, is intenseand we may not be able to retain or attract other highly qualified personnel. Inaddition, there has been increased competition in Romania, making it moredifficult to hire and retain qualified engineers at our design center. We havehistorically used stock options and other forms of stock-based compensation asa means to hire, motivate and retain our employees, and to align employees’interests with those of our stockholders. As a result of our adoption ofStatement of Financial Accounting Standard (“SFAS”) No. 123(R) (revised2004), *“Share-based Payment,”* or SFAS No. 123(R),we incur increased compensation costs associated with our stock-basedcompensation awards, which may affect this form of compensation to hire andretain employees. Our business, financial condition and results of operationscould be materially adversely affected by the loss of or failure to attract andretain highly qualified personnel.

***Expensing employeestock options materially and aversely affects our reported operating resultsand could adversely affect our competitive position as well.***

As of May 1, 2006, we were required to expensestock options and other share-based payments to employees and directors. Sinceour inception, we have used stock options as fundamental components of ourcompensation packages. Prior to May 1, 2006, we had not recognizedcompensation cost for employee stock options. We believe that our stock optionprogram directly motivates our employees and, through the use of vesting,encourage our employees to remain with us. In December 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 123(R), which requiresthe measurement and recognition of compensation expense for all stock-basedcompensation payments. SFAS No. 123(R) requires that we recordcompensation expense for stock options using the fair value of those awards. Duringfiscal 2007, we recorded $2.2 million related to stock-based compensation,which negatively impacted our operating results. We believe that SFAS No. 123(R) willcontinue to negatively impact our operating results.

To the extent that SFAS No. 123(R) makesit more expensive to grant stock options, we may decide to incur increased cashcompensation costs. In addition, actions that we may take to reduce stock-basedcompensation expense that may be more severe than any actions our competitorsmay implement may make it difficult to attract, retain and motivate employees,which could adversely affect our competitive position as well as our businessand operating results. These actions may also unfavorably influence our futureChief Financial Officer’s transition into our management team.

***Our low-densityflash memory products may become obsolete.***

A portion of our netrevenues have been and continue to be derived from sales of low density flashmemory products. Flash memory products represented 6.5%, 8.3% and 9.6 % of ournet revenues for fiscal 2007, 2006 and 2005, respectively. In general, themarket for flash memory products has been characterized by competingtechnologies, migration of demand to larger memory sizes and intense overallcompetition. Other flash memory vendors continue to design, develop and sellflash memory devices with larger memory in reaction to changes in market demand.This transition to larger flash memory sizes is resulting in a limited andshrinking market for the low density flash memory products that we currentlyoffer. We have decided not to develop any of the higher density flash memorydevices due to the extreme competition in the medium and high density flashmemory market and the considerable costs of development associated with it. Dueto these and other factors, we may experience declining net revenues from ourlow-density flash memory products, which could harm our operating results.

21

----

***Risks Related to Our Industry and Competition***

***Competition in ourmarkets may lead to reduced average selling prices of our products, reducedsales of our products or gross margins.***

The non-volatile memory market is competitive and hasbeen characterized by rapid price erosion, manufacturing capacity constraintsand limited product availability. Average selling prices in the non-volatilememory market generally, and for our products in particular, have fluctuatedsignificantly over the life of each product and, over the long term, theaverage selling price of each product has tended to decline. Declines inaverage selling prices for our products, if not offset by reductions in thecost of producing those products or by sales of new products with higher grossmargins, would decrease our overall gross margins, could cause a negativeadjustment to the value of our inventories and could materially and adverselyaffect our operating results.

We compete with majordomestic and international semiconductor companies, many of which havesubstantially greater financial, technical, marketing, distribution and otherresources. We may not be able to compete successfully in the future. Our moremature products, such as serial and parallel EEPROM devices, compete on thebasis of price, product availability and customer service. Principal competitorsfor our EEPROM products currently include Atmel Corporation, STMicroelectronicsN.V. and Microchip Technology Incorporated. Principal competitors for our lowdensity flash products include Integrated Silicon Solution, Inc. Principalcompetitors for our analog/mixed-signal products include FairchildSemiconductor International, Inc., Intersil Corporation, Linear TechnologyCorporation, Maxim Integrated Products, National Semiconductor and TexasInstruments Incorporated.

***The semiconductorindustry is highly cyclical in nature, which may cause our operating results tofluctuate.***

We operate in a highly cyclical industry that has beensubject to significant economic downturns often in connection with, or inanticipation of, maturing product cycles and declines in general economicconditions. During such downturns, we experience reduced product demand andproduction overcapacity, which result in competitive pricing pressures leadingto accelerated erosion of average selling prices and reduced gross margins. Thesedownturns may occur for extended periods. Accordingly, we may experiencesubstantial period-to-period fluctuations in operating results.

Our continued successdepends in large part on the continued growth of various electronics industriesthat use semiconductors. We attempt to identify changes in market conditions assoon as possible; however, market dynamics make our prediction of and timelyreaction to such events difficult. Our business could be harmed in the futureby additional cyclical downturns in the semiconductor industry or by slowergrowth by any of the markets served by our end customers’ products.

***If our productsfail to keep pace with the rapid changes in the semiconductor industry, wecould lose customers and revenues.***

The markets for ourproducts are characterized by rapidly changing customer demand, over or underutilization of manufacturing capacity and price fluctuations. To competesuccessfully, we must introduce new products in a timely manner at competitiveprice, quality and performance levels. In particular, our future success willdepend on our ability to develop and implement new design and processtechnologies which enable us to reduce product costs. Our business, financialcondition and results of operations could be materially adversely affected bydelays in developing new products, achievement of volume production and marketacceptance of new products, successful completion of technology transitions ofour existing products to new process geometries or foundries with acceptableyields and reliability.

22

----

***Risks Related to Our Intellectual Property***

***Our business may beharmed if we fail to protect our proprietary technology.***

We rely on a combinationof patents, trademarks, copyrights, trade secret laws, confidentialityprocedures and licensing arrangements to protect our intellectual propertyrights. We currently have 26 patents granted and 15 pending in the UnitedStates and intend to seek further United States and international patents onour technology. The expiration dates of our patents range from January 2008to June 2025. We cannot be certain that patents will be issued from any ofour pending applications, that patents will be issued in all countries whereour products can be sold or that any issued patents will be of sufficient scopeor strength to provide meaningful protection or any commercial advantage. Ourcompetitors may also be able to design around our patents. The laws of somecountries in which our products are or may be developed, manufactured or soldmay not protect our products or intellectual property rights to the same extentas do the laws of the United States, increasing the possibility of piracy ofour technology and products. Although we intend to vigorously defend ourintellectual property rights, we may not be able to prevent misappropriation ofour technology. Our competitors may also independently develop technologiesthat are substantially equivalent or superior to our technology.

***Our ability toproduce our products may suffer if someone claims we infringe on theirintellectual property.***

The semiconductorindustry is characterized by vigorous protection and pursuit of intellectualproperty rights or positions, which have resulted in significant and oftenprotracted and expensive litigation. In addition, it is typical for companiesin the industry to receive notices from time to time that allege infringementof patents or other intellectual property rights. We may receive other noticesor become a party to other proceedings alleging our infringement of patents orintellectual property rights in the future. If it is necessary or desirable, wemay seek licenses under such patents or other intellectual property rights. However,we cannot be certain that licenses will be offered or that we would find theterms of licenses that are offered acceptable or commercially reasonable. Ourfailure to obtain a license from a third party for technology used by us couldcause us to incur substantial liabilities and to suspend the manufacture of theaffected products. Furthermore, we may initiate claims or litigation againstthird parties for infringement of our proprietary rights or to establish thevalidity of our proprietary rights. Litigation by or against us could result insignificant expense and divert the efforts of our technical personnel andmanagement, whether or not the litigation results in a favorable resolution. Inthe event of an adverse result in any litigation, we could be required to:

·       paysubstantial damages;

·       payamounts to indemnify our customers;

·       stopthe manufacture and sale of the infringing products;

·       expendsignificant resources to develop non-infringing technology;

·       discontinuethe use of certain processes; or

·       obtainlicenses to the technology.

We may be unsuccessful indeveloping non-infringing products or negotiating licenses with reasonableterms, or at all. These problems might not be resolved in time to avoid harmingour results of operations. If any third party makes a successful claim againstour customers or us and a license is not made available to us on commerciallyreasonable terms, our business could be harmed.

23

----

***We may be subjectto damages resulting from claims that we have wrongfully used the alleged tradesecrets of our employees’ former employers.***

Many of our employees werepreviously employed at other companies, including our competitors or potentialcompetitors. Although we have no current or pending claims against us, we maybe subject to claims that we have relied on information that these employeeshave inadvertently, or otherwise, disclosed trade secrets or other proprietaryinformation of their former employers. Litigation may be necessary to defendagainst these claims. If we fail in defending such claims, in addition topaying monetary damages, we may lose valuable intellectual property rights orpersonnel. A loss of key research personnel or their work product could hamperor prevent our ability to develop new products, which could severely harm ourbusiness. Even if we are successful, litigation could result in substantialcosts and be a distraction to management.

***We may not be ableto expand our proprietary technology if we do not acquire rights to use keytechnologies, consummate potential acquisitions or investments or successfullyintegrate them with our business.***

To expand our proprietarytechnologies, we may acquire or make investments in complementary businesses,technologies or products if appropriate opportunities arise. We may be unableto identify suitable acquisition or investment candidates at reasonable pricesor on reasonable terms or consummate transactions with such candidates, thefailure of which could slow our growth. We may also have difficulty inacquiring licenses to use proprietary technologies of third parties to expandour product lines. We may have difficulty integrating the acquired products,personnel or technologies of any acquisition we might make. These difficultiescould disrupt our ongoing business, limit our future growth, distract ourmanagement and employees and increase our expenses.

***Risks Related to Our Stock***

***Our stock issubject to substantial price and volume fluctuations due to a number offactors, many of which are beyond our control, and those fluctuations mayprevent our stockholders from reselling our common stock at a profit.***

The trading priceof our common stock has in the past been and could in the future be subject tosignificant fluctuations in response to:

·       quarterlyvariations in our results of operations;

·       announcementsof technological innovations or new products by us, our customers orcompetitors;

·       ourfailure to achieve the operating results anticipated by analysts or investors;

·       salesor the perception in the market of possible sales of a large number of sharesof our common stock by our directors, officers, employees or principalstockholders;

·       internationalpolitical, socioeconomic and financial instability, including instabilityassociated with military action in Afghanistan, Iraq or other conflicts;

·       releasesor reports by or changes in security analysts’ recommendations; and

·       developmentsor disputes concerning patents or proprietary rights or other events.

If our net revenues andresults of operations are below the expectations of investors, significantfluctuations in the market price of our common stock could occur. Furthermore,because our stock generally trades at relatively low volumes, any suddenincreases in trading volumes can cause significant volatility in the stockprice. In addition, the securities markets have, from time to time, experiencedsignificant price and volume fluctuations, which have particularly affected themarket prices for high technology companies and often are unrelated anddisproportionate to the operating performance of 

24

----

particularcompanies. These broad market fluctuations, as well as general economic,political and market conditions, may negatively affect the market price of ourcommon stock.

***Our charterdocuments, Delaware law and our stockholder rights plan contain provisions thatmay inhibit potential acquisition bids, which may adversely affect the marketprice of our common stock, discourage merger offers or prevent changes in ourmanagement.***

Our board ofdirectors has the authority to issue up to 2,000,000 shares of preferred stockand to determine the rights, preferences, privileges and restrictions,including voting rights, of the shares without any further vote or action byour stockholders. If we issue any of these shares of preferred stock in thefuture, the rights of shareholders of our common stock may be negatively affected.If we issue preferred stock, a change of control of our company could bedelayed, deferred or prevented. We have no current plans to issue shares ofpreferred stock. Section 203 of the Delaware General Corporation Lawrestricts certain business combinations with any “interested stockholder” asdefined by that statute. In addition, our certificate of incorporation andbylaws contain certain other provisions that may have the effect of delaying,deferring or preventing a change of control. These provisions include:

·       theclassification of our board so that only a portion of our directors are electedeach year and each director serves a three year term;

·       theelimination of actions by written consent of stockholders; and

·       theestablishment of an advance notice procedure and a minimum holding requirementfor stockholder proposals and director nominations to be acted upon at annualmeetings of the stockholders.

In December 2006, our board of directors adopteda stockholder rights plan with a term of ten years which will expire in December 2016.Under this plan, we issued a dividend of one right for each share of our commonstock. Each right initially entitles stockholders to purchase oneone-thousandth of a share of our preferred stock for $18.00. However, therights are not immediately exercisable. If a person or group acquires, orannounces a tender or exchange offer that would result in the acquisition of15% of our common stock, unless the rights are redeemed by us for $0.01 perright, the rights will become exercisable by all rights holders, except theacquiring person or group, for shares of our common stock or the stock of thethird party acquirer having a value of twice the right’s then-current exerciseprice.

These provisions aredesigned to encourage potential acquirers to negotiate with our board ofdirectors and give our board of directors an opportunity to consider variousalternatives to increase stockholder value. These provisions are also intendedto discourage certain tactics that may be used in proxy contests. However, thepotential issuance of preferred stock, our charter and bylaw provisions, therestrictions in Section 203 of the Delaware General Corporation Law andour stockholder rights plan could discourage potential acquisition proposalsand could delay or prevent a change in control, which may adversely affect themarket price of our stock. These provisions and plans may also have the effectof preventing changes in our management or board of directors.

***We may be the subject of securities class actionlitigation due to future stock price volatility.***

In the past, when themarket price of a stock has been volatile, holders of that stock have ofteninitiated securities class action litigation against the company that issuedthe stock. If any of our stockholders brought a lawsuit against us, we couldincur substantial costs defending the lawsuit. The lawsuit could also divertthe time and attention of our management.

**Item 1B.   *UnresolvedStaff Comments***

Not Applicable.

25

----

**Item 2.   *Properties***

In August 2006, we moved our principaladministrative, sales, marketing, research and development and sort facility toa 41,965 square-foot building in Santa Clara, California that we purchased on March 16,2006. Prior to moving into the new facility, we leased space in a building ofapproximately 42,500 square feet in Sunnyvale, California. This lease ended in July 2006.

In addition, we purchasedour research and development facility in Bucharest, Romania, consisting of25,800 square feet, in August 2004. We lease sales office space in EastDundee, Illinois; Shanghai and Shenzhen, China; Oxford, United Kingdom; Munich,Germany; Yokohama, Japan; Singapore; Seoul, South Korea; and Taipei, Taiwan;and an operations site in Bangpa-in, Thailand. We believe that our existingfacilities are adequate to meet our current needs and that additional oralternative space will be available in the future on commercially reasonableterms.

**Item 3.   *Legal Proceedings***

We are not party to anymaterial legal proceedings as of the date of this report.

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

No matters were submitted to a vote of securityholders during the fourth quarter of the fiscal year ended April 29, 2007.

26

----

**PART II**

**Item 5.   *Market for Registrant’sCommon Equity and Related Stockholder Matters and Issuer Purchases of EquitySecurities***

**Common Stock MarketPrices and Dividends**

Ourcommon stock is quoted on the NASDAQ Global Market under the symbol“CATS.”  The following table sets forth,for the periods indicated, the high and low closing sales price per share ofour common stock as reported on the NASDAQ Global Market.

| ** **                                | ** ** | **Price Range** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **High**             | ** ** | **Low** | ** ** |
| **Fiscal year ended April 29, 2007** |       |                 |       |   |   |
| First Quarter                             |       | $                    | 5.01       |   | $ | 3.23 |   |
| Second Quarter                            |       | 3.70                 |       | 3.20 |   |
| Third Quarter                             |       | 3.70                 |       | 3.13 |   |
| Fourth Quarter                            |       | 3.84                 |       | 3.14 |   |
| **Fiscal year ended April 30, 2006** |       |                 |       |   |   |
| First Quarter                             |       | $                    | 5.06       |   | $ | 4.16 |   |
| Second Quarter                            |       | 5.19                 |       | 4.30 |   |
| Third Quarter                             |       | 5.20                 |       | 4.50 |   |
| Fourth Quarter                            |       | 5.05                 |       | 4.60 |   |

 

As of April 29, 2007,there were approximately 144 holders of record of our common stock, excludingthose persons holding shares in street or nominee name. The actual number ofour stockholders is greater than this number of holders of record.

**Dividend Policy**

We have never declared orpaid any cash dividends on our common stock or other securities. We currentlyexpect to retain future earnings for use in the operation and expansion of ourbusiness and do not anticipate paying cash dividends in the foreseeable future.

**Purchases of OurStock**

Thefollowing table sets forth certain information regarding purchases by us ofshares of our common stock during the fourth quarter of fiscal 2007.

| ** **         | ** ** | ** **            | ** ** | ** **          | ** ** | **Total Number of**     | ** ** | **Maximum Number of**        | ** ** |
|--------------------|------------|-----------------------|------------|---------------------|------------|-----------------------------------|------------|----------------------------------------|------------|
| ** **         | ** ** | ** **            | ** ** | ** **          | ** ** | **Shares Purchased as** | ** ** | **Shares That May Yet** | ** ** |
| ** **         | ** ** | **Total Number** | ** ** | **Average**         | ** ** | **Part of Publicly**    | ** ** | **Be Purchased**                  | ** ** |
| ** **         | ** ** | **of Shares**    | ** ** | **Price Paid** | ** ** | **Announced Plans or**  | ** ** | **Under the Plans**          | ** ** |
| **Period**         | ** ** | ** **            | ** ** | **Purchased**       | ** ** | **Per Share**                | ** ** | **Programs(1)**                        | ** ** | **or Programs** | ** ** |
| February 2007 |       |                  | —     |                |       |                              | $          | —                                 |       |   |   | — |   |   |   | 888,381 |   |   |
| March 2007    |       |                  | 102,395    |                |       |                              | 3.56       |                                   |       |   | 102,395 |   |   |   | 785,986 |   |   |
| April 2007    |       |                  | —     |                |       |                              | —     |                                   |       |   | — |   |   |   | 785,986 |   |   |
| Total              |       |                  | 102,395    |                |       |                              | $          | 3.56                                   |       |   |   | 102,395 |   |   |   |   |   |   |
|                    |            |                       |            |                     |            |                                   |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          InSeptember 2005 our board of directors authorized a new stock repurchaseprogram to repurchase up to 1.0 million shares of its common stock. Prior toSeptember 2005, the board of directors authorized the repurchase of 3.5million shares. In subsequent periods, our board of directors amended theprogram and authorized the purchase of up to an aggregate of 2.0 million sharesof our common stock. The purpose of these share repurchase programs is toreduce the long-term potential dilution in earnings per share that might resultfrom issuances under our stock option plans. Through 

27

----

April 29, 2007(excluding repurchases of shares from Elex N.V.) we have repurchased 4,714,014shares under our board of director’s authorized repurchase plans at a totalcost of $19,175,197 or an average cost per share of $4.07 per share. See“Note 3—Stock-based Compensation” in Part IV, Item 15(a)(1) ofthis Annual Report on Form 10-K.

**Stock PerformanceGraph**

The following graph compares the cumulative totalreturn to stockholders of our common stock from April 30, 2002 toApril 30, 2007 to the cumulative total return over such period of(i) the S&P 500 Index and (ii) the S&P Semiconductors Index.The graph assumes that $100 was invested on April 30, 2002 in our commonstock and in each of the other two indices and the reinvestment of alldividends, if any.

The information contained in the Performance Graphshall not be deemed to be “soliciting material” or to be “filed” with the SEC,nor shall such information be incorporated by reference into any future filingunder the Securities Act of 1933, as amended, or the Securities Exchange Act of1934, as amended, except to the extent that Catalyst specifically incorporatesit by reference into any such filing. The graph is presented in accordance withSEC requirements. Stockholders are cautioned against drawing any conclusionsfrom the data contained therein, as past results are not necessarily indicativeof future performance.

**COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN***

AmongCatalyst Semiconductor, Inc., The S&P 500 Index

And The S&P Semiconductors Index

****

----

*                    $100 investedon April 30, 2002 in stock or index-including reinvestment of dividends.For purposes of presentation, datapresented above reflect April 30 of each year.

Copyright © 2007,Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.All rights reserved. www.researchdatagroup.com/S&P.ht

28

----

**Item 6.   *Selected Financial Data***

Theselected consolidated financial data set forth below should be read togetherwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and the consolidated financial statements and notes thereto inthis Annual Report on Form 10-K. Historical results are notnecessarily indicative of results to be expected in the future.

| ** **                                      | ** ** | **Fiscal Year Ended**                                    | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **April 29,  2007**                                           | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** | **May 2,  2004** | ** ** | **April 27,  2003** | ** ** |
| ** **                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statements of Operations Data:** |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net revenues                                    |       | $                                                                  | 66,350     |   | $ | 60,217 |   | $ | 62,320 |   | $ | 63,538 |   | $ | 48,221 |   |
| Cost of revenues                                |       | 44,238                                                             |       | 36,900 |   | 35,852 |   | 37,375 |   | 28,396 |   |
| Gross profit                                    |       | 22,112                                                             |       | 23,317 |   | 26,468 |   | 26,163 |   | 19,825 |   |
| Research and development                        |       | 7,844                                                              |       | 7,472 |   | 7,910 |   | 7,130 |   | 5,223 |   |
| Selling, general and administrative             |       | 15,748                                                             |       | 13,445 |   | 13,696 |   | 11,453 |   | 10,020 |   |
| Income (loss) from operations                   |       | (1,480                                                             | )          | 2,400 |   | 4,862 |   | 7,580 |   | 4,582 |   |
| Interest income and other, net                  |       | 1,339                                                              |       | 1,175 |   | 732 |   | 379 |   | 382 |   |
| Income (loss) before income taxes               |       | (141                                                               | )          | 3,575 |   | 5,594 |   | 7,959 |   | 4,964 |   |
| Income tax provision (benefit)                  |       | 288                                                                |       | 1,019 |   | 1,773 |   | (1,408 | ) | (1,354 | ) |
| Net income (loss)(1)                            |       | $                                                                  | (429       | ) | $ | 2,556 |   | $ | 3,821 |   | $ | 9,367 |   | $ | 6,318 |   |
| Net income (loss) per share:                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                                                  | (0.03      | ) | $ | 0.15 |   | $ | 0.22 |   | $ | 0.57 |   | $ | 0.38 |   |
| Diluted                                         |       | $                                                                  | (0.03      | ) | $ | 0.14 |   | $ | 0.20 |   | $ | 0.48 |   | $ | 0.34 |   |
| Weighted average common shares:                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | 16,341                                                             |       | 16,685 |   | 17,507 |   | 16,567 |   | 16,721 |   |
| Diluted                                         |       | 16,341                                                             |       | 18,220 |   | 19,485 |   | 19,411 |   | 18,339 |   |

----

(1)          Infiscal 2004 and fiscal 2003, our net income was favorably impacted by$4.7 million and $1.9 million, respectively, due to the reversals ofour tax valuation allowance.

| ** **                                                 | ** ** | **April 29,**                                                 | ** ** | **April 30,** | ** ** | **May 1,** | ** ** | **May 2,** | ** ** | **April 27,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------|------------|-----------------|------------|-----------------|------------|--------------------|------------|
| ** **                                                 | ** ** | **2007**                                                           | ** ** | **2006**           | ** ** | **2005**        | ** ** | **2004**        | ** ** | **2003**           | ** ** |
| ** **                                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Balance Sheet  Data:**                      |       |                                                               |       |               |       |            |       |            |       |               |       |
| Cash, cash  equivalents and short-term   investments       |       | $                                                                  | 28,658     |               | $          | 29,139          |       | $               | 33,793     |               | $          | 33,809 |   | $ | 27,906 |   |
| Total working  capital                                     |       | 42,127                                                             |       | 43,268             |       | 48,084          |       | 46,338          |       | 39,017             |       |
| Total assets                                               |       | 69,212                                                             |       | 70,420             |       | 70,061          |       | 66,865          |       | 50,588             |       |
| Total current  liabilities                                 |       | 10,957                                                             |       | 12,890             |       | 12,193          |       | 12,877          |       | 8,235              |       |
| Total long-term  liabilities and capital lease obligations |       | —                                                             |       | —             |       | —          |       | —          |       | —             |       |
| Stockholders’ equity                                  |       | 58,255                                                             |       | 57,530             |       | 57,868          |       | 53,988          |       | 42,353             |       |
|                                                            |            |                                                                    |            |                    |            |                 |            |                 |            |                    |            |  |  |  |  |  |

 

29

----

**Item 7.   *Management’s Discussionand Analysis of Financial Condition and Results of Operations***

**EXPLANATORY NOTE**

*The following discussion should be read together withthe consolidated financial statements and notes thereto included in this annualreport on Form 10-K. Certain statements in this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” areforward-looking statements. These forward-looking statements contained hereinare based on current expectations and involve various risks and uncertaintiesthat could cause actual results to differ materially from those expressed inthe forward-looking statements. See the risks and uncertainties identified in “Part I.Item 1A. Risk Factors” above and in the documents filed by us from time to timewith the SEC. We undertake no obligation to revise or update publicly anyforward-looking statements for any reason.*

**Overview**

We design, develop and market a broad line ofreprogrammable non-volatile memory products and analog/mixed-signal products. Ourproducts are used by manufacturers of electronic products in a wide range ofconsumer, computing, communications, industrial and automotive applications. Wegenerally target high volume markets for our cost effective, high qualityproducts. Through periods of tight manufacturing capacity and cyclicaldownturns, we have demonstrated long-term commitment to the memory productsmarket.

The market for our non-volatile memory is highlycompetitive and market participants have relatively weak pricing power. Averageselling prices of our non-volatile memory products have declined over time andprices are sensitive to conditions in our OEM customers’ target markets. Infiscal 2007, we experienced an increase in total unit volume sold to endcustomers, driven by strong demand particularly for our EEPROM andanalog/mixed-signal products. However, this increase in unit volume was partlyoffset by an overall decrease in average selling prices. In general, we expectthe average selling price for a given memory product to decline in the future,primarily due to market competition, product availability and manufacturingcapacity. In response to that trend, we continue to work with our foundries andother vendors to increase the manufacturing efficiency of our products.

We are leveraging our extensive experience in highvolume, reprogrammable memory products to develop complementaryanalog/mixed-signal products that offer our customers a more complete systemsolution. We have strengthened and expanded the expertise of our research anddevelopment team by establishing our own development center in Bucharest,Romania and by hiring additional engineers in Romania and in our Santa Clara,California headquarters. In fiscal 2006, we purchased a building in Santa Clara,California that houses our principal offices and our principal wafer testoperations, which were previously located in Sunnyvale, California. The moveprovides employees with modern facilities and makes efficient use of spacewhile reducing our occupancy costs. We continue to make substantial investmentsin research and development to advance our non-volatile memory products, aswell as develop broader solutions with our line of analog/mixed-signal products.In fiscal 2007, we formed a subsidiary in Thailand that will perform a portionof the inventory management and processing functions that are currently subcontractedto Trio-Tech. This is expected to reduce our expenses and improve our controlover the personnel and assets located in Thailand.

Sales of our analog/mixed-signal products continued totrend upwards, reaching 8.9% of net revenues in fiscal 2007 as compared to7.6% of net revenues in fiscal 2006. We expect net revenues fromanalog/mixed-signal products to comprise a larger portion of our net revenuesin the future.

Our business is less capital intensive thantraditional semiconductor companies since we outsource to third parties themanufacturing, assembling and most of the testing of our products. We strive tomaintain long-term relationships with our suppliers to ensure stability in oursupply of products at a competitive 

30

----

cost. In addition, in aneffort to alleviate any potential wafer capacity constraints, we maintain asupply of wafers in a die bank for selected products.

We market and sell our products directly through oursales force and sales representatives to OEMs and indirectly through distributorsand resellers who sell to their end customers. Indirect sales represented 56.8%of net revenues in fiscal 2007 as compared to 60.2% in fiscal 2006. Our totalcustomer base, including OEMs and end-customers of our distributors andresellers, is relatively diverse and during fiscal 2007 consisted of more than3,000 end customers. We have approximately 49 distributors and resellers.

Distributors and resellers have accounted for asignificant portion of our net revenues in the past. For fiscal 2007 and 2006,Avnet, Inc. represented 10.3% and 11.8%, respectively, of our net revenues.For fiscal 2005, none of our direct or indirect customers represented 10.0% ormore of our net revenues.

Our sales are initiated by purchase orders receivedfrom our customers and are typically shipped within a few weeks of receivingthe order. Since industry practice allows customers to reschedule or cancelorders on relatively short notice, we do not use backlog to forecast our futurenet revenues. Cancellations of customer orders, distributor price protectionand distributor stock rotation rights, all industry standards, could result inthe loss of future net revenues without allowing us sufficient time to reduceour inventory and operating expenses.

Sales to customers outside the United States comprised92.1%, 88.2% and 88.0% of our net revenues for fiscal 2007, fiscal 2006 andfiscal 2005, respectively. Substantially all sales of our products aredenominated in U.S. dollars, minimizing the effects of foreign currency fluctuations.

Our net revenues infiscal 2005 benefited by approximately $1.0 million from the terminationof price adjustment and stock rotation rights of certain small regionalresellers, which had not historically used those rights that resulted in recognitionof revenue and gross margin for the inventories held by such resellers. We didnot have similar benefits in fiscal 2007 or 2006.

**Description ofOperating Accounts**

*NetRevenues.**  *Netrevenues consist of product sales, net of returns and allowances.

*GrossProfit.**  *Grossprofit is net revenues less cost of revenues and is affected by a number offactors, including competitive pricing, product mix, foundry pricing, the costof test and assembly services and manufacturing yields. Cost of revenuesconsists primarily of costs of manufacturing, assembly and testing of ourproducts, compensation (including stock-based compensation) and associatedcosts related to manufacturing support, inbound freight shipments and qualityassurance personnel, as well as provision for excess and obsolete inventoriesand any recoveries from sales of previously written down inventories. It alsocan include, on occasion, adjustments to inventory valuations based on demandand average selling prices expected in future periods.

*Researchand Development*   Research and development expenseconsists primarily of compensation (including stock-based compensation) andassociated costs for engineering, technical and support personnel, contractengineering services, depreciation of equipment and cost of wafers and masksets used to evaluate new products and new versions of current products.

*Selling, General andAdministrative.**  *Selling,general and administrative expense consists primarily of compensation(including stock-based compensation) and associated costs for sales, marketingand administrative personnel, commissions, promotional activities, bad debtexpense, outbound freight shipments, professional fees and director and officerinsurance.

31

----

**Critical AccountingPolicies and Estimates**

The preparation of ourconsolidated financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenue, cost of revenues, expenses and related disclosure ofcontingencies. On an on-going basis, we evaluate our estimates, including thoserelated to revenue recognition, inventory valuation, accounts receivable andallowance for doubtful accounts, stock-based compensation and income taxes. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, and apply them on aconsistent basis. We believe that such consistent application results incondensed consolidated financial statements and accompanying notes that fairlyrepresent our financial condition, operating results and cash flows for allperiods presented. However, any factual errors or errors in these estimates andjudgments may have a material impact on our financial conditions, operatingresults and cash flows.

***Recognition of Revenues***

We generallyrecognize revenues as products are shipped if all of the following criteria aremet:

·       wehave evidence that a sales arrangement exists;

·       ourcustomer has taken title to the products;

·       wehave performed the services, if any;

·       thesales price is fixed or determinable;

·       webelieve that collection of the resulting receivable is reasonably assured; and

·       wecan reasonably estimate product returns.

We sell our products directly through our sales forceand sales representatives to OEMs and indirectly through distributors andresellers who sell to their end customers. We recognize revenues upon deliveryto OEM customers and resellers who have no, or limited, product return rightsand no price protection rights. We deem that delivery occurs when legal titleand the risk of loss transfers to the customer. Delivery is generally definedby the customers’ shipping terms, as stated in the related purchase order. Ifthe customers’ purchase orders do not define the shipping terms, the shippingterms will be Ex-Works as defined in our invoice. We record an estimatedallowance for returns from OEM customers and resellers, based on a percentage ofour revenues. This estimate is based on historical averages.

We sell products to certain distributors underagreements that provide for product return and price protection rights. Theseagreements generally permit the distributor to return up to 10% by value of thetotal products that the distributor has purchased from us every six months. Wedefer recognition of revenues until the time the distributor resells theproduct to an end-customer, at which time the sales price becomes fixed. On amonthly basis, we receive point of sales and ending inventory information fromeach distributor. Using this information, we determine the amount of revenuesto recognize. For distributors who have product return rights, we also recordan inventory reserve to address the cost of products we anticipate that we willnot be able to resell after their return by the distributors. For distributorswho have price protection rights, distributors may take the associated creditsimmediately and in general, we process the credits one or two months after thecredit is earned by the distributor. We record a reserve to cover the estimatedliability of those unprocessed credits.

In assessing the timing of revenue recognition fromsales to distributors and resellers, we consider both direct and indirect risksof returns and price protection associated in our business dealings with them. We recognize that we may accept returns orgrant price protection to certain resellers, even 

32

----

thoughthe sales contracts do not explicitly provide for such rights. Accordingly, we account for sales to such resellers ona sell through basis.

We re-evaluate our revenuerecognition policies periodically and no less often than annually.

***Inventory Valuation***

We value our inventory at the lower of standard costor net realizable value. Standard cost approximates actual cost on a first-in,first-out basis. We routinely evaluate the value and quantities of ourinventory in light of the current market conditions and market trends and werecord reserves for quantities in excess of demand, cost in excess of marketvalue and product age. Our analysis may take into consideration historicalusage, expected demand, anticipated sales price, new product developmentschedules, the effect new products might have on the sales of existingproducts, product age, customer design activity, customer concentration andother factors. Our forecasts for our inventory may differ from actual inventoryuse.

We reduce the value of ourinventory by analyzing on-hand quantities and open purchase orders which are inexcess of demand equal to the cost of inventory that exceeds expected demandfor approximately the next 12 to 15 months. We make judgments in establishingthese reserves and do not establish reserves if we believe we can sell theexcess inventory. If market conditions are less favorable than those weestimate, we may be required to write down inventory. If we overestimate thefuture selling prices, we will incur additional losses when the inventory issold for a lower price or when we establish additional write downs to cover theeven lower estimated sales price. Once written down, we do not reverseinventory provisions until the associated inventory has been sold or physicallyscrapped.

***Allowance for Doubtful Accounts***

We estimate the collectibilityof our accounts receivable at the end of each reporting period. We analyze theaging of accounts receivable and bad debt history, payment history, customerconcentration, customer credit worthiness and current economic trends whenevaluating the adequacy of the allowance for doubtful accounts. We maintain anallowance for doubtful accounts, which is created by charges to selling,general and administrative expenses. Our accounts receivable balance was $10.4million, net of allowance for doubtful accounts of $108,000 as of April 29,2007.

***Stock-Based Compensation***

Effective May 1,2006, we adopted the provisions of SFAS No. 123(R). We estimate the fairvalue of stock options using the Black-Scholes model, consistent with theprovisions of SFAS No. 123(R) and SEC Staff Accounting Bulletin No. 107,*“Share-Based Payment*.” Option-pricing models require the input of highly subjective assumptions,including the price volatility of the underlying stock. The expected termassumption used in calculating the estimated fair value of our stock-basedcompensation awards using the Black-Scholes model is based primarily ondetailed historical data about employees’ exercise behavior, vesting schedules,and death and disability probabilities. In addition, we are required toestimate the expected forfeiture rate and only recognize expense for thoseshares expected to vest. We estimate the forfeiture rate based on historicalexperience of our stock-based awards that have been granted and forfeited priorto vesting. Stock-based compensation is amortized on a straight-line basis andallocated to cost of revenues, research and development and selling, generaland administrative expenses in the accompanying consolidated statements ofoperations based on the related employee’s function.

***Income Taxes***

As part of the process of preparing our consolidatedfinancial statements, we are required to estimate our income taxes in each ofthe jurisdictions in which we operate. This process involves estimating our 

33

----

current tax exposure andassessing temporary differences resulting from differing treatment of items,such as deferred revenues, for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are included on ourbalance sheet on a net basis. We then assess the likelihood that our deferredtax assets will be recovered from future taxable income and to the extent weestablish a valuation allowance or increase this allowance in a period, we willinclude an additional tax provision in the statement of operations.

The calculation of tax liabilities involves dealingwith uncertainties in the application of complex global tax regulations. TheCompany recognizes potential liabilities for anticipated tax audit issues inthe U.S. and other tax jurisdictions based on its estimate of whether, and theextent to which, additional taxes will be due. If payment of these amountsultimately proves to be unnecessary, the reversal of the liabilities that wouldresult in tax benefits being recognized in the period when the Companydetermines that liabilities are not longer necessary. If the estimate of taxliabilities proves to be less than the ultimate assessment, a further charge toexpense would result.

We make significantjudgments in determining our provision for income taxes, our deferred taxassets and any valuation allowance recorded against our net deferred tax asset.As of April 29, 2007 and April 30, 2006, our gross deferred taxassets, consisting primarily of net operating loss carryforwards, tax creditcarryforwards and nondeductible reserves and accruals, were valued at $6.8million and $7.5 million, respectively. Our valuation allowance was zero as wehave concluded that it is more likely than not that all of our deferred taxassets will be realizable, based on available objective evidence and ourhistory of taxable income.

**Results ofOperations**

Thefollowing table sets forth the results of our operations as a percentage of netrevenues for the periods indicated:

| ** **                          | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **April 29,  2007**        | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** |
| Net revenues                        |       |                            | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of revenues                    |       |                            | 66.7       |   |   |   | 61.3 |   |   |   | 57.5 |   |   |
| Gross profit                        |       |                            | 33.3       |   |   |   | 38.7 |   |   |   | 42.5 |   |   |
| Operating expenses:                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Research and development            |       |                            | 11.8       |   |   |   | 12.4 |   |   |   | 12.7 |   |   |
| Selling, general and administrative |       |                            | 23.7       |   |   |   | 22.3 |   |   |   | 22.0 |   |   |
| Income (loss)  from operations      |       |                            | (2.2       | ) |   |   | 4.0 |   |   |   | 7.8 |   |   |
| Interest income  and other, net     |       |                            | 2.0        |   |   |   | 2.0 |   |   |   | 1.2 |   |   |
| Income (loss)  before income taxes  |       |                            | (0.2       | ) |   |   | 6.0 |   |   |   | 9.0 |   |   |
| Income tax provision                |       |                            | 0.4        |   |   |   | 1.8 |   |   |   | 2.9 |   |   |
| Net income (loss)                   |       |                            | (0.6       | )% |   |   | 4.2 | % |   |   | 6.1 | % |   |

 

Thefollowing table sets forth net revenues (in thousands) and percentage of netrevenues by product group:

| ** **          | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **April 29, 2007**    | ** ** | **April 30, 2006** | ** ** | **May 1, 2005** | ** ** |
| EEPROM              |       | $                               | 56,150     |   | 84.6 | % | $ | 50,597 |   | 84.1 | % | $ | 53,397 |   | 85.7 | % |
| Flash               |       | 4,284                           |       | 6.5 |   | 5,016 |   | 8.3 |   | 5,983 |   | 9.6 |   |
| Analog/mixed-signal |       | 5,916                           |       | 8.9 |   | 4,604 |   | 7.6 |   | 2,940 |   | 4.7 |   |
| Net revenues        |       | $                               | 66,350     |   | 100.0 | % | $ | 60,217 |   | 100.0 | % | $ | 62,320 |   | 100.0 | % |

 

34

----

***Comparison of Fiscal 2007 and 2006***

*NetRevenues.**  *Ournet revenues increased $6.2 million, or 10.2%, to $66.4 million forfiscal 2007 from $60.2 million for fiscal 2006. The increase innet revenues was primarily due to a 24.1% increase in total unit volume sold toend customers from 416 million units in fiscal 2006 to 517 million units infiscal 2007, driven by strong demand particularly for our EEPROM andanalog/mixed-signal products. Combined sales of our EEPROM and analog/mixedsignal products increased approximately $6.9 million or 12.4%. This increasewas partially offset by lower unit volume sales of our flash memory products,which decreased $732,000 or 14.6%. However, intensified market competitionresulted in an overall decrease of 11.2% in average selling prices.

Sales to customers outside the United Statesrepresented approximately 92.1% and 88.2% of net revenues in fiscal 2007and fiscal 2006, respectively.

*GrossProfit.**  *Grossprofit decreased $1.2 million, or 5.2%, to $22.1 million for fiscal 2007from $23.3 million for fiscal 2006. Gross margin, which equals grossprofit divided by net revenues, was 33.3% for fiscal 2007 and 38.7% forfiscal 2006. The decrease in gross profit was due to a significant declinein average selling prices that we were not able to fully offset with a declinein our costs; lower revenues from our flash memory products which generallycarry higher margins; and inventory write-offs stemming from the transition to..35 micron technology and products not compliant with new environmentalstandards. The benefit from sales of previously written down inventory was$575,000 for fiscal 2007 and $794,000 for fiscal 2006, and provisionsfor excess and obsolete inventory were $2.2 million for fiscal 2007 and$1.0 million for fiscal 2006. The net impact of these inventory provisions wasa decrease in gross profit of $1.6 million in fiscal 2007 as compared to adecrease in gross profit of $232,000 in fiscal 2006.

*Researchand Development.**  *Researchand development expense increased $372,000, or 5.0%, to $7.8 million for fiscal2007 from $7.5 million for fiscal 2006. As a percentage of net revenues,research and development expense was 11.8% and 12.4% for fiscal 2007 and fiscal2006, respectively. For fiscal 2007, we experienced an increase in payroll andrelated costs of approximately $915,000, of which $761,000 related tostock-based compensation costs resulting from our adoption of SFAS No. 123(R).This amount was offset by a decrease in wafer fabrication tooling of $154,000due to the progression of .35 micron technology transition from development infiscal 2006 to production in fiscal 2007, and a decrease in depreciation andamortization of $385,000 due to assets reaching the end of their useful lives.

*Selling,General and Administrative.**  *Selling, general and administrative expense increased$2.3 million, or 17.1%, to $15.7 million for fiscal 2007 from $13.4 million forfiscal 2006. As a percentage of net revenues, selling, general and administrativeexpense was 23.7% and 22.3% for fiscal 2007 and fiscal 2006, respectively. Theincrease was primarily attributable to a $1.9 million increase in salary andbenefits, of which $1.4 million related to stock-based compensation costsresulting from our adoption of SFAS No. 123(R). In addition, salescommissions increased $377,000 as a result of higher revenues. In fiscal 2007,selling, general and administrative costs were favorably impacted by thereversal of an accrual of approximately $270,000 that we did not considernecessary.

*InterestIncome and Other, Net.**  *Weearned interest income and other, net, of $1.3 million for fiscal 2007, ascompared to interest income and other, net, of $1.2 million for fiscal 2006. Theslight increase in interest income and other, net, primarily relates to ahigher rate of return, despite the lower average balances of our cash, cashequivalents and short-term investments for fiscal 2007. Our rate of return wasapproximately 4.8% for fiscal 2007 compared to approximately 3.4% for fiscal2006.

*Income Tax Provision.**  *The provision for income taxes was$288,000 for fiscal 2007. The provision for income taxes was $1.0 million forfiscal 2006. The effective income tax rate for fiscal 2007 is higher than thestatutory U.S. federal income tax rate of 34.0% primarily due to thenon-deductible stock compensation charges associated with incentive stockoptions recorded as a result of our adoption of SFAS No. 123(R) in

35

----

fiscal 2007. Theprovision for income taxes in fiscal 2006 was favorably impacted by thereversal of certain tax accruals upon expiry of the related statute oflimitations. See Note 7 at Notes to Consolidated Financial Statements.

***Comparison of Fiscal 2006 and 2005***

*NetRevenues.**  *Ournet revenues decreased $2.1 million, or 3.4%, to $60.2 million forfiscal 2006 from $62.3 million for fiscal 2005. The decrease innet revenues was primarily due to a decrease in EEPROM average selling prices,which led to a decline of net revenues from our EEPROM and flash memoryproducts of $3.8 million. This decrease was partially offset by anincrease in net revenues from our analog/mixed-signal products of $1.7 million,or 58.6% to $4.6 million for fiscal 2006 from $2.9 million forfiscal 2005, which resulted from the introduction of new products andincreased sales to our existing OEM customer base. While we experienced animproved market demand that resulted in a 9.0% increase in total unit volumesold to end customers in fiscal 2006, net revenues decreased overall becausethe increase in total unit volume was offset by an 11.0% decrease in overallaverage selling prices from increased market competition in the more recentperiod.

In addition, our net revenues in fiscal 2005 benefitedby approximately $1.0 million from the termination of price adjustment andstock rotation rights of certain small regional resellers that had nothistorically used those rights, which resulted in recognition of revenue andgross margin for the inventories held by such resellers. We did not experiencea similar benefit in fiscal 2006.

Sales to customers outside the United Statesrepresented approximately 88.0% of net revenues in both fiscal 2006 andfiscal 2005.

*GrossProfit.**  *Grossprofit decreased $3.2 million, or 11.9%, to $23.3 million forfiscal 2006 from $26.5 million for fiscal 2005. Gross margin,which equals gross profit divided by net revenues, was 38.7% forfiscal 2006 and 42.5% for fiscal 2005. The decrease in gross profitwas primarily due to increased market competition resulting in a decline inoverall average selling prices, as well as the unfavorable impact of movementsin our inventory reserves in fiscal 2006 as compared to fiscal 2005. Thebenefit from sales of previously reserved inventory was $794,000 forfiscal 2006 and $1.0 million for fiscal 2005, and provisions forexcess and obsolete inventory were $1.0 million for fiscal 2006 and $1.1million for fiscal 2005. The net impact of these inventory provisions was adecrease in gross profit of $232,000 in fiscal 2006 as compared to a decreasein gross profit of $83,000 in fiscal 2005.

*Researchand Development.**  *Researchand development expense decreased $438,000, or 5.5%, to $7.5 million forfiscal 2006 from $7.9 million for fiscal 2005. As a percentageof net revenues, research and development expense was 12.4% in fiscal 2006and 12.7% in fiscal 2005. The decrease in research and development expensewas primarily attributable to a $152,000 decrease in employee incentivecompensation, a $143,000 decrease in wafer fabrication and test and assemblycosts and a $133,000 decrease in facilities and insurance costs for ourresearch and development activities.

*Selling,General and Administrative.**  *Selling, general and administrative expense decreased$251,000, or 1.8%, to $13.4 million for fiscal 2006 from$13.7 million for fiscal 2005. As a percentage of net revenues,selling, general and administrative expense was 22.3% in fiscal 2006 and22.0% in fiscal 2005. The decrease in selling, general and administrativeexpense was primarily attributable to a decrease in employee incentive andcommission related compensation of $329,000, a decrease in consulting workperformed for Section 404 compliance of $224,000, offset by an increase indepreciation expense for our new enterprise resource planning systems of$104,000, an increase in freight expense of $139,000 for increased unitshipments and an increase in marketing expense of $58,000.

*InterestIncome and Other, net.**  *Weearned interest income and other, net, of $1.2 million in fiscal 2006 ascompared to interest income and other, net, of $732,000 in fiscal 2005. Ourrate of return on 

36

----

our average balance ofcash, cash equivalents and short-term investments was approximately 3.4% infiscal 2006 and approximately 1.8% in fiscal 2005. The change was dueto higher average interest rates experienced in fiscal 2006 compared to fiscal2005, partially offset by lower investable cash.

*Income Tax Provision(Benefit).**  *Theprovision for income taxes was $1.0 million, or 28.5% of income before taxes,for fiscal 2006. The provision for income taxes was $1.8 million or 31.7% ofincome before taxes, for fiscal 2005. The income tax rates are impacted by thelevel of available tax credits as compared to pretax income and the currentestimate of the level of income subject to California taxation. The provisionfor income taxes in fiscal 2006 has also been favorably impacted by thereversal of certain tax accruals upon expiry of the related statute oflimitations.

**Liquidity andCapital Resources**

At April 29, 2007, we had cash, cash equivalentsand short-term investments of $28.7 million. During fiscal 2007, werepurchased 355,795 shares of common stock for approximately $1.3 million. Weinvest our excess cash in short-term financial instruments to generate interestincome. These instruments are U.S. government debt securities, the majority ofwhich have maturities that are less than one year. They are highly liquid andcan be converted to cash at any time.

Historically, our primary source of cash has beenprovided through operations and the issuance of our common stock. Ourhistorical uses of cash have primarily been for operating activities as well ascapital expenditures. Supplemental information pertaining to our historicalsources and uses of cash is presented as follows and should be read inconjunction with our Consolidated Statements of Cash Flows and notes thereto(in thousands):

| ** **                                                              | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **April 29, 2007**    | ** ** | **April 30, 2006** | ** ** | **May 1, 2005** | ** ** |
| Net cash provided  by operating activities                              |       |                            | $          | 4,820 |   |   |   | $ | 4,473 |   |   |   | $ | 4,868 |   |   |
| Net cash proceeds  from sales and (purchases) of short-term investments |       |                            | 9,411      |   |   |   | 1,425 |   |   |   | (6,285 | ) |   |
| Acquisitions of  property and equipment                                 |       |                            | 4,261      |   |   |   | 5,728 |   |   |   | 4,126 |   |   |
| Treasury stock purchases                                                |       |                            | 1,253      |   |   |   | 4,503 |   |   |   | 9,553 |   |   |

 

***Net Cash from Operating Activities***

In fiscal 2007, net cash generated in operatingactivities was $4.8 million, which was primarily due to a net loss of $429,000,adjusted for depreciation and amortization of $2.0 million and other non-cashitems such as stock-based compensation of $2.2 million, as well as additionalinventory provisions of $2.2 million. Cash provided in operating activitiesincluded the sale of previously written down inventory of $575,000 and theeffect of decreases in inventory of $1.5 million, offset by increases inaccounts receivable of $942,000, due in part to the increase in net revenuesand timing of shipments and collections. In addition, we made significantpayments to vendors during fiscal 2007 for amounts that became due as a resultof our increased purchases of inventory in prior periods. As a result, accountspayable and accrued liabilities decreased by $1.8 million during fiscal 2007. Deferredgross profit from distributors decreased $162,000 for fiscal 2007.

In fiscal 2006, we had cash from operatingactivities of $4.5 million, which resulted from net income of$2.6 million, adjusted for non-cash charges including depreciation andamortization of $1.9 million, a charge of $232,000 for net movements ininventory reserves and a tax benefit of $505,000 related to the exercise ofemployee stock options. Cash provided by operating activities also included adecrease in gross accounts receivable of $464,000 related to our decreasein net revenues, an increase in accounts payable of $1.5 million primarilydue to the timing and amount of inventory purchases, and a decrease in accruedexpenses of $1.2 million related primarily to tax liabilities. These decreaseswere partially offset by an 

37

----

increase in grossinventory of $3.0 million due to faster delivery times from our suppliers, andan increase in our deferred gross profit on shipments to distributors.

In fiscal 2005, wehad cash from operating activities of $4.9 million, which resulted fromnet income of $3.8 million, adjusted for non-cash charges includingdepreciation and amortization of $1.6 million, a net charge of $1.1 million formovements in inventory reserves, a reduction in gross accounts receivable of$2.6 million, an increase in accounts payable of $1.1 millionprimarily due to the timing and amount of inventory purchases and an increasein accrued expenses and accrued expenses of $463,000 related primarily to taxliabilities. These increases were partially offset by a reduction of grossinventories of $4.6 million and a decrease of $2.2 million fordeferred gross profit on distributor sales due to decreased distributorinventories.

***Net Cash from Investing Activities***

In fiscal 2007, net cash provided by investingactivities was $5.2 million, primarily related to the proceeds from thesales and maturities of our short-term investments of $39.5 million andpurchases of short-term investments of $30.1 million. We had capitalexpenditures of $4.3 million, mostly for construction costs related to ournewly acquired headquarters building, as well as for production mask sets andequipment.

In fiscal 2006, cash used by investing activitieswas $4.3 million. During fiscal 2006 our short-term investments decreasedby $1.4 million. We used $5.7 million to acquire property andequipment, of which $3.7 million was used for the purchase of a building inSanta Clara, California, which replaced the leased principal headquarters inSunnyvale, California.

In fiscal 2005, cashused by investing activities was $10.4 million. During fiscal 2005,our short-term investments increased by $6.3 million as we transferredthose funds from cash and cash equivalents. We also used $4.1 million,which was primarily for the purchase of our new building for our R&Doperations in Romania and for continuing investments in our new enterpriseresource planning and supply chain management systems.

***Net Cash from Financing Activities***

In fiscal 2007, net cash used in our financingactivities was $1.1 million, consisting primarily of $1.3 million used torepurchase an aggregate of 355,795 shares of our common stock on the openmarket during fiscal 2007, offset by proceeds of $112,000 from the sale ofcommon stock through the exercise of stock options.

In fiscal 2006, cash used by financing activitieswas $3.4 million, consisting of $4.5 million used for the repurchase of anaggregate of 912,943 shares of common stock on the open market, at an averageprice per share of $4.93, which was partially offset by $1.1 million inproceeds from the sale of common stock through the exercise of stock options byemployees.

In fiscal 2005, cashused by financing activities was $724,000, consisting of $9.6 million forthe repurchase of an aggregate of 1,901,176 shares of common stock on the openmarket, at an average price per share of $5.02, which was partially offset by$8.0 million in net proceeds from our public offering of 1,450,000 sharesof common stock in July 2004 and $843,000 in proceeds from the sale ofcommon stock through the exercise of stock options by employees.

38

----

***Common Stock Repurchase Plan***

In September 2001,our board of directors authorized a program for the open market repurchase ofup to 1.5 million shares of our common stock. In subsequent periods, ourboard of directors amended the program and authorized purchases up to anaggregate of 3.5 million shares of our common stock. Upon reaching the maximumnumber of shares authorized under this program, our board of directorsauthorized a new stock repurchase program in September 2005 to repurchaseup to 1.0 million shares of its common stock. In subsequent periods, our boardof directors amended the program and authorized the purchase of up to anaggregate of 2.0 million shares of our common stock. The purpose of these sharerepurchase programs is to reduce the long-term potential dilution in earningsper share that might result from issuances under our stock option plans. Thefollowing table summarizes the activity of the open market repurchase programfor the stated periods and does not include our repurchase of shares from ElexN.V.:

| ** **                         | ** ** | **Fiscal Years** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **Total**             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Shares  repurchased in open market |       | 3,169,914             |       | 355,795 |   | 912,943 |   | 1,901,176 |   |
| Total cost of  shares              |       | $                     | 15,309,000 |   | $ | 1,253,000 |   | $ | 4,503,000 |   | $ | 9,553,000 |   |
| Average cost per share             |       | $                     | 4.83       |   | $ | 3.52 |   | $ | 4.93 |   | $ | 5.02 |   |

 

Through April 29,2007 (excluding repurchases of shares from Elex N.V.) we have repurchased4,714,014 shares under the board of director’s authorized repurchase plans at atotal cost of $19,175,197 or an average cost per share of $4.07 per share.

***Contractual Obligations and Commercial Commitments***

Thefollowing table summarizes our contractual obligations as of April 29,2007 and the effects these obligations and commitments are expected to have onour liquidity and cash flows in future periods (in thousands):

| ** **                          | ** ** | **Fiscal Years** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | ** **            | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More Than** | ** ** |
| ** **                          | ** ** | **Total**             | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| *Contractual cash obligations*      |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases(1)                 |       | $                     | 1,776      |   |   | $ | 291 |   |   |   | $ | 1,167 |   |   |   | $ | 318 |   |   |   | $ | — |   |   |
| Wafer purchases                     |       | 5,441                 |       |   | 5,441 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other purchase commitments          |       | 469                   |       |   | 469 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total contractual  cash obligations |       | $                     | 7,686      |   |   | $ | 6,201 |   |   |   | $ | 1,167 |   |   |   | $ | 318 |   |   |   | $ | — |   |   |

----

(1)          InJuly 2006, our primary facility lease in Sunnyvale, California expired andin August 2006 we moved into a building we purchased in Santa Clara,California.

***Off-Balance Sheet Arrangements***

As part of our ongoingbusiness, we do not participate in transactions that generate relationshipswith unconsolidated entities of financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, or SPEs, whichwould have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purpose. As of April 29,2007, we were not involved in any SPE transactions.

***Future Liquidity***

We believe that ourcurrent cash, cash equivalents and available-for-sale securities will besufficient to meet our anticipated operating and capital requirements for atleast the next 12 months. We have no 

39

----

currentplans, nor are we currently negotiating, to obtain additional financing. Ourlong-term plan is to finance our core business operations with cash we generatefrom operations. However, from time to time we may raise additional capitalthrough a variety of sources, including the public equity market, privatefinancings, collaborative arrangements and debt. The additional capital weraise could be used for working capital purposes, to fund our research anddevelopment activities or our capital expenditures or to acquire complementarybusinesses or technologies. If we raise additional capital through the issuanceof equity or securities convertible into equity, our stockholders mayexperience dilution. Those securities may have rights, preferences orprivileges senior to those of the holders of the common stock. Additionalfinancing may not be available to us on favorable terms, if at all. If we areunable to obtain financing, or to obtain it on acceptable terms, we may beunable to successfully support our business requirements.

**Effects ofTransactions with Related Parties**

***Elex N.V.***

During the fourth quarter of fiscal 2000, we begantaking delivery of wafers fabricated at X-FAB Texas, Inc. (“X-FAB”)a wholly owned subsidiary of Elex N.V. (“Elex”), a Belgian holding company. RolandDuchâtelet, the Chairman and Chief Executive Officer of Elex, serves as amember of our Board of Directors. Elex initially became a related party in 1998through the purchase of 5.5 million restricted shares of our common stock.The wafers provided by X-FAB include most of our analog/mixed-signalproducts and supplement some of the same EEPROM designs fabricated at variousother foundries we utilize. Other than purchase orders currently open with X-FAB,there is no purchasing agreement in place with X-FAB. Duringfiscal 2007, fiscal 2006 and fiscal 2005, we purchased $1.2million, $2.5 million and $2.4 million of wafers, respectively, from X-FAB.As of April 29, 2007 and April 30, 2006, the total amount we owed X-FABwas $68,000 and $143,000, respectively. Elex held 4.5% of our outstandingshares as of April 29, 2007.

We believe that the termsof these transactions were no less favorable than reasonably could be expectedto be obtained from unaffiliated parties.

**Recent AccountingPronouncements**

In July 2006, the FASB issued FASB InterpretationNumber 48,*“Accounting for Uncertainty inIncome Taxes—an interpretation of FAS 109”.*This Interpretationclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,*“Accounting for Income Taxes”.*Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. The guidance will becomeeffective as of the beginning of a company’s fiscal year beginning after December 15,2006. We are currently assessing the impact, if any, of adopting this standardon our financial position, results of operations and liquidity.

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measurements”* (“SFAS No. 157”).SFAS No. 157 defines fair value, establishes a framework and givesguidance regarding the methods used for measuring fair value, and expandsdisclosures about fair value measurements. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The adoption of thisstandard is not expected to have a material impact on our consolidated financialstatements.

In February 2007, theFASB issued SFAS No. 159,*“The FairValue Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115”* (“SFAS No. 159”). SFASNo. 159 permits entities to choose to measure many financial instrumentsand certain other items at fair 

40

----

valuethat are not currently required to be measured at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings. SFAS No. 159 does not affect any existing accountingliterature that requires certain assets and liabilities to be carried at fairvalue. SFAS No. 159 is effective for fiscal years beginning after November 15,2007. We are currently assessing the impact, if any, of adopting this standardon our financial position, results of operations and liquidity.

**Item 7A.   *Quantitative and Qualitative Disclosures about Market Risk***

*InterestRate Risk.**  *Wedo not use derivative financial instruments in our investment portfolio. Ourinvestment portfolio is generally comprised of U.S. government debt securitiesand cash deposits. Our policy is to place these investments in instruments thatmeet high credit quality standards and have maturities of less than two yearswith an overall average maturity of less than one year. These securities aresubject to interest rate risk and could decline in value if interest ratesfluctuate. Due to the short duration of the securities in which we invest andthe conservative nature of our investment portfolio, a 10% change in interestrates would have an immaterial effect on our financial position, results ofoperations and cash flows.

*Foreign Currency ExchangeRate Risk.**  *Themajority of our sales, manufacturing costs, and research and development andmarketing expenses are transacted in U.S. dollars. Accordingly, our netprofitability is not currently subject to material foreign exchange ratefluctuations. Gains and losses from fluctuations in exchange rates have notbeen material to us to date.

**Item 8.**   *Financial Statements and Supplementary Data*

Our consolidated financial statements required by thisItem are set forth at the pages indicated in Part IV, Item 15(a).

Thefollowing table presents selected unaudited consolidated statements of incomedata for our eight most recently completed fiscal quarters. The information foreach of these quarters is unaudited and has been prepared on the same basis asthe audited consolidated financial statements appearing elsewhere in thisreport. In our opinion, all necessary adjustments, consisting only of normalrecurring adjustments, have been included to present fairly the unauditedquarterly results when read together with our consolidated financial statementsand related notes included elsewhere in the report. We believe that results ofoperations for interim periods should not be relied upon as any indication ofthe results to be expected or achieved in any future period or any fiscal yearas a whole.

| ** **                    | ** ** | **Three Months Ended**                                                    | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Apr. 29,  2007**                                                             | ** ** | **Jan. 28,  2007** | ** ** | **Oct. 29,  2006** | ** ** | **July 30,  2006** | ** ** | **Apr. 30,  2006** | ** ** | **Jan. 29,  2006** | ** ** | **Oct. 30,  2005** | ** ** | **July 31,  2005** | ** ** |
| ** **                    | ** ** | **(Unaudited) (In thousands, except per share data)** | ** ** |
| Net revenues                  |       | $                                                                                   | 18,398     |   | $ | 16,417 |   | $ | 16,310 |   | $ | 15,225 |   | $ | 14,187 |   | $ | 14,423 |   | $ | 16,931 |   | $ | 14,676 |   |
| Gross profit                  |       | 5,580                                                                               |       | 5,841 |   | 5,787 |   | 4,904 |   | 4,946 |   | 6,215 |   | 6,438 |   | 5,718 |   |
| Income (loss) from operations |       | (524                                                                                | )          | (61 | ) | 22 |   | (917 | ) | (283 | ) | 1,041 |   | 1,110 |   | 532 |   |
| Net income (loss)(1)          |       | $                                                                                   | (457       | ) | $ | 111 |   | $ | 176 |   | $ | (259 | ) | $ | 270 |   | $ | 864 |   | $ | 927 |   | $ | 495 |   |
| Net income (loss) per  share: |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                         |       | $                                                                                   | (0.03      | ) | $ | 0.01 |   | $ | 0.01 |   | $ | (0.02 | ) | $ | 0.02 |   | $ | 0.05 |   | $ | 0.05 |   | $ | 0.03 |   |
| Diluted                       |       | $                                                                                   | (0.03      | ) | $ | 0.01 |   | $ | 0.01 |   | $ | (0.02 | ) | $ | 0.02 |   | $ | 0.05 |   | $ | 0.05 |   | $ | 0.03 |   |

----

(1)           In the quarter ended April 30, 2006,our net income was favorably impacted by $226,000 due to the reversal ofcertain tax accruals upon expiry of a state income tax statute of limitation.

**Item 9.   *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure***

None.

41

----

**Item 9A.   *Controls and Procedures***

**Evaluation ofDisclosure Controls and Procedures**

Our management evaluated,with the participation of our Principal Executive Officer and PrincipalFinancial Officer, the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this Annual Report on Form 10-K.Based upon that evaluation, our Principal Executive Officer and PrincipalFinancial Officer concluded that our disclosure controls and procedures areeffective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934, as amended,is recorded, processed, summarized and reported within the time periodsspecified in SEC rules and forms.

**Management’s Reporton Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting. Our managementassessed the effectiveness of the company’s internal control over financialreporting as of April 29, 2007. In making this assessment, our managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission in *Internal Control—IntegratedFramework*.

Based on this assessment, our management concludedthat, as of April 29, 2007, our internal control over financial reportingwas effective.

Management’s assessment ofthe effectiveness of our internal control over financial reporting as of April 29,2007, has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report which appears herein.

**Changes in InternalControl Over Financial Reporting**

There were no changes inour internal control over financial reporting during the quarter ended April 29,2007 that have materially affected or are reasonably likely to materiallyaffect its internal control over financial reporting, as defined in Rule 13a-15(f) underthe Exchange Act.

**Item 9B.   *Other Information***

None.

42

----

**PART III**

Certain informationrequired by Part III is incorporated by reference from the Company’s 2007definitive proxy statement to be filed not later than 120 days following theclose of the 2007 fiscal year (“2007 Definitive Proxy Statement”).

**Item 10.   *Directors, Executive Officers and Corporate Governance***

Certain information regarding our executive officersrequired by this Item 10 is contained under Part 1, Item 1, “ExecutiveOfficers” and is incorporated herein by reference.

Certain information regarding our Code of BusinessConduct and Ethics required by this Item 10 is contained under Part 1,Item 1, “Website Postings” and is incorporated herein by reference.

All other informationrequired under this Item is hereby incorporated by reference from the Company’s2007 Definitive Proxy Statement.

**Item 11.   *Executive Compensation***

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2007Definitive Proxy Statement.

**Item 12.   *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters***

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2007Definitive Proxy Statement.

**Item 13.   *Certain Relationships and Related Transactions, and Director Independence***

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2007Definitive Proxy Statement.

**Item 14.   *Principal Accountant Fees and Services***

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2007Definitive Proxy Statement.

**PART IV**

**Item 15.   *Exhibits and Financial Statement Schedules***

**(a)(1)   *Financial Statements***

See Index to ConsolidatedFinancial Statements on page F-1 hereof.

**(a)(2)   *Financial Statement Schedules***

Schedule II—Valuation and Qualifying Accounts.

All other schedules areomitted because they are not required or the required information is shown inthe financial statements or notes thereto.

43

----

**(b)   *Exhibits***

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                | ** ** | **Description** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1(1)           |       | Restated Certificate of  Incorporation of Registrant.                                                                                                                                                                                                                                                                     |
| 3.2(2)           |       | Certificate of  Designation of Rights, Preferences and Privileges of Series A  Participating Preferred Stock.                                                                                                                                                                                                        |
| 3.4(3)           |       | Bylaws of  Catalyst Semiconductor, Inc., as amended and restated June 6, 2004.                                                                                                                                                                                                                                  |
| 4.1(4)           |       | Specimen Stock  Certificate.                                                                                                                                                                                                                                                                                              |
| 4.2(2)           |       | Preferred Shares  Rights Agreement, dated as of December 21, 2006 between Catalyst  Semiconductor, Inc. and Computershare Trust Company, N.A., including the  Certificate of Designation, the form of Rights Certificate and the Summary of  Rights attached thereto as Exhibits A, B and C, respectively. |
| 4.6(5)           |       | Amended and  Restated 2003 Stock Incentive Plan.                                                                                                                                                                                                                                                                          |
| 4.6.1(6)         |       | Form of  Stock Option Agreement.                                                                                                                                                                                                                                                                                     |
| 4.6.2(7)         |       | Form of  Restricted Stock Agreement.                                                                                                                                                                                                                                                                                 |
| 4.6.3(5)         |       | Form of  Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                            |
| 4.7              |       | 2003 Director  Stock Option Plan.                                                                                                                                                                                                                                                                                         |
| 4.7.1(6)         |       | Form of 2003  Director Option Plan (same as 4.6.1).                                                                                                                                                                                                                                                                  |
| 4.8(8)           |       | 1998 Special  Equity Incentive Plan.                                                                                                                                                                                                                                                                                      |
| 10.27(9)*        |       | Form of  Indemnification Agreement entered into by Registrant with each of its  directors and executive officers.                                                                                                                                                                                                    |
| 10.61(10)        |       | Common Stock  Purchase Agreement dated as of May 26, 1998 between Registrant and Elex  N.V. with Standstill Agreement dated as of May 26, 1998 between the  Registrant and Elex N.V.                                                                                                                            |
| 10.61.1(11)      |       | Common Stock  Purchase Agreement dated as of September 14, 1998 between Registrant and  Elex N.V. with Standstill Agreement dated as of September 14, 1998  between the Registrant and Elex N.V.                                                                                                                |
| 10.61.2(12)      |       | Amendment  No. 1 to Amended and Restated Standstill Agreement dated as of  April 22, 2004.                                                                                                                                                                                                                 |
| 10.61.3(12)      |       | Second Amended  and Restated Standstill Agreement dated as of June 10, 2004.                                                                                                                                                                                                                                         |
| 10.83(13)        |       | Stock Transfer  Agreement dated April 19, 2002 between Elex NV and Registrant.                                                                                                                                                                                                                                       |
| 10.84(14)*       |       | Form of  Change of Control Agreement between Registrant and its non-employee  directors.                                                                                                                                                                                                                             |
| 10.85(15)*       |       | Amended and  Restated Employment Agreement dated May 14, 2007 between Gelu Voicu and  Registrant.                                                                                                                                                                                                                    |
| 10.86(12)        |       | Stock Transfer  Agreement dated as of April 22, 2004 between the Registrant and Elex N.V.                                                                                                                                                                                                                       |
| 10.87(16)*       |       | Severance  Agreement dated October 14, 2002 between George Smarandoiu and  Registrant.                                                                                                                                                                                                                               |
| 10.88(17)        |       | Sale-Purchase  Promissory Agreement dated November 6, 2003 between Registrant and S.C.  Hathor Impex SRL.                                                                                                                                                                                                            |
| 10.91(18)        |       | Fiscal 2005 Bonus  Plan.                                                                                                                                                                                                                                                                                                  |

44

----

 

| 10.92(19)    |   | Severance Agreement  dated August 23, 2005 between Thomas Gay and Registrant.                                                                                                                    |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.93(19)    |   | Severance Agreement  dated August 23, 2005 between Sorin Georgescu and Registrant.                                                                                                               |
| 10.94(19)    |   | Severance Agreement dated August 23, 2005  between Irvin Kovalik and Registrant.                                                                                                                 |
| 10.95(19)    |   | Severance Agreement dated August 23, 2005  between George Smarandoiu and Registrant.                                                                                                             |
| 10.96(20)    |   | Fiscal 2006 Bonus  Plan.                                                                                                                                                                              |
| 10.97(21)    |   | Separation  agreement effective as of July 29, 2005 between Barry Wiley and  Registrant.                                                                                                         |
| 10.98(22)    |   | Offer Letter with  Scott Brown dated August 18, 2005.                                                                                                                                            |
| 10.99(23)    |   | Agreement of Sale  by and between 2975 Stender Associates LLC and Catalyst  Semiconductor, Inc. effective as of February 3, 2006.                                                           |
| 10.100(24)   |   | Lease Agreement  entered into on March 6, 2006 by and between Catalyst Semiconductor  International, Inc. and Stars Microelectronics.                                                       |
| 10.100.1(25) |   | Amendment  No. 1 dated October 19, 2006 to Lease Agreement by and between  Catalyst Semiconductor (Thailand) Limited and Stars Microelectronics.                                            |
| 21.1         |   | List of  Subsidiaries of Registrant.                                                                                                                                                                  |
| 23.1         |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                            |
| 24.1         |   | Power of Attorney  (included on page 39).                                                                                                                                                        |
| 31           |   | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002.                                            |
| 32           |   | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

----

(1)          Incorporated byreference to Registrant’s Registration Statement on Form 8-A/A filedwith the SEC on December 28, 2006.

(2)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on December 28, 2006.

(3)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on June 12, 2007.

(4)          Incorporated byreference to Registrant’s Registration Statement on Form 8-A/A filedwith the SEC on April 29, 1993.

(5)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on December 28, 2006.

(6)          Incorporated byreference to Registrant’s Registration Statement on Form S-8 filedwith the SEC on March 3, 2006 (File No. 333-132204).

(7)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on December 4, 2006.

(8)          Incorporated byreference to an Appendix to Registrant’s Definitive Proxy Statement previouslyfiled with the SEC on July 27, 2000.

45

----

(9)          Incorporated byreference to Registrant’s Registration Statement on Form S-1 filedwith the SEC on May 11, 1993 (File No. 33-60132), as amended.

(10)   Incorporated by reference toRegistrant’s Annual Report on Form 10-K filed with the SEC on August 19,1998.

(11) Incorporated by reference to Registrant’sQuarterly Report on Form 10-Q filed with the SEC on September 21,1998.

(12) Incorporated by reference to Registrant’sRegistration Statement on Form S-3 filed with the SEC on June 14,2004 (File No. 333-116425).

(13) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on April 30,2002.

(14) Incorporated by reference to Registrant’sAnnual Report on Form 10-K filed with the SEC on July 29, 2002.

(15) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on May 25, 2007.

(16) Incorporated by reference to Registrant’sAnnual Report on Form 10-K filed with the SEC on June 30, 2004.

(17) Incorporated by reference to Registrant’sQuarterly Report on Form 10-Q filed with the SEC on March 9,2004.

(18) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on August 5,2005.

(19) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on August 26,2005.

(20) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on September 7,2005.

(21) Incorporated by reference to Registrant’sQuarterly Report on Form 10-Q filed with the SEC on September 9,2005.

(22) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on October 11,2005.

(23) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on February 9,2006.

(24) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on March 10,2006.

(25) Incorporated by reference to Registrant’sCurrent Report on Form 8-K filed with the SEC on October 25,2006.

†                    Confidentialtreatment has been granted as to a portion of this Exhibit. Such portion hasbeen redacted and filed separately with the SEC.

*                    Constitutesa management contract or compensatory plan or arrangement required to be filedas an exhibit pursuant to Item 14(c) of Form 10-K.

46

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, Registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized, in the City of Santa Clara andState of California, on July 13, 2007.

|          | CATALYST SEMICONDUCTOR, INC. |
|----------|------------------------------|
|     | By:                          | /s/  GELU VOICU |
|     |                         | Gelu Voicu |
| * * |                         | *President,  Chief Executive Officer and Director* |

 

**POWER OF ATTORNEY**

**KNOW ALL PERSONS BY THESEPRESENTS**, that each personwhose signature appears below constitutes and appoints Gelu Voicu, as hisattorney-in-fact, with the full power of substitution, for him in any and allcapacities, to sign any amendments to this Report on Form 10-K andto file the same with exhibits thereto and other documents in connectiontherewith with the Securities and Exchange Commission, hereby ratifying andconfirming all that said attorney-in-fact, or his substitute or substitutes maydo or cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of Registrant and in thecapacities and on July 13, 2007.

| By:    |   | /s/ GELU VOICU             |     | President, Chief Executive Officer and                  |   | July 13, 2007 |
|--------|--------|----------------------------|----------|---------------------------------------------------------|--------|--------------------|
|   |   | Gelu Voicu                 | * * | Director *(Principal Executive  and Financial Officer)* |   |               |
| By:    |   | /s/ STEVE  MILLER          |     | Corporate Controller                                    |   | July 13, 2007 |
|   |   | Steve Miller               | * * | *(Principal  Accounting Officer)*                       |   |               |
| By:    |   |                       |     | Director                                                |   |               |
|   |   | Roland M.  Duchâtelet |     |                                                    |   |               |
| By:    |   | /s/  GARRETT GARRETTSON    |     | Director                                                |   | July 13, 2007 |
|   |   | Garrett  Garrettson        |     |                                                    |   |               |
| By:    |   | /s/  HENRY C. MONTGOMERY   |     | Chairman of the Board                                   |   | July 13, 2007 |
|   |   | Henry C.  Montgomery       |     |                                                    |   |               |
| By:    |   | /s/  GLEN G. POSSLEY       |     | Director                                                |   | July 13, 2007 |
|   |   | Glen G. Possley            |     |                                                    |   |               |

 

47

----

**CATALYST SEMICONDUCTOR, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                                               | ** ** | **Pages** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|
| Report  of Independent Registered Public Accounting Firm                                                                                                                      |       | F-2       |
| Consolidated Balance Sheets as of April 29, 2007  and April 30, 2006                                                                                                |       | F-4       |
| Consolidated Statements of Operations for the years  ended April 29, 2007, April 30, 2006 and May 1, 2005                                                 |       | F-5       |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Income (Loss) for the years ended April 29, 2007,  April 30, 2006 and May 1, 2005 |       | F-6       |
| Consolidated Statements of Cash Flows for the years  ended April 29, 2007, April 30, 2006 and May 1, 2005                                                 |       | F-7       |
| Notes to Consolidated Financial Statements                                                                                                                                    |       | F-8       |
| Schedule II—Valuation and Qualifying Accounts                                                                                                                            |       | F-28      |

 

F-1

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofCatalyst Semiconductor, Inc.

We have completedintegrated audits of Catalyst Semiconductor, Inc.’s consolidated financialstatements and of its internal control over financial reporting as of April 29,2007, in accordance with the standards of the Public Company AccountingOversight Board (United States). Ouropinions, based on our audits, are presented below.

***Consolidatedfinancial statements and financial statement schedule***

In our opinion, theconsolidated financial statements listed in the index appearing under Item 15(a)(1) presentfairly, in all material respects, the financial position of CatalystSemiconductor, Inc. and its subsidiaries at April 29, 2007 and April 30,2006, and the results of their operations and their cash flows for each of thethree years in the period ended April 29, 2007 in conformity withaccounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements andfinancial statement schedule are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our audits ofthese statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit of financialstatements includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

As discussed in Note 3 ofthe Notes to the Consolidated Financial Statements, the Company changed themanner in which it accounted for stock-based compensation in fiscal 2007.

***Internal control over financial reporting***

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial Reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of April 29, 2007 based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of April 29, 2007, based oncriteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all materialrespects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such other 

F-2

----

procedures as we considernecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

PricewaterhouseCoopers LLPSan Jose, CaliforniaJuly 13, 2007

F-3

----

**CATALYST SEMICONDUCTOR, INC.CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                | ** ** | **   April 29,     2007**      | ** ** | **   April 30,     2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **(In thousands,  except per share amounts)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                |       |                                                              |       |                                                         |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                           |       |                                                              |       |                                                         |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                 |       |                                                              | $          | 16,626                                                       |       |   |   | $ | 7,730 |   |   |
| Short-term investments                                                                                                                                                                                                    |       |                                                              | 12,032     |                                                         |       |   | 21,409 |   |   |
| Accounts receivable, net                                                                                                                                                                                                  |       |                                                              | 10,444     |                                                         |       |   | 9,502 |   |   |
| Inventories                                                                                                                                                                                                               |       |                                                              | 11,137     |                                                         |       |   | 14,262 |   |   |
| Deferred tax assets                                                                                                                                                                                                       |       |                                                              | 2,391      |                                                         |       |   | 2,771 |   |   |
| Other current assets                                                                                                                                                                                                      |       |                                                              | 454        |                                                         |       |   | 484 |   |   |
| Total current assets                                                                                                                                                                                                      |       |                                                              | 53,084     |                                                         |       |   | 56,158 |   |   |
| Property and equipment,  net                                                                                                                                                                                              |       |                                                              | 11,700     |                                                         |       |   | 9,408 |   |   |
| Deferred tax  assets                                                                                                                                                                                                      |       |                                                              | 4,376      |                                                         |       |   | 4,759 |   |   |
| Other assets                                                                                                                                                                                                              |       |                                                              | 52         |                                                         |       |   | 95 |   |   |
| Total assets                                                                                                                                                                                                              |       |                                                              | $          | 69,212                                                       |       |   |   | $ | 70,420 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                             |       |                                                              |       |                                                         |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                      |       |                                                              |       |                                                         |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                                          |       |                                                              | $          | 6,622                                                        |       |   |   | $ | 7,453 |   |   |
| Accounts payable—related parties                                                                                                                                                                                     |       |                                                              | 68         |                                                         |       |   | 143 |   |   |
| Accrued expenses                                                                                                                                                                                                          |       |                                                              | 2,137      |                                                         |       |   | 3,002 |   |   |
| Deferred gross profit on shipments to distributors                                                                                                                                                                        |       |                                                              | 2,130      |                                                         |       |   | 2,292 |   |   |
| Total current liabilities                                                                                                                                                                                                 |       |                                                              | 10,957     |                                                         |       |   | 12,890 |   |   |
| Commitments and  contingencies (Note 11)                                                                                                                                                                                  |       |                                                              |       |                                                         |       |   |   |   |   |
| Stockholders’  equity:                                                                                                                                                                                               |       |                                                              |       |                                                         |       |   |   |   |   |
| Preferred stock, $0.001 par value, 2,000 shares  authorized; no shares issued and outstanding                                                                                                                        |       |                                                              | —     |                                                         |       |   | — |   |   |
| Common stock, $0.001 par value, 45,000 shares  authorized; 23,131 shares issued and 16,317 shares outstanding at  April 29, 2007 and 22,808 shares issued and 16,350 shares  outstanding at April 30, 2006 |       |                                                              | 23         |                                                         |       |   | 23 |   |   |
| Additional paid-in-capital                                                                                                                                                                                                |       |                                                              | 72,834     |                                                         |       |   | 70,461 |   |   |
| Treasury stock, 6,814 shares at April 29, 2007  and 6,458 shares at April 30, 2006                                                                                                                         |       |                                                              | (27,925    | )                                                            |       |   | (26,672 | ) |   |
| Retained earnings                                                                                                                                                                                                         |       |                                                              | 13,330     |                                                         |       |   | 13,759 |   |   |
| Accumulated other comprehensive loss                                                                                                                                                                                      |       |                                                              | (7         | )                                                            |       |   | (41 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                           |       |                                                              | 58,255     |                                                         |       |   | 57,530 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                          |       |                                                              | $          | 69,212                                                       |       |   |   | $ | 70,420 |   |   |

 

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

F-4

----

**CATALYST SEMICONDUCTOR, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                   | ** ** | **Fiscal Year Ended**           | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **April 29,  2007**                  | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** |
| ** **                                   | ** ** | **(In thousands, except per share data)** | ** ** |
| Net revenues                                 |       | $                                         | 66,350     |   | $ | 60,217 |   | $ | 62,320 |   |
| Cost of revenues                             |       | 44,238                                    |       | 36,900 |   | 35,852 |   |
| Gross profit                                 |       | 22,112                                    |       | 23,317 |   | 26,468 |   |
| Operating expenses:                          |       |                                      |       |   |   |   |   |
| Research and development                     |       | 7,844                                     |       | 7,472 |   | 7,910 |   |
| Selling, general and administrative          |       | 15,748                                    |       | 13,445 |   | 13,696 |   |
| Income (loss)  from operations               |       | (1,480                                    | )          | 2,400 |   | 4,862 |   |
| Interest income  and other, net              |       | 1,339                                     |       | 1,175 |   | 732 |   |
| Income (loss)  before income taxes           |       | (141                                      | )          | 3,575 |   | 5,594 |   |
| Income tax  provision                        |       | 288                                       |       | 1,019 |   | 1,773 |   |
| Net income (loss)                            |       | $                                         | (429       | ) | $ | 2,556 |   | $ | 3,821 |   |
| Net income (loss)  per share:                |       |                                      |       |   |   |   |   |
| Basic                                        |       | $                                         | (0.03      | ) | $ | 0.15 |   | $ | 0.22 |   |
| Diluted                                      |       | $                                         | (0.03      | ) | $ | 0.14 |   | $ | 0.20 |   |
| Weighted average  common shares outstanding: |       |                                      |       |   |   |   |   |
| Basic                                        |       | 16,341                                    |       | 16,685 |   | 17,507 |   |
| Diluted                                      |       | 16,341                                    |       | 18,220 |   | 19,485 |   |

 

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

F-5

----

**CATALYST SEMICONDUCTOR, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

| ** **                                          | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | **Retained**     | ** ** | **Accumulated**        | ** ** | ** **             | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|--------------|------------|------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | **Earnings** | ** ** | **Other**        | ** ** | **Total**              | ** ** |
| ** **                                          | ** ** | **Shares**            | ** ** | **Par**        | ** ** | **Paid-In** | ** ** | **Treasury** | ** ** | **(Accumulated** | ** ** | **Comprehensive**      | ** ** | **Stockholders’** | ** ** |
| ** **                                          | ** ** | **Outstanding**       | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Stock**    | ** ** | **Deficit)**     | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
| ** **                                          | ** ** | **(In thousands)**    | ** ** |
| Balance at May 2, 2004                         |       |                  | 16,413     |           |       |        | $          | 20           |       |             |       | $                      | 59,228     |                   |       | $ | (12,616 | ) |   | $ | 7,382 |   |   |   | $ | (26 | ) |   |   | $ | 53,988 |   |   |
| Exercise of stock options                           |       |                  | 628        |           |       |        | 1          |         |       |             | 842        |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 843 |   |   |
| Purchase of stock for treasury                      |       |                  | (1,901     | )              |       |        | —     |         |       |             | —     |                   |       | (9,553                 | )          |   | — |   |   |   | — |   |   |   | (9,553 | ) |   |
| Tax benefits of stock options                       |       |                  | —     |           |       |        | —     |         |       |             | 817        |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 817 |   |   |
| Secondary public offering of common stock           |       |                  | 1,450      |           |       |        | 1          |         |       |             | 7,985      |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 7,986 |   |   |
| Unrealized losses on investments, net of taxes |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | — |   |   |   | (34 | ) |   |   | — |   |   |
| Net income                                          |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | 3,821 |   |   |   | — |   |   |   | — |   |   |
| Comprehensive income                                |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 3,787 |   |   |
| Balance at May 1, 2005                         |       |                  | 16,590     |           |       |        | 22         |         |       |             | 68,872     |                   |       | (22,169                | )          |   | 11,203 |   |   |   | (60 | ) |   |   | 57,868 |   |   |
| Exercise of stock options                           |       |                  | 673        |           |       |        | 1          |         |       |             | 1,084      |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 1,085 |   |   |
| Purchase of stock for treasury                      |       |                  | (913       | )              |       |        | —     |         |       |             | —     |                   |       | (4,503                 | )          |   | — |   |   |   | — |   |   |   | (4,503 | ) |   |
| Tax benefits of stock options                       |       |                  | —     |           |       |        | —     |         |       |             | 505        |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 505 |   |   |
| Unrealized gains on investments, net of taxes  |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | — |   |   |   | 19 |   |   |   | — |   |   |
| Net income                                          |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | 2,556 |   |   |   | — |   |   |   | — |   |   |
| Comprehensive income                                |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 2,575 |   |   |
| Balance at April 30,  2006                     |       |                  | 16,350     |           |       |        | 23         |         |       |             | 70,461     |                   |       | (26,672                | )          |   | 13,759 |   |   |   | (41 | ) |   |   | 57,530 |   |   |
| Stock-based  compensation                           |       |                  | —     |           |       |        | —     |         |       |             | 2,194      |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 2,194 |   |   |
| Exercise of stock options                           |       |                  | 98         |           |       |        | —     |         |       |             | 112        |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 112 |   |   |
| Issuance of restricted  stock                       |       |                  | 225        |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Purchase of stock for treasury                      |       |                  | (356       | )              |       |        | —     |         |       |             | —     |                   |       | (1,253                 | )          |   | — |   |   |   | — |   |   |   | (1,253 | ) |   |
| Tax benefits of stock options                       |       |                  | —     |           |       |        | —     |         |       |             | 67         |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | 67 |   |   |
| Unrealized gains on investments, net of taxes  |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | — |   |   |   | 34 |   |   |   | — |   |   |
| Net income (loss)                                   |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | (429 | ) |   |   | — |   |   |   | — |   |   |
| Comprehensive loss                                  |       |                  | —     |           |       |        | —     |         |       |             | —     |                   |       | —                 |       |   | — |   |   |   | — |   |   |   | (395 | ) |   |
| Balance at  April 29,  2007                    |       |                  | 16,317     |           |       |        | $          | 23           |       |             |       | $                      | 72,834     |                   |       | $ | (27,925 | ) |   | $ | 13,330 |   |   |   | $ | (7 | ) |   |   | $ | 58,255 |   |   |

 

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

F-6

----

**CATALYST SEMICONDUCTOR, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**
|                                                                                           | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **April 29, 2007**    | ** ** | **April 30, 2006** | ** ** | **May 1, 2005** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**         | ** ** |
| **Cash flows from operating  activities:**                                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                         |       |                            | $          | (429 | ) |   |   | $ | 2,556 |   |   |   | $ | 3,821 |   |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization of property and  equipment                                  |       |                            | 1,969      |   |   |   | 1,891 |   |   |   | 1,621 |   |   |
| Stock-based compensation                                                                  |       |                            | 2,194      |   |   |   | — |   |   |   | — |   |   |
| Benefit from sale of inventory previously written  down                                   |       |                            | (575       | ) |   |   | (794 | ) |   |   | (1,002 | ) |   |
| Provision for excess and obsolete inventory                                               |       |                            | 2,175      |   |   |   | 1,026 |   |   |   | 1,085 |   |   |
| Loss on disposal of property and equipment                                                |       |                            | —     |   |   |   | 11 |   |   |   | 257 |   |   |
| Tax benefits of options                                                                   |       |                            | —     |   |   |   | 505 |   |   |   | 817 |   |   |
| Changes in deferred tax assets                                                            |       |                            | 763        |   |   |   | 786 |   |   |   | 806 |   |   |
| Changes in assets  and liabilities:                                                       |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                       |       |                            | (942       | ) |   |   | 464 |   |   |   | 2,581 |   |   |
| Inventories                                                                               |       |                            | 1,525      |   |   |   | (3,039 | ) |   |   | (4,578 | ) |   |
| Other assets                                                                              |       |                            | 73         |   |   |   | 370 |   |   |   | 144 |   |   |
| Accounts payable (including related parties)                                              |       |                            | (906       | ) |   |   | 1,527 |   |   |   | 1,053 |   |   |
| Accrued expenses                                                                          |       |                            | (865       | ) |   |   | (1,243 | ) |   |   | 463 |   |   |
| Deferred gross profit on shipments to distributors                                        |       |                            | (162       | ) |   |   | 413 |   |   |   | (2,200 | ) |   |
| Net cash provided by operating activities                                                 |       |                            | 4,820      |   |   |   | 4,473 |   |   |   | 4,868 |   |   |
| **Cash  flows from investing activities:**                                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Purchases of short-term investments                                                       |       |                            | (30,132    | ) |   |   | (24,114 | ) |   |   | (47,292 | ) |   |
| Proceeds from sales and maturities of short-term  investments                             |       |                            | 39,543     |   |   |   | 25,539 |   |   |   | 41,007 |   |   |
| Acquisition of property and equipment                                                     |       |                            | (4,261     | ) |   |   | (5,728 | ) |   |   | (4,126 | ) |   |
| Net cash provided by (used in) investing activities                                       |       |                            | 5,150      |   |   |   | (4,303 | ) |   |   | (10,411 | ) |   |
| **Cash  flows from financing activities:**                                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Common stock issuances                                                                    |       |                            | 112        |   |   |   | 1,085 |   |   |   | 843 |   |   |
| Net proceeds from secondary public offering                                               |       |                            | —     |   |   |   | — |   |   |   | 7,986 |   |   |
| Tax benefits of options                                                                   |       |                            | 67         |   |   |   | — |   |   |   | — |   |   |
| Treasury stock purchases                                                                  |       |                            | (1,253     | ) |   |   | (4,503 | ) |   |   | (9,553 | ) |   |
| Net cash used in financing activities                                                     |       |                            | (1,074     | ) |   |   | (3,418 | ) |   |   | (724 | ) |   |
| Net increase (decrease) in cash and cash equivalents                                      |       |                            | 8,896      |   |   |   | (3,248 | ) |   |   | (6,267 | ) |   |
| Cash and cash  equivalents at beginning of the period                                     |       |                            | 7,730      |   |   |   | 10,978 |   |   |   | 17,245 |   |   |
| Cash and cash  equivalents at end of the period                                           |       |                            | $          | 16,626 |   |   |   | $ | 7,730 |   |   |   | $ | 10,978 |   |   |
| Supplemental cash  flow disclosures:                                                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Cash paid during  the year for:                                                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Income taxes                                                                              |       |                            | $          | 66 |   |   |   | $ | 43 |   |   |   | $ | 100 |   |   |

 

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

F-7

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1—TheCompany and Basis of Presentation**

Catalyst Semiconductor, Inc. (the “Company”), wasfounded in October 1985, and designs, develops and markets a broad line ofreprogrammable non-volatile memory and analog/mixed-signal products.

The Company’s fiscal yearends on the Sunday closest to April 30. Fiscal 2007, 2006 and 2005 endedon April 29, 2007, April 30, 2006 and May 1, 2005, respectively.Fiscal 2007, 2006 and 2005 were comprised of 52 weeks.

***Principles of Consolidation***

The consolidated financialstatements include the accounts of Catalyst Semiconductor, Inc. and itswholly owned subsidiaries. All significant intercompany accounts andtransactions are eliminated in consolidation.

***Uses of Estimates***

The preparation of financial statements in conformitywith U.S. GAAP requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Estimates in these financial statements include inventory valuation,stock-based compensation, deferral of gross profit on shipments of inventorynot sold by the distributors at the end of the period, reserves for stockrotation on sales to distributors, the original equipment manufacturers (“OEMs”)sales return reserve, reserve for warranty costs, allowances for doubtfulaccounts receivable and income taxes. Actual results could differ from thoseestimates.

The Company’s fiscal 2007operating results were favorably impacted by the reversal in selling, generaland administrative costs of an allowance of approximately $270,000 ($174,000net of tax) that was not considered necessary. The favorable impact of thisadjustment was offset by a charge of $136,000 recorded by us in our provisionfor income taxes for a write off resulting from the reconciliation of ourtemporary differences relating to book versus tax depreciation for fixed assets.The net impact of these adjustments was a net decrease in net loss of $38,000(or $0.00 per share).

**Note 2—SignificantAccounting Policies**

***Cash and Cash Equivalents***

All highly liquidinvestments purchased with a remaining maturity of 90 days or less areconsidered cash equivalents.

***Short-term Investments***

All of the Company’sshort-term investments are classified as available-for-sale. Investments inavailable-for-sale securities are reported at fair value with unrealized gainsand losses, being recorded net of related tax, as a component of accumulatedother comprehensive income (loss). Refer to Note 5 for details related toavailable-for-sale securities.

F-8

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Accounts Receivable***

The Company’s accountsreceivable are reported net of an allowance for doubtful accounts. The Companyestimates the collectibility of its accounts receivable at the end of eachreporting period. The Company analyzes the aging of accounts receivable and baddebt history, payment history, customer concentration, customer creditworthiness and current economic trends when evaluating the adequacy of theallowance for doubtful accounts. The Company maintains an allowance fordoubtful accounts, which is created by charges to selling, general andadministrative expenses in the condensed consolidated statements of operations.

***Fair Value of Financial Instruments***

The Company measures itsfinancial assets and liabilities in accordance with U.S. GAAP. For financial instruments,including cash and cash equivalents, short-term investments, accountsreceivable, accounts payable and accrued expenses, the carrying amountsapproximate fair value due to their short maturities.

***Foreign Currency Translation***

The Company uses the U.S.dollar as its functional currency. All of the Company’s sales and a substantialmajority of its costs are transacted in U.S. dollars. The Company purchaseswafers and has test and assembly activities in Asia and supports sales andmarketing activities in various countries outside of the United States. Most ofthese costs are paid for with U.S. dollars. Research and development personnelcosts in Romania are tracked against the euro while all other activities arepaid in Romanian leu. Sales and marketing activities in Japan are paid inJapanese yen. Foreign currency transaction gains and losses, resulting fromremeasuring local currency to the U.S. dollar, are included in determining netincome (loss) for the period. The foreign exchange gains and losses were notmaterial for the periods presented.

***Revenue Recognition***

The Company generally recognizes revenues as productsare shipped if evidence of an arrangement exists, the customer has taken titleto the products, services, if any, have been rendered, the sales price is fixedor determinable, collection of the resulting receivable is reasonably assuredand product returns are reasonably estimable.

The Company markets and sells its products through itsdirect sales force and sales representatives to OEMs and indirectly throughdistributors and resellers who sell to their end customers. Revenues arerecognized upon delivery to OEMs and resellers who have no, or limited, productreturn rights and no price protection rights. Reserves for estimated returns andallowances are provided against net revenues at the time of recognition ofrevenues. The Company also sells products to certain distributors underagreements that provide for product return and price protection rights. Theseagreements generally permit the distributor to return up to 10% by value of thetotal products they purchased from the Company every six months. As a result,the Company defers recognition of revenues until the time the distributor sellsthe product to an end-customer, at which time the sales price becomes fixed. Uponshipment to a distributor, the Company records an account receivable from thedistributor, relieves inventory for the cost of the product shipped, andrecords the gross profit, which equals revenues less the cost of revenues, onthe consolidated balance sheet as “deferred gross profit on shipments todistributors” until such time as the inventory is resold by the distributor toits end-customers.

F-9

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In assessing the timing ofrevenue recognition from sales to distributors and resellers, we consider bothdirect and indirect risks of returns and price protection associated in our business dealings with them. We recognize that wemay accept returns or grant price protection to certain resellers, even thoughthe sales contracts do not explicitly provide for such rights. Accordingly, we account for sales to such resellers ona sell through basis.

***Inventories***

Inventories are stated atthe lower of standard cost or net realizable value. Standard cost approximatesactual cost on a first-in, first-out basis. The Company periodically reviewsits inventory for slow moving or obsolete items and writes down the relatedproducts to estimated net realizable value. Inventory writedown or provisionsonce established are not reversed until the related inventory has been sold orphysically scrapped. Purchases of inventory from two of the Company’s vendorsrepresented 44.0% and 43.1%, respectively of total purchases of inventory forfiscal 2007 and 2006.

***Shipping and Handling Costs***

The Company chargesinbound freight shipments within the supply chain and associated handling coststo the “cost of revenues” on its condensed consolidated statements ofoperations. The Company charges outbound freight shipments and associatedhandling costs to “selling, general and administrative” on its condensedconsolidated statements of operations. Such outbound freight costs aggregatedto $654,000, $658,000 and $516,000 in fiscal 2007, fiscal 2006 andfiscal 2005, respectively.

***Property and Equipment***

Property and equipment arestated at cost less accumulated depreciation and amortization. Depreciation iscalculated on a straight-line basis over the estimated useful lives of theassets. Furniture, office equipment and engineering/test equipment aredepreciated over five years with the exception of production mask sets whichare depreciated over two years. Computer hardware is depreciated over threeyears. Computer software is depreciated over three or five years. Buildings aregenerally depreciated over 30 years. Amortization of leasehold improvements iscomputed on a straight-line basis and amortized over the shorter of theremaining lease term or the estimated useful lives of the assets.

***Income Taxes***

The provision for income taxes is determined using theasset and liability approach of accounting for income taxes. Under thisapproach, deferred taxes represent the future tax consequences expected tooccur when the reported amounts of assets and liabilities are recovered or paid.The provision for income taxes represents income taxes paid or payable for thecurrent year plus the change in deferred taxes during the year. Deferred taxesresult from differences between the financial and tax basis of our assets andliabilities and are adjusted for changes in tax rates and tax laws when changesare enacted. Valuation allowances are recorded to reduce deferred tax assetswhen it is more likely than not that a tax benefit will not be realized.

We have not provided for U.S. income taxes and foreignwithholding taxes on a cumulative total of approximately $271,000 ofundistributed earnings for certain non-U.S. subsidiaries as of April 29,2007. We intend to reinvest these earnings indefinitely in operations outsidethe United States. These earnings include 100% of the accumulated undistributedearnings of our Japan and Romanian subsidiary.

F-10

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The calculation of taxliabilities involves dealing with uncertainties in the application of complexglobal tax regulations. The Company recognizes potential liabilities foranticipated tax audit issues in the U.S. and other tax jurisdictions based onits estimate of whether, and the extent to which, additional taxes will be due.If payment of these amounts ultimately proves to be unnecessary, the reversalof the liabilities would result in tax benefits being recognized in the periodwhen the Company determines the liabilities are no longer necessary. If theestimate of tax liabilities proves to be less than the ultimate assessment, afurther charge to expense would result.

***Concentration of Credit Risk***

Financial instruments, which potentially subject theCompany to concentrations of credit risk, consist principally of cash and cashequivalents, short-term investments and accounts receivable. Cash and cashequivalents and short-term investments are maintained with high qualityfinancial institutions. The Company’s accounts receivable are denominated inU.S. dollars and are derived from sales to customers located principally inNorth America, Europe and Asia. The Company performs ongoing credit evaluationsof its customers and generally does not require collateral.

As of April 29, 2007,one customer accounted for approximately 15.0% of gross accounts receivable. Asof April 30, 2006 no single customer accounted for greater than 10% ofgross accounts receivable.

***Concentration of Other Risks***

The semiconductor industryis characterized by rapid technological change, competitive pricing pressuresand cyclical market patterns. The Company’s financial results are affected by awide variety of factors, including general economic conditions worldwide,economic conditions specific to the semiconductor industry, the timelyimplementation of new manufacturing process technologies and the ability tosafeguard patents and intellectual property in a rapidly evolving market. Inaddition, the semiconductor market has historically been cyclical and subjectto significant economic downturns at various times. As a result, the Companymay experience significant period to period fluctuations in operating resultsdue to the factors mentioned above or other factors.

***Advertising Costs***

Costs related toadvertising and promotional expenditures are charged to “selling, general andadministrative” on the Company’s consolidated statements of operations. Suchadvertising and promotional expenditures were less than $175,000 for each offiscal 2007, fiscal 2006 and fiscal 2005.

***Accumulated Other Comprehensive Income (Loss)***

Accumulated othercomprehensive income (loss) includes all changes in stockholders’ equity duringa period from non-owner sources. Accumulated other comprehensive income (loss)for the Company is comprised of unrealized gains (losses) on securitiesavailable-for-sale, net of tax.

***Stock-Based Compensation***

The Company accounts forstock-based compensation under the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123 (revised 2004), “*Share-Based Payment,”*(“SFAS No. 123(R)”) and relatedinterpretations which requires the measurement and recognition of expenserelated to the fair value of stock-based compensation awards. Accordingly,stock-based compensation is measured at the 

F-11

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

grantdate and re-measured upon modification, as appropriate, based on the fair valueof the award using the Black-Scholes option pricing model (“Black-Scholes”),and is recognized as expense over the requisite services period of the award. Black-Scholesrequires the use of highly subjective, complex assumptions, including expectedterm and the price volatility of the Company’s stock.

***Segment Reporting***

The Company reports inaccordance with Statement of Financial Accounting Standards No. 131,*“Disclosures about Segments of an Enterprise andRelated Information”* (“SFAS No. 131”). SFAS No. 131requires the management approach in identifying reportable segments. Themanagement approach designates the internal organization that is used bymanagement for making operating decisions and assessing performance as thesource of the company’s reportable segments. Based on its operating structureand management reporting, the Company has concluded it has one reportingsegment: the semiconductor manufacturing segment.

***Reclassifications***

Certain prior yearbalances have been reclassified to conform to current year presentations. Thesereclassifications had no impact on total assets, income (loss) from operationsor net income (loss).

***Recently Issued Accounting Standards***

In July 2006, the FASB issued FASB InterpretationNumber 48,*“Accounting for Uncertainty inIncome Taxes—an interpretation of FAS 109”.*This Interpretationclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,*“Accounting for Income Taxes”.*Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. The guidance will becomeeffective as of the beginning of a company’s fiscal year beginning after December 15,2006. The Company is currently assessing the impact, if any, of adopting thisstandard on the Company’s financial position, results of operations andliquidity.

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measurements”* (“SFAS No. 157”).SFAS No. 157 defines fair value, establishes a framework and givesguidance regarding the methods used for measuring fair value, and expandsdisclosures about fair value measurements. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The adoption of thisstandard is not expected to have a material impact on the consolidatedfinancial statements.

In February 2007, theFASB issued SFAS No. 159,*“The FairValue Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115”* (“SFAS No. 159”). SFASNo. 159 permits entities to choose to measure many financial instrumentsand certain other items at fair value that are not currently required to bemeasured at fair value. Unrealized gains and losses on items for which the fairvalue option has been elected are reported in earnings. SFAS No. 159 doesnot affect any existing accounting literature that requires certain assets andliabilities to be carried at fair value. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. The Company is currentlyassessing 

F-12

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

theimpact, if any, of adopting this standard on the Company’s financial position,results of operations and liquidity.

**Note 3—Stock-BasedCompensation**

Effective May 1,2006, the Company adopted the provisions of SFAS No. 123 (revised 2004),*“Share-Based Payment*s*”* (“SFAS No. 123(R)”). SFAS No. 123(R) establishesaccounting for stock-based awards exchanged for employee services. Accordingly,stock-based compensation cost is measured at the grant date, based on the fairvalue of the awards, and is recognized as expense over the requisite employeeservice period.

***Prior to the adoption of SFAS No. 123(R)***

Prior to the adoption of SFAS No. 123(R), theCompany applied APB Opinion No. 25,*Accounting for Stock Issued to Employees* (“APB No. 25”), andrelated interpretations to account for stock-based employee compensation plans.As such, compensation expense was recorded if, on the date of grant, thecurrent fair value per share of the underlying stock exceeded the exerciseprice per share. The Company provided the disclosures required under SFAS No. 123,*“Accounting for Stock-Based Compensation”*(“SFAS No. 123”), as amended by SFAS No. 148,*“Accounting for Stock-Based Compensation—Transitionand Disclosures*”, in periodic reports.

Thepro forma information required under SFAS No. 123(R) for periodsprior to fiscal 2007, as if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to awards granted under equity incentive plans,was as follows for fiscal 2006 and 2005 (in thousands, except per shareamounts):

| ** **                                                                                                                                                                                | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **April 30, 2006**    | ** ** | **May 1, 2005** | ** ** |
| Reported net  income                                                                                                                                                                      |       |                            | $          | 2,556 |   |   |   | $ | 3,821 |   |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of tax                                                                                               |       |                            | —     |   |   |   | — |   |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of taxes of $261,000 and $316,000 in fiscal 2006  and 2005, respectively |       |                            | (2,026     | ) |   |   | (2,085 | ) |   |
| As adjusted net  income                                                                                                                                                                   |       |                            | $          | 530 |   |   |   | $ | 1,736 |   |   |
| As adjusted net income per share:                                                                                                                                                         |       |                            |       |   |   |   |   |   |   |
| Basic                                                                                                                                                                                     |       |                            | $          | 0.03 |   |   |   | $ | 0.10 |   |   |
| Diluted                                                                                                                                                                                   |       |                            | $          | 0.03 |   |   |   | $ | 0.09 |   |   |
| Reported net income per share:                                                                                                                                                            |       |                            |       |   |   |   |   |   |   |
| Basic                                                                                                                                                                                     |       |                            | $          | 0.15 |   |   |   | $ | 0.22 |   |   |
| Diluted                                                                                                                                                                                   |       |                            | $          | 0.14 |   |   |   | $ | 0.20 |   |   |

 

F-13

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Impact of the adoption of SFAS No. 123(R)***

The Company elected toadopt the modified prospective application method beginning May 1, 2006 asprovided by SFAS No. 123(R). Accordingly, during fiscal 2007, theCompany recorded stock-based compensation expense equal to the amount thatwould have been recognized if the fair value method required for pro formadisclosure under SFAS No. 123 had been in effect for expenserecognition purposes, adjusted for estimated forfeitures, and stock-basedcompensation expense for the fair value of options granted or modified duringfiscal 2007, net of forfeitures as calculated under SFAS No. 123(R). TheCompany recognized stock-based compensation expense using the straight-lineattribution method. Previously reported amounts have not been restated. Theeffect of recording stock-based compensation for fiscal 2007 was as follows (inthousands, except per share amounts):

| ** **                                     | ** ** | **Fiscal 2007** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| Stock-based compensation  expense:             |       |                 |       |   |   |
| Employee stock options                         |       |                 | $          | 2,096 |   |   |
| Restricted stock                               |       |                 | 98         |   |   |
| Total stock-based compensation expense         |       |                 | 2,194      |   |   |
| Tax effect of stock-based compensation         |       |                 | (471       | ) |   |
| Net effect on net income                       |       |                 | $          | 1,723 |   |   |
| Stock-based  compensation expense by category: |       |                 |       |   |   |
| Cost of revenues                               |       |                 | $          | 58 |   |   |
| Research and development                       |       |                 | 761        |   |   |
| General and administrative                     |       |                 | 1,375      |   |   |
|                                           |       |                 | $          | 2,194 |   |   |
| Effect on net income per share:                |       |                 |       |   |   |
| Basic                                          |       |                 | $          | 0.11 |   |   |
| Diluted                                        |       |                 | $          | 0.11 |   |   |

 

Prior to adopting SFAS No. 123(R), the Companypresented all tax benefits resulting from the exercise of stock options asoperating cash flows in the condensed consolidated statement of cash flows. However,as required by the adoption of SFAS No. 123(R) beginning May 1,2006, the Company began classifying cash flows resulting from excess taxbenefits as a part of cash flows from financing activities. Excess tax benefitsare realized tax benefits from tax deductions for exercised options in excessof the deferred tax asset attributable to stock-based compensation for suchoptions. The change in classification on the condensed consolidated statementof cash flows was not material because minimal stock options were exercisedduring fiscal 2007.

As of May 1, 2006, the Company had unearnedstock-based compensation related to stock options of $4.7 million before theimpact of estimated forfeitures. In the pro forma footnote disclosures prior tothe adoption of SFAS No. 123(R), the Company accounted for forfeituresupon occurrence. SFAS No. 123(R) requires forfeitures to be estimatedat the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

F-14

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

During fiscal 2007, the Company granted approximately1,542,000 stock options with an estimated total grant date fair value of $1.9million and a weighted average grant date fair value of $1.25 per option. Duringfiscal 2007, the Company recorded stock-based compensation expense related tostock options of $2,096,000.

During fiscal 2007, the Company granted 225,000 sharesof restricted stock with a total grant date fair value of $732,000 and aweighted average grant date fair value of $3.25 per share. The restricted stockvests over a period of three years with 1/3 of the grant vesting at the end ofeach year. There were no shares of restricted stock outstanding at thebeginning of the year. During fiscal 2007, the Company recorded stock-basedcompensation expense related to restricted stock of $98,000. Through fiscal2007, no shares vested or forfeited. As of April 29, 2007, there were225,000 unvested shares of restricted stock.

As of April 29, 2007, the aggregate amount ofunearned stock-based compensation expense, net of estimated forfeitures,related to stock options was $3.2 million, which the Company will recognizeover an estimated weighted average amortization period of 2.6 years.

As of April 29, 2007, the aggregate amount ofunearned stock-based compensation expense, net of estimated forfeitures,related to restricted stock was $587,000, which the Company will recognize overan estimated weighted average amortization period of 2.6 years.

Stock-based compensationexpense capitalized in inventory at April 29, 2007 was not material.

***Valuation Assumptions***

Duringfiscal 2007, fiscal 2006 and fiscal 2005, the Company continued to utilize theBlack-Scholes model for calculating the estimated fair value of stock-basedcompensation awards granted under the Company’s stock option plans. Theexpected term and volatility estimates are based on the Company’s historicalexperience. The fair value of stock options granted under the Company’s stockoption plans were estimated at the date of grant using a straight-line attributionmethod with the following weighted average assumptions:

| ** **                | ** ** | **Fiscal Year Ended**        | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **April 29, 2007**           | ** ** | **April 30, 2006** | ** ** | **May 1, 2005** | ** ** |
| ** **                | ** ** | **Directors   and Officers** | ** ** | **Other   Employees** | ** ** | **All Employees** | ** ** | **All Employees** | ** ** |
| Expected life (in  years) |       |                                   | 3.1        |   |   |   | 2.9 |   |   |   | 3.8 |   |   |   | 4.0 - 5.3 |   |   |
| Risk-free  interest rate  |       |                                   | 4.74       | % |   |   | 4.74 | % |   |   | 4.74 | % |   |   | 3.90 | % |   |
| Volatility                |       |                                   | 40.2       | % |   |   | 39.2 | % |   |   | 48 | % |   |   | 66%-68 | % |   |
| Dividend yield            |       |                                   | —     | % |   |   | — | % |   |   | — | % |   |   | — | % |   |

 

F-15

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Equity Incentive Programs:***

***Overview***

The Company considers equity compensation to be longterm compensation and an integral component of efforts to attract and retainexceptional executives, senior management and world-class employees. TheCompany believes that properly structured equity compensation aligns thelong-term interests of stockholders and employees by creating a strong, directlink between employee compensation and stock appreciation, as stock options areonly valuable to the Company’s employees if the value of the Company’s commonstock increases after the date of grant.

The Company’s board ofdirectors has approved a common stock repurchase program that is describedbelow.

***2003 Stock Incentive Plan***

In October 1989, the Company adopted a founder stockplan for incentive stock options and non-statutory stock options. The founderstock plan was amended and restated in March 1993 as the Stock OptionPlan, which had the effect of extending its expiration date to March 2003.In January 1999 and September 2000, the stockholders authorized anadditional 1.8 million shares and 2.5 million shares, respectively,to be reserved under the 1993 Stock Option Plan (the “1993 Plan”). In December 2002,the stockholders approved an amendment and restatement of the 1993 Plan,renaming it the 2003 Stock Incentive Plan (“SIP”), extending its expirationdate to November 2012, authorized an additional 1.0 million shares and aprovision to automatically authorize annual additions to the plan on the firstday of each fiscal year of 1.0 million shares or 5% of the thenoutstanding shares, whichever is less. A total of 7.4 million shares of commonstock have been reserved for issuance under the SIP. The SIP allows for theissuance of incentive and non-statutory stock options, restricted stock,restricted stock units and stock appreciation rights. Options granted under theSIP are for periods not to exceed 10 years. Incentive stock option andnon-statutory stock option grants under the SIP generally must be at pricesequal to 100% of the fair market value of the stock at the date of grant. Optionsgenerally vest over four years. Restricted stock units represent the right toreceive shares of common stock in the future, with the right to future deliveryof the shares subject to a risk of forfeiture or other restrictions that willlapse upon satisfaction of specified conditions.

On November 28, 2006,the compensation committee of the board of directors approved the grant ofrestricted stock to certain executive officers of the Company pursuant to theCompany’s SIP. The grant of the restricted stock to each of the executiveofficers vest over a period of three years with 1/3 of the grant vesting at theend of each year.

***2003 Director Stock Option Plan***

During 1993, the Companyadopted the 1993 Director Stock Option Plan (the “1993 Director SOP”), whichprovides for the grant of non-statutory stock options to non-employee directors.In November 1999 and September 2000, the stockholders authorized anadditional 100,000 and 450,000 shares, respectively, to be reserved under the1993 Director SOP. In December 2002, the stockholders approved anamendment and restatement of the 1993 Director SOP, renaming it the 2003Director Stock Option Plan (the “2003 Director SOP”) and extending its expirationdate to November 2012. A total of 770,000 shares of common stock have beenreserved for issuance under the 2003 Director SOP. Options granted under the2003 Director SOP prior to May 1, 2000 were for periods not to exceed fiveyears and not to exceed a period of 

F-16

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

10 yearsfor grants made thereafter. Option grants under the 2003 Director SOP must beat prices equal to 100% of the fair market value of the stock at the date ofgrant. Options granted prior to December 2002 vested over a period ofthree years. Options granted beginning in December 2002 vest immediatelyas of the date of the grant.

***1998 Special Equity Incentive Plan***

In December 1998, the Company adopted anadditional stock option plan entitled the 1998 Special Equity Incentive Plan (“SEIP”)for incentive stock options and non-statutory stock options for certaindirectors, officers and consultants of the Company. A total of 3.5 millionshares of common stock have been reserved for issuance under the SEIP. Optionsgranted under the SEIP are for periods not to exceed 10 years. Optionsgenerally vest over four years.

Asummary of stock option and restricted stock activity under the SIP, the 2003Director SOP and the SEIP is as follows (in thousands, except per shareamounts):

| ** **                                  | ** ** | **Shares  Available  for Grant** | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in  years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Balances, May 2, 2004                  |       |                                  | 871        |                     |       |                                                   | 5,718      |                                                                 |       |                            | $          | 3.58 |   |   |   |   |   |   |   |   |   |   |
| Additional shares  authorized               |       |                                  | 821        |                     |       |                                                   | —     |                                                                 |       |                            | —     |   |   |   |   |   |   |   |   |   |   |
| Granted—stock  options                 |       |                                  | (1,363     | )                        |       |                                                   | 1,363      |                                                                 |       |                            | 4.69       |   |   |   |   |   |   |   |   |   |   |
| Exercised                                   |       |                                  | —     |                     |       |                                                   | (628       | )                                                                    |       |                            | 1.35       |   |   |   |   |   |   |   |   |   |   |
| Cancelled                                   |       |                                  | 86         |                     |       |                                                   | (86        | )                                                                    |       |                            | 4.44       |   |   |   |   |   |   |   |   |   |   |
| Expired                                     |       |                                  | 40         |                     |       |                                                   | (40        | )                                                                    |       |                            | 4.96       |   |   |   |   |   |   |   |   |   |   |
| Balances, May 2, 2005                  |       |                                  | 455        |                     |       |                                                   | 6,327      |                                                                 |       |                            | 4.02       |   |   |   |   |   |   |   |   |   |   |
| Additional shares  authorized               |       |                                  | 829        |                     |       |                                                   | —     |                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Granted—stock  options                 |       |                                  | (568       | )                        |       |                                                   | 568        |                                                                 |       |                            | 4.75       |   |   |   |   |   |   |   |   |   |   |
| Exercised                                   |       |                                  | —     |                     |       |                                                   | (673       | )                                                                    |       |                            | 1.61       |   |   |   |   |   |   |   |   |   |   |
| Cancelled                                   |       |                                  | 327        |                     |       |                                                   | (327       | )                                                                    |       |                            | 4.90       |   |   |   |   |   |   |   |   |   |   |
| Expired                                     |       |                                  | 233        |                     |       |                                                   | (233       | )                                                                    |       |                            | 6.66       |   |   |   |   |   |   |   |   |   |   |
| Balances, May 1, 2006                  |       |                                  | 1,276      |                     |       |                                                   | 5,662      |                                                                 |       |                            | 4.22       |   |   |   |   |   |   |   |   |   |   |
| Granted—stock  options                 |       |                                  | (1,542     | )                        |       |                                                   | 1,542      |                                                                 |       |                            | 3.40       |   |   |   |   |   |   |   |   |   |   |
| Granted—restricted  stock              |       |                                  | (225       | )                        |       |                                                   |       |                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Exercised                                   |       |                                  | —     |                     |       |                                                   | (98        | )                                                                    |       |                            | 1.15       |   |   |   |   |   |   |   |   |   |   |
| Cancelled                                   |       |                                  | 1,613      |                     |       |                                                   | (1,613     | )                                                                    |       |                            | 6.37       |   |   |   |   |   |   |   |   |   |   |
| Expired                                     |       |                                  | 108        |                     |       |                                                   | (108       | )                                                                    |       |                            | 4.94       |   |   |   |   |   |   |   |   |   |   |
| Balances, April 29, 2007               |       |                                  | 1,230      |                     |       |                                                   | 5,385      |                                                                 |       |                            | $          | 3.37 |   |   |   | 7.0 |   |   |   | $ | 4,248 |   |   |
| Options exercisable at  April 29, 2007 |       |                                  |       |                     |       |                                                   | 3,258      |                                                                 |       |                            | $          | 3.13 |   |   |   | 5.6 |   |   |   | $ | 3,634 |   |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value for in-the-money options as of April 29,2007, based on the $3.77 closing stock price of our common stock on the NASDAQGlobal Market, which would have been received by the option holders had alloption holders exercised their options as of that date. The total number ofin-the-money options outstanding and exercisable as of April 29, 2007 and April 30,2006 was 3,513,000 and 2,078,000, respectively.

F-17

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**During the fiscal year ended April 29, 2007 (inthousands, except per share amounts):**

| ** **                                                                         | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **April 29,  2007**        | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** |
| The weighted  average grant date fair value of options granted (per share)         |       |                            | $          | 1.25 |   |   |   | $ | 2.69 |   |   | $ | 2.55 |   |
| Total fair value  of awards vested                                                 |       |                            | $          | 2,204 |   |   |   | $ | 2,400 |   |   | $ | 2,811 |   |
| Total intrinsic  value of options exercised                                        |       |                            | $          | 209 |   |   |   | $ | 2,082 |   |   | $ | 2,807 |   |
| Total cash  received from employees as a result of employee stock option exercises |       |                            | $          | 112 |   |   |   | $ | 1,084 |   |   | $ | 842 |   |
| Tax benefits realized as  a result of employee stock option exercises              |       |                            | $          | 67 |   |   |   | $ | 333 |   |   | $ | 709 |   |

 

The Company settlesemployee stock option exercises with newly issued shares of common stock. TheCompany does not have any equity instruments outstanding other than the optionsand restricted stock described above as of April 29, 2007.

***2001 Common Stock Repurchase Program***

In September 2001 andsubsequent periods, the Company’s board of directors authorized a program forthe open market repurchase of up to an aggregate of 3.5 million shares ofits common stock. Upon reaching the maximum number of shares authorized underthis program, the board of directors authorized a new stock repurchase programin September 2005 to repurchase up to 1.0 million shares of its commonstock. In subsequent periods, the board of directors amended the program andauthorized the purchase of up to an aggregate of 2.0 million shares. Thepurpose of these share repurchase programs are to reduce the long-termpotential dilution in earnings per share that might result from issuances underthe Company’s stock option plans and to take advantage of the relatively lowprice of the Company’s common stock. During fiscal 2007, fiscal 2006 and fiscal2005, the Company repurchased 355,795, 912,943 and 1,901,176 shares,respectively, for an approximate cost of $1.3 million, $4.5 million and $9.6million, respectively**.**The Companyaccounts for treasury stock using the cost method. Of the 2.0 million sharescurrently authorized by the Company’s board of directors for repurchase, theCompany has repurchased a total of 1,214,014 shares and, as of April 29,2007, can repurchase a total of 785,986 additional shares.

F-18

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 4—Net IncomePer Share**

Basicnet income per share is computed by dividing net income available to commonstockholders (numerator) by the weighted average number of common sharesoutstanding (denominator) during the period. Diluted net income per share iscomputed using the weighted number of common shares and potentially dilutivecommon shares outstanding during the period under the treasury stock method. Underthe treasury stock method, the effect of stock options outstanding is notincluded in the computation of diluted net income per share for periods whentheir effect is anti-dilutive, which in the current period includesconsideration of unearned stock-based compensation as required by SFAS No. 123(R).In computing diluted net income per share, the average stock price for theperiod is used in determining the number of shares assumed to be purchased fromthe exercise of stock options. A reconciliation of the basic and diluted pershare computations is as follows (in thousands, except per share data):

| ** **                | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **April 29, 2007**    | ** ** | **April 30, 2006** | ** ** | **May 1, 2005** | ** ** |
| ** **                | ** ** | **Net  Income  (Loss)**         | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** |
| Basic                     |       |                            | $          | (429 | ) |   | 16,341 |   |   | $ | (0.03 | ) |   | $ | 2,556 |   | 16,685 |   |   | $ | 0.15 |   |   | $ | 3,821 |   | 17,507 |   |   | $ | 0.22 |   |   |
| Effect of stock   options |       |                            | —     |   |   | — |   |   | — |   |   | — |   | 1,535 |   |   | (0.01 | ) |   | — |   | 1,978 |   |   | (0.02 | ) |   |
| Diluted                   |       |                            | $          | (429 | ) |   | 16,341 |   |   | $ | (0.03 | ) |   | $ | 2,556 |   | 18,220 |   |   | $ | 0.14 |   |   | $ | 3,821 |   | 19,485 |   |   | $ | 0.20 |   |   |

 

Options to purchase 5,385,000 shares of common stockwith an exercise price in excess of $3.77 per share outstanding duringfiscal 2007, as well as unvested restricted stock were not included in thecomputation of diluted income per share because they were anti-dilutive.

Options to purchase 2,278,000 shares of common stockwith an exercise price in excess of $4.80 per share outstanding duringfiscal 2006 were not included in the computation of diluted income pershare because they were anti-dilutive.

Options to purchase1,822,000 shares of common stock with an exercise price in excess of $4.62 pershare outstanding during fiscal 2005 were not included in the computationof diluted income per share because they were anti-dilutive.

**Note 5—Balance Sheet Components**

| ** **                                                                                         | ** ** | **April 29, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                         | ** ** | **Cost**                     | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Estimated  Fair Market  Value** | ** ** |
| ** **                                                                                         | ** ** | **(In thousands)**      | ** ** |
| Investments  available-for-sale:                                                                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government  debt securities with maturities greater than 90 days but less than one  year |       | $                            | 12,035     |   |   | $ | — |   |   |   | $ | (3 | ) |   |   | $ | 12,032 |   |   |
|                                                                                                    |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-19

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Theunrealized losses on available-for-sale securities as of April 29, 2007are recorded in accumulated other comprehensive income (loss) of the consolidatedstatements of stockholders’ equity and comprehensive income, net of tax of$1,000.

| ** **                                                                                         | ** ** | **April 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                         | ** ** | **Cost**                     | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Estimated  Fair Market  Value** | ** ** |
| ** **                                                                                         | ** ** | **(In thousands)**      | ** ** |
| Investments  available-for-sale:                                                                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government  debt securities with maturities greater than 90 days but less than one  year |       | $                            | 21,474     |   |   | $ | — |   |   |   | $ | (65 | ) |   |   | $ | 21,409 |   |   |
|                                                                                                    |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The unrealized losses on available-for-sale securitiesas of April 30, 2006 are recorded in accumulated other comprehensiveincome (loss) of the consolidated statements of stockholders’ equity andcomprehensive income, net of tax.

Thefinancial instruments in short-term investments are highly liquid and can beconverted to cash and cash equivalents without restriction and, accordingly,are classified as current assets in the accompanying consolidated balancesheets.

| ** **                            | ** ** | **April 29,  2007** | ** ** | **April 30,  2006** | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **(In thousands)**  | ** ** |
| Accounts receivable:                  |       |                     |       |                     |       |   |   |
| Accounts receivable                   |       | $                        | 10,552     |                     |       | $ | 9,640 |   |   |
| Less: Allowance for doubtful accounts |       | (108                     | )          |                     | (138       | ) |   |
|                                  |       | $                        | 10,444     |                     |       | $ | 9,502 |   |   |

 

F-20

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Baddebts in aggregate of $0, $0 and $0 were written off to the allowance fordoubtful accounts in fiscal 2007, fiscal 2006 and fiscal 2005,respectively.

| ** **                                      | ** ** | **April 29,  2007** | ** ** | **April 30,  2006** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**  | ** ** |
| Inventories:                                    |       |                     |       |                     |       |
| Work-in-process                                 |       | $                        | 8,743      |                     | $          | 9,220 |   |
| Finished goods                                  |       | 2,394                    |       | 5,042                    |       |
|                                            |       | $                        | 11,137     |                     | $          | 14,262 |   |
| Property and  equipment:                        |       |                     |       |                     |       |
| Land                                            |       | $                        | 2,525      |                     | $          | 165 |   |
| Buildings and improvements                      |       | 5,470                    |       | 2,045                    |       |
| Construction in progress                        |       | —                   |       | 3,746                    |       |
| Engineering and test equipment                  |       | 11,801                   |       | 9,962                    |       |
| Computer software                               |       | 1,803                    |       | 1,779                    |       |
| Computer hardware                               |       | 712                      |       | 589                      |       |
| Leasehold improvements                          |       | 46                       |       | 671                      |       |
| Furniture and office equipment                  |       | 718                      |       | 838                      |       |
| Vehicles                                        |       | 68                       |       | 69                       |       |
|                                            |       | 23,143                   |       | 19,864                   |       |
| Less: accumulated depreciation and amortization |       | (11,443                  | )          | (10,456                  | )          |
|                                            |       | $                        | 11,700     |                     | $          | 9,408 |   |

 

Softwareamortization expense for fiscal 2007, fiscal 2006 and fiscal 2005 was$181,000, $308,000 and $220,000, respectively.

| ** **                    | ** ** | **April 29,  2007** | ** ** | **April 30,  2006** | ** ** |
|-------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **(In thousands)**  | ** ** |
| Accrued expenses:             |       |                     |       |                     |       |   |   |   |   |
| Accrued employee compensation |       |                     | $          | 1,026                    |       |   |   | $ | 866 |   |   |
| Accrued income taxes          |       |                     | 198        |                     |       |   | 746 |   |   |
| Other                         |       |                     | 913        |                     |       |   | 1,390 |   |   |
|                          |       |                     | $          | 2,137                    |       |   |   | $ | 3,002 |   |   |

 

**Note 6—Leases**

TheCompany leases office facilities under operating leases which have variousexpiration dates. Total rent expense under these leases was $376,000, $623,000and $601,000 for fiscal 2007, fiscal 2006 and fiscal 2005,respectively. The aggregate future minimum lease payments, by fiscal year,under operating leases with initial terms of one year or more as ofApril 29, 2007 are as follows (in thousands):

| ** **       | ** ** | **Fiscal Year** | ** ** |
|------------------|------------|----------------------|------------|
| ** **       | ** ** | **Total**            | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
| Operating leases |       | $                    | 1,776      |   | $ | 291 |   | $ | 405 |   | $ | 381 |   | $ | 381 |   | $ | 318 |   |
|                  |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-21

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 7—Income Taxes**

TheCompany’s provision for income taxes was comprised as follows (in thousands):

| ** **                  | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **April 29,  2007**        | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** |
| Current:                    |       |                            |       |   |   |   |   |   |   |   |   |
| Federal                     |       |                            | $          | 135 |   |   |   | $ | 143 |   |   | $ | 360 |   |
| State                       |       |                            | 61         |   |   |   | 24 |   |   | (237 | ) |
| Foreign                     |       |                            | 110        |   |   |   | 66 |   |   | 14 |   |
| Total current income taxes  |       |                            | 306        |   |   |   | 233 |   |   | 137 |   |
| Deferred:                   |       |                            |       |   |   |   |   |   |   |   |   |
| Federal                     |       |                            | 132        |   |   |   | 868 |   |   | 1,498 |   |
| State                       |       |                            | (150       | ) |   |   | (82 | ) |   | 138 |   |
| Total deferred income taxes |       |                            | (18        | ) |   |   | 786 |   |   | 1,636 |   |
| Provision for income  taxes |       |                            | $          | 288 |   |   |   | $ | 1,019 |   |   | $ | 1,773 |   |

 

Theprovision for income taxes differed from the amount of income tax determined byapplying the applicable statutory federal income tax rate to pretax income as aresult of the following (dollars in thousands):

| ** **                         | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **April 29,  2007**        | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** |
| Statutory federal  tax rate        |       |                            | $          | (48 | ) |   |   | $ | 1,216 |   |   | $ | 1,902 |   |
| State taxes                        |       |                            | (3         | ) |   |   | 77 |   |   | (99 | ) |
| Research credits                   |       |                            | (262       | ) |   |   | (232 | ) |   | (144 | ) |
| Foreign                            |       |                            | 110        |   |   |   | 66 |   |   | — |   |
| Non-deductible  stock compensation |       |                            | 324        |   |   |   | — |   |   | — |   |
| Other                              |       |                            | 167        |   |   |   | (108 | ) |   | 114 |   |
| Total                              |       |                            | $          | 288 |   |   |   | $ | 1,019 |   |   | $ | 1,773 |   |

 

Income (loss) before income taxes included incomerelating to non-U.S. operations of $88,000, $47,000 and $99,000 infiscal 2007, fiscal 2006 and fiscal 2005, respectively.

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amount used for income tax purposes.

F-22

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Significantcomponents of the Company’s net deferred tax assets and liabilities for federaland state income taxes at April 29, 2007 and April 30, 2 006consisted of (in thousands):

| ** **                                 | ** ** | **April 29,  2007** | ** ** | **April 30,  2006** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Deferred tax assets:                       |       |                     |       |                     |       |   |   |   |   |
| Capitalized research                       |       |                     | $          | 100                      |       |   |   | $ | 337 |   |   |
| Non-deductible reserves and accruals       |       |                     | 1,867      |                     |       |   | 944 |   |   |
| Credit carryforwards                       |       |                     | 3,222      |                     |       |   | 3,643 |   |   |
| Loss carryforwards                         |       |                     | 990        |                     |       |   | 1,699 |   |   |
| Deferred income and sales returns reserves |       |                     | 771        |                     |       |   | 829 |   |   |
| Other                                      |       |                     | —     |                     |       |   | 78 |   |   |
| Gross deferred tax assets                  |       |                     | 6,950      |                     |       |   | 7,530 |   |   |
| Deferred tax  liabilities:                 |       |                     |       |                     |       |   |   |   |   |
| Fixed assets                               |       |                     | (183       | )                        |       |   | (— | ) |   |
| Gross deferred tax liabilities             |       |                     | (183       | )                        |       |   | (— | ) |   |
| Total net  deferred tax assets             |       |                     | $          | 6,767                    |       |   |   | $ | 7,530 |   |   |

 

At April 29, 2007, the Company had a federal netoperating loss carryforward of approximately $1.0 million available to offsetfuture taxable income that expires between fiscal 2018 and 2025 if notutilized.

At April 29, 2007, the Company had approximately$2.6 million and $1.9 million of federal and state research anddevelopment credit carryovers, respectively, available to offset future taxableincome. The federal credits expire between fiscal 2009 and 2027 if notutilized. The state credits carryovers are indefinite. At April 29, 2007,the Company has a federal alternative minimum tax credit of $177,000, which canbe carried forward indefinitely.

Under the Internal Revenue Code Section 382, theamounts of and benefits from net operating loss and tax credit carryforwardsmay be impaired or limited in certain circumstances. Events which cause limitationsin the amount of net operating losses and tax credit carryforwards that theCompany may utilize in any one year include, but are not limited to, acumulative ownership change of more than 50%, as defined, over a three-yearperiod.

During fiscal 2006, theCompany reversed approximately $226,000 of tax reserves upon expiry of thestatute of limitations. These tax reserves had been established to allow forpotential tax exposures relating to the level of income apportioned toCalifornia in the Company’s state tax returns.

**Note 8—Stockholders’Equity**

***Common and Preferred Stock***

The Company was originallyincorporated in California in October 1985 and reincorporated in Delawarein May 1993. The Board of Directors approved a recapitalization thatauthorized 45 million shares of common stock and 2 million shares ofundesignated preferred stock. In December 1996, the Board of Directorsdesignated 60,000 shares of preferred stock as Series A ParticipatingPreferred Stock. The Board of Directors has the authority to determine thepowers, preferences, rights and the qualifications, limitations or restrictionsgranted to or imposed upon any wholly unissued shares of undesignated preferredstock, without any further vote or action by the Company’s shareholders.

F-23

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Secondary Public Offering***

The Company completed asecondary public offering of its common stock in July 2004. The Companysold 1,450,000 common shares at $6.00 per share. Proceeds to the Company, netof underwriting discounts and commissions and related offering expenses of$714,000 were approximately $8.0 million. In connection with this transaction,Elex N.V., a related party and other selling stockholders sold 2,850,000 and300,000 common shares, respectively, at $6.00 per share. In aggregate,4,600,000 common shares were sold

***Stockholder Rights Plan***

In December 2006, ourboard of directors adopted a stockholder rights plan with a term of ten yearswhich will expire in December 2016. Under this plan, we issued a dividendof one right for each share of our common stock. Each right initially entitlesstockholders to purchase one one-thousandth of a share of our preferred stockfor $18.00. However, the rights are not immediately exercisable. If a person orgroup acquires, or announces a tender or exchange offer that would result inthe acquisition of 15% of our common stock, unless the rights are redeemed byus for $0.01 per right, the rights will become exercisable by all rightsholders, except the acquiring person or group, for shares of our common stockor the stock of the third party acquirer having a value of twice the right’sthen-current exercise price.

***Common Stock Option Exchange Offer***

On March 16, 2007, the Company repriced employeestock option awards. Under the terms of this repricing, the Company repricedcertain employee stock options having an exercise price of greater than $4.00to an exercise price of $3.35, the trading stock price fair value on the dateof the exchange. All options tendered received a non-statutory stock option topurchase one (1) share for every two (2) exchanged incentive ornon-statutory stock options pursuant to the exchange offer. In considerationfor the repricing of these eligible stock option awards, employees wererequired to return their previously awarded options for cancellation. Regardlessof whether the original options were vested, the new options vest as to 1/36thof the shares subject to the new option each month commencing one month afterthe new option grant date of March 16, 2007, and have a contractual termof 10 years beginning on that date.

The Company has accountedfor the repricing and cancellation transactions as a modification under SFAS No. 123(R).In accordance with SFAS No. 123(R), the Company will record theincremental fair value related to the repriced awards, together withunamortized stock-based compensation expense associated with the unvestedcancelled awards, over the remaining requisite service period of the optionholders. Seventy eight employees participated in this program. A total of1,545,538 shares were cancelled for 772,769 newly issued non-statutory stockoptions. The incremental fair value of the repricing was approximately$117,000, which will be recognized on a straight-line basis over the newrequisite service period of 36 months.

**Note 9—EmployeeBenefit Plan**

In January 2004, theCompany implemented a Section 401(k) Plan. The 401(k) Planprovides participating employees with an opportunity to accumulate funds forretirement and hardship. The 401(k) Plan provides for a 25% matchingcontribution which vests immediately. In fiscal 2007, fiscal 2006 andfiscal 2005, the Company made matching contributions of $208,000, $190,000and $192,000, respectively.

F-24

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 10—SegmentReporting**

The company operates in one business segment, thesemiconductor manufacturing segment. Sales transactions are denominated in U.S.dollars.

Netrevenues by product group were as follows (in thousands):

| ** **          | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **April 29,  2007**        | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** |
| EEPROM              |       | $                               | 56,150     |   | $ | 50,597 |   | $ | 53,397 |   |
| Flash               |       | 4,284                           |       | 5,016 |   | 5,983 |   |
| Analog/mixed-signal |       | 5,916                           |       | 4,604 |   | 2,940 |   |
| Total net  revenues |       | $                               | 66,350     |   | $ | 60,217 |   | $ | 62,320 |   |

 

Netrevenues by geography were as follows (in thousands):

| ** **          | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **April 29,  2007**        | ** ** | **April 30,  2006** | ** ** | **May 1,  2005** | ** ** |
| United States       |       | $                               | 5,259      |   | $ | 7,127 |   | $ | 7,470 |   |
| Hong Kong/China     |       | 13,462                          |       | 17,901 |   | 14,513 |   |
| Japan               |       | 7,465                           |       | 8,716 |   | 11,724 |   |
| Taiwan              |       | 8,568                           |       | 8,344 |   | 8,960 |   |
| Europe              |       | 7,452                           |       | 6,977 |   | 8,160 |   |
| South Korea         |       | 9,615                           |       | 5,886 |   | 6,947 |   |
| Singapore           |       | 10,771                          |       | 3,645 |   | 1,919 |   |
| Other Far East      |       | 1,671                           |       | 1,162 |   | 612 |   |
| Other Americas      |       | 2,087                           |       | 459 |   | 2,015 |   |
| Total net  revenues |       | $                               | 66,350     |   | $ | 60,217 |   | $ | 62,320 |   |

 

Distributors and resellershave accounted for a significant portion of the Company’s net revenues in thepast. For fiscal 2007, sales to Avnet Inc., an international distributor,represented 10.3% of the Company’s net revenues. For fiscal 2006, sales toAvnet represented 11.8% of the Company’s net revenues. For fiscal 2005, none ofthe Company’s customers represented 10% or more of the Company’s net revenues.

Propertyand equipment geographical breakdown was as follows (in thousands):

| ** **                                       | ** ** | **April 29,  2007** | ** ** | **April 30,  2006** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| United States                                    |       | $                        | 14,261     |                     | $          | 12,010 |   |
| Thailand                                         |       | 2,875                    |       | 2,695                    |       |
| Romania                                          |       | 2,976                    |       | 2,874                    |       |
| Japan                                            |       | 2,755                    |       | 2,191                    |       |
| Other                                            |       | 276                      |       | 94                       |       |
|                                             |       | 23,143                   |       | 19,864                   |       |
| Less: accumulated  depreciation and amortization |       | (11,443                  | )          | (10,456                  | )          |
| Total net  property and equipment                |       | $                        | 11,700     |                     | $          | 9,408 |   |

 

F-25

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11—Commitmentsand Contingencies**

***Purchase Commitments***

Purchase commitments foropen purchase orders at April 29, 2007 and April 30, 2006 for whichgoods and services had not been received were approximately $5.9 million and$6.2 million, respectively.

***Litigation and Other Claims***

In the normal course ofbusiness, the Company periodically receives notification of threats of legalaction in relation to claims of patent infringement by the Company. Currentlythere are no such active actions.

***Guarantees***

In November 2002, theFASB issued FASB Interpretation No. 45,*“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others”* (“FIN 45”). TheCompany applies the disclosure provisions of FIN 45 to its agreements thatcontain guarantee or indemnification clauses. FIN 45 requires that aliability be recorded in the guarantor’s balance sheet upon issuance of aguarantee. In addition, FIN 45 requires disclosures about the guaranteesthat an entity has issued, including a reconciliation of changes in the entity’sproduct warranty liabilities. These disclosure provisions expand those requiredby SFAS No. 5,*“Accounting forContingencies”* by requiring that guarantors disclose certain typesof guarantees, even if the likelihood of requiring the guarantor’s performanceis remote. The following is a description of significant arrangements throughwhich the Company is a guarantor:

***IndemnificationObligations***

The Company is a party to a variety of agreementspursuant to which it may be obligated to indemnify the other party with respectto certain matters. Typically, these obligations arise in the context ofcontracts entered into by the Company, under which the Company customarilyagrees to hold the other party harmless against losses arising from a breach ofrepresentations and covenants related to such matters as title to assets soldand certain intellectual property rights. Generally, payment by the Company isconditioned on the other party making a claim pursuant to the proceduresspecified in the particular contract, which procedures typically allow theCompany to challenge the other party’s claims. Further, the Company’sobligations under these agreements may be limited in terms of time and/oramount, and in some instances, the Company may have recourse against thirdparties for certain payments made by it under these agreements.

It is not possible topredict the maximum potential amount of future payments under these or similaragreements due to the conditional nature of the Company’s obligations and theunique facts and circumstances involved in each particular agreement. Historically,payments made by the Company under these agreements have not had a materialeffect on its business, financial condition, cash flows or results ofoperations. The Company believes that if it were to incur a loss in any ofthese matters, such loss should not have a material effect on its business,financial condition, cash flows or results of operations.

F-26

----

**CATALYST SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Product Warranties***

The Company estimates itsproduct warranty costs based on historical warranty claim experience andapplies this estimate to the revenue stream for products under warranty. Includedin the Company’s sales returns reserves are estimated return exposuresassociated with product warranties. Estimated future costs for warrantiesapplicable to revenues recognized in the current period are charged to theCompany’s cost of revenues. The warranty accrual is reviewed quarterly toverify that it properly reflects the remaining obligations based on theanticipated expenditures over the balance of the obligation period. Adjustmentsare made when actual claim experience differs from estimates. Warranty costswere less than $100,000 for each of fiscal 2007, fiscal 2006 and fiscal 2005.

**Note 12—RelatedParty Transactions**

***Elex N.V.***

During the fourth quarter of fiscal 2000, the Companybegan taking delivery of wafers fabricated at X-FAB Texas, Inc. (“X-FAB”)a wholly owned subsidiary of Elex N.V. (“Elex”), a Belgian holding company. RolandDuchâtelet, the Chairman and Chief Executive Officer of Elex, serves as amember of the Company’s Board of Directors. Elex initially became a relatedparty in 1998 through the purchase of 5.5 million restricted shares of theCompany’s common stock. The wafers provided by X-FAB include most of theCompany’s analog/mixed-signal products and supplement some of the sameEEPROM designs fabricated at various other foundries the Company utilizes. Otherthan purchase orders currently open with X-FAB, there is no purchasingagreement in place with X-FAB. During fiscal 2007, fiscal 2006and fiscal 2005, the Company purchased $1.2 million, $2.5 million and$2.4 million of wafers, respectively, from X-FAB. As of April 29,2007 and April 30, 2006, the total amount owed to X-FAB by theCompany was approximately $68,000 and $143,000, respectively. Elex held 4.5% ofthe outstanding shares of the Company as of April 29, 2007.

The Company believes that the terms of thesetransactions were no less favorable than reasonably could be expected to beobtained from unaffiliated parties.

F-27

----

**ScheduleII—Valuation and Qualifying Accounts**

| **Fiscal Year Ended**             | ** ** | ** **              | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Year** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| ***April 29,  2007***                  |       |                    |       |                                         |       |                                                     |       |           |       |                                   |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts receivable |       |                    | $          | 138                                          |       |                                                     |       | $              | —     |                                   |       |   | $ | (30 | ) |   |   | $ | 108 |   |   |
| OEM sales returns  allowance                |       |                    | $          | 110                                          |       |                                                     |       | $              | 52         |                                   |       |   | $ | (32 | ) |   |   | $ | 130 |   |   |
| ***April 30,  2006***                  |       |                    |       |                                         |       |                                                     |       |           |       |                                   |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts receivable |       |                    | $          | 138                                          |       |                                                     |       | $              | —     |                                   |       |   | $ | — |   |   |   | $ | 138 |   |   |
| OEM sales returns  allowance                |       |                    | $          | 107                                          |       |                                                     |       | $              | 87         |                                   |       |   | $ | (84 | ) |   |   | $ | 110 |   |   |
| ***May 1,  2005***                     |       |                    |       |                                         |       |                                                     |       |           |       |                                   |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts receivable |       |                    | $          | 138                                          |       |                                                     |       | $              | —     |                                   |       |   | $ | — |   |   |   | $ | 138 |   |   |
| OEM sales returns  allowance                |       |                    | $          | 39                                           |       |                                                     |       | $              | 147        |                                   |       |   | $ | (79 | ) |   |   | $ | 107 |   |   |

 

F-28

----

**EXHIBITINDEX**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                | ** ** | **Description** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1(1)           |       | Restated Certificate of  Incorporation of Registrant.                                                                                                                                                                                                                                                                     |
| 3.2(2)           |       | Certificate of  Designation of Rights, Preferences and Privileges of Series A  Participating Preferred Stock.                                                                                                                                                                                                        |
| 3.4(3)           |       | Bylaws of  Catalyst Semiconductor, Inc., as amended and restated June 6, 2004.                                                                                                                                                                                                                                  |
| 4.1(4)           |       | Specimen Stock  Certificate.                                                                                                                                                                                                                                                                                              |
| 4.2(2)           |       | Preferred Shares  Rights Agreement, dated as of December 21, 2006 between Catalyst  Semiconductor, Inc. and Computershare Trust Company, N.A., including the  Certificate of Designation, the form of Rights Certificate and the Summary of  Rights attached thereto as Exhibits A, B and C, respectively. |
| 4.6(5)           |       | Amended and  Restated 2003 Stock Incentive Plan.                                                                                                                                                                                                                                                                          |
| 4.6.1(6)         |       | Form of  Stock Option Agreement.                                                                                                                                                                                                                                                                                     |
| 4.6.2(7)         |       | Form of  Restricted Stock Agreement.                                                                                                                                                                                                                                                                                 |
| 4.6.3(5)         |       | Form of  Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                            |
| 4.7              |       | 2003 Director  Stock Option Plan.                                                                                                                                                                                                                                                                                         |
| 4.7.1(6)         |       | Form of 2003  Director Option Plan (same as 4.6.1).                                                                                                                                                                                                                                                                  |
| 4.8(8)           |       | 1998 Special  Equity Incentive Plan.                                                                                                                                                                                                                                                                                      |
| 10.27(9)*        |       | Form of  Indemnification Agreement entered into by Registrant with each of its  directors and executive officers.                                                                                                                                                                                                    |
| 10.61(10)        |       | Common Stock  Purchase Agreement dated as of May 26, 1998 between Registrant and Elex  N.V. with Standstill Agreement dated as of May 26, 1998 between the  Registrant and Elex N.V.                                                                                                                            |
| 10.61.1(11)      |       | Common Stock  Purchase Agreement dated as of September 14, 1998 between Registrant and  Elex N.V. with Standstill Agreement dated as of September 14, 1998  between the Registrant and Elex N.V.                                                                                                                |
| 10.61.2(12)      |       | Amendment  No. 1 to Amended and Restated Standstill Agreement dated as of  April 22, 2004.                                                                                                                                                                                                                      |
| 10.61.3(12)      |       | Second Amended  and Restated Standstill Agreement dated as of June 10, 2004.                                                                                                                                                                                                                                         |
| 10.83(13)        |       | Stock Transfer  Agreement dated April 19, 2002 between Elex NV and Registrant.                                                                                                                                                                                                                                       |
| 10.84(14)*       |       | Form of  Change of Control Agreement between Registrant and its non-employee  directors.                                                                                                                                                                                                                             |
| 10.85(15)*       |       | Amended and  Restated Employment Agreement dated May 14, 2007 between Gelu Voicu and  Registrant.                                                                                                                                                                                                                    |
| 10.86(12)        |       | Stock Transfer  Agreement dated as of April 22, 2004 between the Registrant and Elex N.V.                                                                                                                                                                                                                       |
| 10.87(16)*       |       | Severance  Agreement dated October 14, 2002 between George Smarandoiu and  Registrant.                                                                                                                                                                                                                               |
| 10.88(17)        |       | Sale-Purchase  Promissory Agreement dated November 6, 2003 between Registrant and S.C.  Hathor Impex SRL.                                                                                                                                                                                                            |
| 10.91(18)        |       | Fiscal 2005 Bonus  Plan.                                                                                                                                                                                                                                                                                                  |

----

 
| 10.92(19)    |   | Severance Agreement  dated August 23, 2005 between Thomas Gay and Registrant.                                                                                                                    |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.93(19)    |   | Severance  Agreement dated August 23, 2005 between Sorin Georgescu and Registrant.                                                                                                               |
| 10.94(19)    |   | Severance  Agreement dated August 23, 2005 between Irvin Kovalik and Registrant.                                                                                                                 |
| 10.95(19)    |   | Severance  Agreement dated August 23, 2005 between George Smarandoiu and  Registrant.                                                                                                            |
| 10.96(20)    |   | Fiscal 2006 Bonus  Plan.                                                                                                                                                                              |
| 10.97(21)    |   | Separation  agreement effective as of July 29, 2005 between Barry Wiley and  Registrant.                                                                                                         |
| 10.98(22)    |   | Offer Letter with  Scott Brown dated August 18, 2005.                                                                                                                                            |
| 10.99(23)    |   | Agreement of Sale  by and between 2975 Stender Associates LLC and Catalyst Semiconductor, Inc.  effective as of February 3, 2006.                                                           |
| 10.100(24)   |   | Lease Agreement  entered into on March 6, 2006 by and between Catalyst Semiconductor  International, Inc. and Stars Microelectronics.                                                       |
| 10.100.1(25) |   | Amendment  No. 1 dated October 19, 2006 to Lease Agreement by and between  Catalyst Semiconductor (Thailand) Limited and Stars Microelectronics.                                            |
| 21.1         |   | List of  Subsidiaries of Registrant.                                                                                                                                                                  |
| 23.1         |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                            |
| 24.1         |   | Power of Attorney  (included on page 39).                                                                                                                                                        |
| 31           |   | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002.                                            |
| 32           |   | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

----

(1)          Incorporated byreference to Registrant’s Registration Statement on Form 8-A/A filedwith the SEC on December 28, 2006.

(2)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on December 28, 2006.

(3)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on June 12, 2007.

(4)          Incorporated byreference to Registrant’s Registration Statement on Form 8-A/A filedwith the SEC on April 29, 1993.

(5)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on December 28, 2006.

(6)          Incorporated byreference to Registrant’s Registration Statement on Form S-8 filedwith the SEC on March 3, 2006 (File No. 333-132204).

(7)          Incorporated byreference to Registrant’s Current Report on Form 8-K filed with theSEC on December 4, 2006.

(8)          Incorporated byreference to an Appendix to Registrant’s Definitive Proxy Statement previouslyfiled with the SEC on July 27, 2000.

(9)          Incorporated byreference to Registrant’s Registration Statement on Form S-1 filedwith the SEC on May 11, 1993 (File No. 33-60132), as amended.

----

(10) Incorporated by reference to Registrant’s Annual Report on Form 10-Kfiled with the SEC on August 19, 1998.

(11) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Qfiled with the SEC on September 21, 1998.

(12) Incorporated by reference to Registrant’s Registration Statement on Form S-3filed with the SEC on June 14, 2004 (File No. 333-116425).

(13) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on April 30, 2002.

(14) Incorporated by reference to Registrant’s Annual Report on Form 10-Kfiled with the SEC on July 29, 2002.

(15) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on May 25, 2007.

(16) Incorporated by reference to Registrant’s Annual Report on Form 10-Kfiled with the SEC on June 30, 2004.

(17) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Qfiled with the SEC on March 9, 2004.

(18) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on August 5, 2005.

(19) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on August 26, 2005.

(20) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on September 7, 2005.

(21) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Qfiled with the SEC on September 9, 2005.

(22) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on October 11, 2005.

(23) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on February 9, 2006.

(24) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on March 10, 2006.

(25) Incorporated by reference to Registrant’s Current Report on Form 8-Kfiled with the SEC on October 25, 2006.

†                    Confidentialtreatment has been granted as to a portion of this Exhibit. Such portion hasbeen redacted and filed separately with the SEC.

*                    Constitutes amanagement contract or compensatory plan or arrangement required to be filed asan exhibit pursuant to Item 14(c) of Form 10-K.

----