**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

| **x**  | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                            |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **For the fiscal year ended  April 30, 2006**                                                                                                                             |
| **OR** |
| **o**  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                        |
|   | **For the transition period from              to             .** |

 

**CommissionFile Number 0-21488**

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**CatalystSemiconductor, 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.) |

 

**1250 Borregas Avenue,Sunnyvale, California 94089**

(Address of PrincipalExecutive Offices)

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

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

**NONE**

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

**CommonStock, $.001 par value**

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 tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during 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. o

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  x | Non-accelerated  filer  o |
|--------------------------------------|---------------------------------|-------------------------------------|

 

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 31,2005, the last day of the registrant’s most recently completed second quarter,was $49.5 million based upon the last sales price reported for such dateon the NASDAQ Global Market. For purposes of disclosure, shares of common stockheld by persons who hold more than 5% of the outstanding shares of common stockand shares held by executive officers and directors of the registrant have beenexcluded in that such persons may be deemed to be affiliates. Thisdetermination is not necessarily conclusive.

The number of shares of Registrant’s Common Stockoutstanding as of June 30, 2006 was 16,350,073.

**DOCUMENTSINCORPORATED BY REFERENCE**

Items 10,11, 12, 13, and 14 of Part III of this Form 10-K incorporateinformation by reference from portions of the registrant’s 2006 DefinitiveProxy Statement to be filed not later than 120 days after the close of the 2006fiscal year.

 

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**CATALYST SEMICONDUCTOR, INC.FORM 10-KFOR THE FISCAL YEAR ENDED APRIL 30, 2006INDEX**

|                                             | ** **                                                                                                          | **Page** | ** ** |
|---------------------------------------------|---------------------------------------------------------------------------------------------------------------------|----------|------------|
| **PART I**                             |                                                                                                                |     |       |   |   |
| Item 1.                                     | Business                                                                                                            |     |       | 3 |   |   |
| Item 1A.                                    | Risk Factors                                                                                                        |     |       | 14 |   |   |
| Item 1B.                                    | Unresolved  Staff Comments                                                                                          |     |       | 25 |   |   |
| Item 2.                                     | Properties                                                                                                          |     |       | 25 |   |   |
| 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, Related Stockholder Matters and Issuer  Purchases of Equity Securities |     |       | 27 |   |   |
| Item 6.                                     | Selected  Financial Data                                                                                            |     |       | 28 |   |   |
| Item 7.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |     |       | 29 |   |   |
| Item 7A.                                    | Quantitative  and Qualitative Disclosures About Market Risk                                                         |     |       | 40 |   |   |
| Item 8.                                     | Financial  Statements and Supplementary Data                                                                        |     |       | 40 |   |   |
| Item 9.                                     | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |     |       | 41 |   |   |
| Item 9A.                                    | Controls  and Procedures                                                                                            |     |       | 41 |   |   |
| Item 9B.                                    | Other  Information                                                                                                  |     |       | 42 |   |   |
| **PART III**                           |                                                                                                                |     |       |   |   |
| Item 10.                                    | Directors  and Executive Officers of the Registrant                                                                 |     |       | 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                                                                     |     |       | 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        |   |   |

 

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**CATALYSTSEMICONDUCTOR, INC.**

**EXPLANATORY NOTE**

*This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. 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 industryand 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 provide non-volatile memory products, thesufficiency of our current cash, cash equivalents and available-for-salesecurities, our ability to retain and attract employees, our internal controls,the adequacy of our facilities to meet our customers needs, and the effects ofnew accounting rules. Actual results may differ materially from those projectedin the forward-looking statements as a result of various factors. Factors thatcould cause actual results to differ materially from those included hereininclude, but are not limited to: the information contained under the captions “Part I,Item 1. Business,” “Part I, Item 1A. Risk Factors” and “Part II,Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations.”*

**PART I**

**Item 1.   *Business***

**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. Wefocus on high volume markets for our cost effective, high quality products. Wehave been a committed long-term supplier of memory products for the past twodecades even through periods of tight manufacturing capacity and cyclicalmarket downturns. We are leveraging our extensive experience in high volume,reprogrammable memory products to develop complementary analog/mixed-signalproducts that offer our customers a more complete system solution. We supplysemiconductor products in high volumes to our diverse customer base of morethan 3,400 customers and shipped approximately 104 million units onaverage in each of the last four fiscal quarters.

We outsource the fabrication of our products to thirdparty foundries for a high quality, efficient and long term supply of ourproducts. We focus our internal efforts on product design, testing, marketingand sales. We have strengthened and expanded the expertise of our research anddevelopment team by establishing our own engineering center in Bucharest,Romania and by hiring additional experienced engineers in Romania and in ourSunnyvale, California headquarters. We continue to make substantial investmentsin research and development to advance our non-volatile memory products, aswell as to broaden our product 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 1250 Borregas Avenue, Sunnyvale, California 94089, ourtelephone number is (408) 542-1000 and our website is *www.catsemi.com*. We have purchased abuilding that is being prepared for the relocation of our principal executiveoffices in August 2006. The address is 

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2975 Stender Way, SantaClara, CA 95054. Information contained on or accessible through our websitedoes 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 28, 2002 as fiscal 2002, the fiscal year ended April 27,2003 as fiscal 2003, the fiscal year ended May 2, 2004 asfiscal 2004, the fiscal year ended May 1, 2005 as fiscal 2005and the fiscal year ended April 30, 2006 as fiscal 2006. Fiscal 2007will end on April 29, 2007. For presentation purposes only, we refer inthis report to April 30 as the end of each fiscal year.

**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 thesedevices may be used to improve the performance of the specific analogapplication. Non-volatile memory devices require certain building blocks thathave analog characteristics included within them in order to perform theirmemory 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 electrically erasable programmable read only memory, orEEPROM, and/or flash memory. Many electronic systems utilize a combination ofvolatile and non-volatile memory.

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.

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.

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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 original equipment manufacturer, or OEM,customers. Manufacturers customarily use flash memory and EEPROM to addressdifferent needs but often within the same electronic system. Since mostconsumer and industrial electronic devices continue to use EEPROM eitherseparately or in conjunction with other memory, OEM customers want to developrelationships with memory vendors who are likely to be long-term vendorsof EEPROM and those vendors which are developing and supplying a broad range ofproducts.

***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 thatperform a given function usually are interchangeable with standard componentsfrom another supplier. Similarly, in the memory market, most non-volatilememory components 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 drop outvoltage 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.

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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. We believe we have established a brand name thatour OEM and distribution customers associate with cost effective, high qualityand high value products supported by excellent customer service. Thesestrengths have helped us grow in the competitive non-volatile memory market. OnApril 30, 2006, we completed our eighth consecutive fiscal year ofprofitability. We intend to leverage our OEM customer base and the design andoperational expertise developed in our non-volatile memory products to increaseour revenues from our non-volatile memory and analog/mixed-signal productofferings.

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 Sunnyvale, California engineering capabilities, in 2003, weestablished our own design and development center in Bucharest, Romania. Wepreviously used contract personnel in Romania but now have an integrated designorganization, which currently includes a total of 45 engineers. Through thedevelopment of our EEPROM products, we also routinely design and develop highperformance 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 Sunnyvale, California headquarters and take othersteps to maintain and improve the quality of our products. These efforts haveimproved the yield on our products. We use third party contractors for amajority of our manufacturing, packaging, testing and shipping activities inorder to control our costs and to be able to respond quickly to customerrequests.

*Long-Term,Established Foundry Relationships.**  *We have worked with our primaryfoundry supplier located in Japan for more than 20 years. This long standingfoundry relationship has enabled us to optimize our designs for its high volumeand high yield processes. To reduce our reliance on a single wafer foundry, wealso developed our processes so that different fabrication facilities couldreplicate them. We purchase volume shipments of our products from a UnitedStates based foundry, which currently produces most of our analog/mixed-signalproducts and can act as a second fabrication facility for some of ournon-volatile memory products. We also regularly evaluate other foundries thatmay support the production of a broad range 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 whichelectronic system manufacturers need, such as interfaces, memory densities,voltages and bus speeds.

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*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.

*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 2006, we served more than 3,400 customers. Through our collaborationswith OEM customers in an interactive product design and development process, wehave established durable relationships, solidified our customer base anddefined the next generation of our products. Consequently, we believe that weare 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.

**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. Weintend to continue to introduce additional industry standardanalog/mixed-signal products to increase net revenues, address new applicationsand increase our portfolio of analog building blocks for internal reuse inother products, such as application specific analog/mixed-signal products. Wereuse proven design blocks, which enables us to reduce the design andmanufacturing risks associated with new products and assists us in reducingdevelopment times and in 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 

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leverage our non-volatilememory and analog design expertise. We intend to continue to have theseproducts built for us by our foundry suppliers using our proprietary processtechnology and open source technology, which supports both analog andnon-volatile memory elements in a single manufacturing process. Some of ournon-volatile memory customers, who include industry leading OEMs, are alsobeginning to purchase our standard analog products. We are now working withselected customers to develop more highly integrated, high value added productscustomized for specific applications. We are targeting selected applications inlarge segments, such as solid state illumination, which is lighting fordisplays, 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.

**Products**

We use our expertise in non-volatilememory to develop and maintain a broad range of EEPROM products and selectedflash memory products. In addition, we have expanded our focus to includeanalog/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 of National Semiconductor Corporationand the serial peripheral interface, or SPI, bus protocol of Motorola, Inc.Additionally, we offer four wire bus interface protocol type products,primarily for Japanese customers. We offer products in a wide variety ofdensities from 1 kilobit, or Kbit, to 256 Kbit, and voltage ranges from1.8 volts 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, compact disc players,cordless phones, laser printers, memory modules for computers, disk drives,remote controls and various automotive 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, such as 16 Kbit to 512 Kbit. Parallel EEPROM provides fastertransfer rates 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 usedprimarily in high performance applications. Parallel EEPROM is primarily usedin applications such as point of sale terminals, industrial controllers, localarea network adapters and telecommunication switches.

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***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 constitute arelatively small portion of our net revenues, we believe that there is asubstantial market opportunity for analog/mixed-signal products and havecontinued leveraging our design, development and sales skills to expand theseproduct 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 introduced a family of microcontroller supervisory products, which combineserial EEPROM with the reset and watchdog functions required by manymicrocontrollers to ensure safe sustained operation and allow systems torecover more efficiently from power disruptions. These products integrate twofunctions in the same semiconductor to provide savings in printed circuit boardspace and component costs. Our initial products are designed for use by theautomotive industry and for power metering functions. Currently, we offer2 Kbit, 16 Kbit, 32 Kbit and 64 Kbit of EEPROM withembedded supervisory functions based on floating gate EEPROM technology.

*SupervisoryProducts without Memory.**  *We have also introduced a family of multi-industrysupervisory products without EEPROM memory.

*DigitallyProgrammable Potentiometers (DPPTM).**  *We have introduced a number ofsolid-state DPP products, which replace mechanical potentiometers used to finetune and trim electronic circuitry in a variety of applications. DPP productsare built using the same processes as our EEPROM products. Our DPP productshave been included in interactive game consoles, digital cameras and opticaltransceivers.

*WhiteLED Drivers.**  *Wehave introduced several products intended to manage the white LEDs used asbacklights in multi-colored LCDscreens in cell phones, digital cameras, MP3 music players, personal digitalassistants, industrial instrumentation, automotive instrument clusters and homeappliances. Color displays require more specialized LED drivers than monochromedisplays. Our products tightly regulate the current to the LEDs to ensure theuniform brightness and color purity necessary for the clarity in viewing thecolor 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 is pin compatible with industry standardcircuits.

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 those OEMs’ contract manufacturers.

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

Currently, we have 4 distributors and 2 resellers inNorth and South America and a network of 7 distributors and 27 resellersthroughout Asia, Europe and Africa to support our international business. Thesefirms work with our regional sales managers in developing new opportunities,providing technical support and other value-added services.

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:

·       targetedprint advertising in local languages for trade, technical and businesspublications;

·       onlinepromotion on our website;

·       developingwith our distributors product evaluation boards that include two or more of thedistributor’s non-competitive manufacturers thus allowing the distributor’s ownsales force to promote more than one supplier at a time;

·       publishingapplication notes and journal articles to support the design-in ofanalog/mixed-signal products;

·       developmentof dedicated demonstration and evaluation boards to assist customer designersin evaluating our products in their systems; and

·       conducting on-site customerengineering training in analog/mixed-signal applications.

**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 30, 2006,our research and development staff consisted of 78 engineers working inSunnyvale, California and Bucharest, Romania.

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 30,2006, we owned 24 U.S. patents and have 13 pending 

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applications foradditional U.S. patents. The expiration dates of our patents range from January 2008to October 2023. As a result of the rapid changes in technology, the livesof these 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.

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 prevent usfrom manufacturing and selling our products. Any of these situations could havea 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. Our designs are manufactured utilizing processes developed jointly by usand our foundry partners. Our Japanese foundry supplier currently manufacturesa majority of our high volume production. Our domestic foundry suppliercurrently manufactures most of our analog/mixed-signal products as well as someof our EEPROM products. We are also working with other foundries in Asia todevelop and manufacture additional analog/mixed signal products. 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 Sunnyvale, California to controlquality and improve yields and we also utilize a subcontractor in Japan forthis purpose. 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 and are in the process of forming a subsidiary in Thailand to performa portion of the functions currently subcontracted.

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**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 subsegment of the flash memory market. This subsegmenthas been characterized by reduced demand for low density memory, which hasresulted in lower product availability and higher cost, due to the shift bymost customers to the larger flash memory sizes that we do not offer. Our keycompetitors for low density or similar flash memory products include SiliconStorage Technology, Inc. and Integrated Silicon Solution, 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 with the applicablesegment and subsegments, including: Fairchild Semiconductor International, Inc.,Intersil Corporation, Linear Technology Corporation, Maxim Integrated Products, Inc.,National Semiconductor and Texas Instruments Incorporated.

**Employees**

As of April 30, 2006,we had a total of 155 full-time employees worldwide, including 78 inresearch and development, 40 in sales and marketing and 37 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.

**FinancialInformation About Geographic Areas**

For information aboutrevenue and long-lived assets by geography, see “Note 8—Segment Reporting”in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K.

**Executive Officers**

Setforth below is certain information as of April 30, 2006, regarding each ofour executive officers:

| **Name**          | ** ** | ** ** | ** ** | **Age** | ** ** | **Principal Occupation**                                             | ** ** |
|-------------------|------------|------------|------------|---------|------------|---------------------------------------------------------------------------|------------|
| Gelu Voicu        |       |       | 56         |    |       | President, Chief Executive Officer and Director                           |       |
| Thomas E. Gay III |       |       | 57         |    |       | Vice President of Finance and Administration  and Chief Financial Officer |       |
| Sorin Georgescu   |       |       | 54         |    |       | Vice President of Technology                                              |       |
| Irvin W. Kovalik  |       |       | 68         |    |       | Vice President of Worldwide Sales                                         |       |
| George Smarandoiu |       |       | 59         |    |       | Vice President of Product Design                                          |       |
| Scott Brown       |       |       | 39         |    |       | Vice President  Marketing for Analog/Mixed-Signal  Products               |       |

 

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*Mr. Voicu* is the Company’s President and Chief ExecutiveOfficer, a position he has held since October 2002. Other managementpositions held with the Company since his joining in 1993 include ExecutiveVice President and Chief Operating Officer, Vice President of Engineering andManufacturing, flash product line director and manager of product engineering.Mr. Voicu is also a board member of the Company. Prior to joining theCompany, 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. Gay* has been the Company’s Vice President of Finance andAdministration and Chief Financial Officer since May 1998. Prior tojoining the Company, Mr. Gay held positions at Wireless Access, Inc, acommunications device manufacturing company, where he was Controller andSanmina Corporation, a contract manufacturer, where he was the CorporateController. Mr. Gay was also the Company’s Controller from April 1993to May 1994. He holds a BS degree in Accounting from San Diego StateUniversity.

*Mr. Georgescu*joined the Company in October 2001 as VicePresident of Technology. Mr. Georgescu has over 20 years of semiconductordevice and process development experience at such firms as Tripath Technology, Inc.,SanDisk Corporation and Power Integrations, Inc. His experience includesCMOS, BiCMOS, HVIC (High-Voltage Integrated Circuits) and non-volatile memorytechnology, processes and architectures. He received a MSEE degree fromPolytechncial Institute in Bucharest, Romania.

*Mr. Kovalik* is the Company’s VicePresident of Sales and joined the Company in November 1998. Prior to joiningthe Company, 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 the Company’sVice President of Sales. Mr. Kovalik holds a BS degree in ElectricalEngineering from the University of Illinois.

*Dr. Smarandoiu*is the Company’s Vice President of Design. He joinedthe Company in October 2002 and has over 20 years of analog,system-on-a-chip and nonvolatile memory integrated circuit developmentexperience. From 1992 to 2002, he was employed at Atmel Corporation, asemiconductor company, and served most recently as Atmel’s director ofmixed-mode product development. From 1981 to 1992, he was employed by SEEQTechnology, a semiconductor company that was acquired in 1999 by LSI LogicCorporation. At SEEQ he attained the position of director of memory design andwas responsible for the development of EEPROM and FLASH products. He received aDoctor of Engineering and Master of Engineering from the University ofCalifornia, Berkeley.

*Mr. Brown* has served as the Company’s Vice President ofMarketing for analog/mixed-signal products since September 2005. From October 1997to August 2005, he was Director of RF and mixed-signal products for MicrelInc., a semiconductor manufacturer. From September 1989 to September 1997,he was 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 SEC our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, and amendments to those Reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of1934. Those reports and statements (1) may be read and copied at the SEC’spublic reference room at 100 F Street, N.E., Washington, DC 20549, (2) areavailable at the SEC’s internet site *(http://www.sec.gov)*,which contains reports, proxy and information statements and other informationregarding issuers that file electronically with the SEC and (3) areavailable free of charge through our website *(www.catsemi.com)*as soon as reasonably practicable after electronic filing with, or furnishingto, the SEC. Information regarding the operation of the SEC’s public referenceroom 

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may beobtained by calling the SEC at 1-800-SEC-0330. Copies of suchdocuments may be requested by contacting our Investor Relations Representativeat (408) 542-1051 or by sending an e-mail through the Investor Relations page onour website. We have adopted a Code of Business Conduct and Ethics for ourprincipal executive officer, principal financial officer, principal accountingofficer or controller and persons performing similar functions. We have postedour Code of Business Conduct and Ethics on our website. Any future amendmentsto this code will also be posted to our website. The information in or that canbe accessed through our website is not part of this Annual Report on Form 10-Keport.

**Item 1A.**                RiskFactors

*We are subject to a number of risks. Some of theserisks are endemic to the high-technology and semiconductor industry and are thesame or similar to those disclosed in our previous SEC filings. The followinglists some, but not all, of the risks and uncertainties which may have amaterial and adverse effect on our business, financial condition or results ofoperations. The risks and uncertainties set out below are not the only risksand uncertainties we face.*

***Risks related to our Business***

***Our quarterlyoperating results may fluctuate due to many factors and are difficult toforecast, which may cause the trading price of our common stock to declinesubstantially.***

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

·       fluctuations in customerdemand for the electronic devices into which our products are incorporated;

·       volatility in supply anddemand affecting semiconductor prices generally, such as an increase in thesupply of competitive products and a significant decline in average sellingprices;

·       establishment of additionalinventory reserves if sales of our inventory fall below our expected sales, orthe anticipated selling prices of our products fall below the amounts paid toproduce and sell certain parts;

·       changes in our product mixincluding product category, density, package type, lead content, or voltage;

·       inadequate visibility offuture demand for our products;

·       timing of new productintroductions and orders for our products;

·       increases in expensesassociated with new product introductions and promotions, process changesand/or expansion of our sales channels;

·       increases in wafer pricesdue to increased market demand and other factors;

·       increases in prices chargedby our suppliers due to increased costs, decreased competition and otherfactors;

·       fluctuations inmanufacturing yields;

·       gains or losses ofsignificant OEM customers or indirect channel sellers, such as distributors orresellers; and

·       general economicconditions.

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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 neverrealize a material portion of our net revenues from our analog/mixed-signal products,despite our expenditure of a disproportionate amount of our research anddevelopment and marketing resources on these products.***

Analog/mixed-signalproducts accounted for 7.6%, 4.7% and 2.1% of net revenues forfiscal 2006, 2005 and 2004, respectively. We believe that the growth inour analog/mixed-signal product revenues has been limited due to the extendedproduct design cycles and production lead times, and a sales force that haslimited experience selling these products. Despite limited product acceptanceto date, we continue to invest in and devote research and development andmarketing resources to analog/mixed-signal products with the expectation thatour standard analog/mixed-signal products will be accepted by many of ourcurrent customers and that we will eventually qualify and sell customanalog/mixed-signal products. Competition is intense as we have initiallyoffered a limited range of products while our more established competitors areoffering a much broader array of analog/mixed-signal products. Many customersfavor a vendor that offers a broad range of products. If we are unable torealize more revenues from these products, our total revenues may not grow. Inaddition, if we devote a disproportionate amount of our research and developmentresources to analog/mixed-signal products, our development of new non-volatilememory products may suffer and operating results may be harmed.

***We have in the pastbeen unable and in the future we may be unable to obtain sufficient quantitiesof wafers from our current foundry suppliers to fulfill customer demand.***

We currentlypurchase a majority of our production wafers from two foundries. To address ourwafer supply concerns, we plan to continue expanding our foundry capability atour primary supplier by qualifying our products in multiple fabrication plantsowned by the supplier and to expand our foundry capacity with other suppliers. Asthe need arises, from time to time, we may pursue additional wafer sources. However,we cannot be certain that these efforts will provide us with access to adequatecapacity in the future at costs which will enable us to remain profitable. Evenif 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:

·       the loss of any of ourcurrent foundries as a supplier;

·       our inability to obtainadditional capacity at our current foundry suppliers;

·       our inability to qualifyour current foundry suppliers for additional products;

·       our inability to locate andqualify other wafer manufacturers for desired foundry capacity; or

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

***We are now requiredto expense share-based payments to our employees, and our financial statementswill have a significant material adverse charge.***

As of May 1, 2006, weare required to expense stock options and other share-based payments toemployees and directors, which will require us to record a significant chargeto earnings. On 

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December 16, 2004,the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-BasedPayment,” which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25.SFAS No. 123(R) requires all share-based payments to employees,including grants of employee stock options, to be valued at fair value on thedate of grant, and to be expensed over the requisite service period. Pro formadisclosure of the income statement effects of share-based payments will nolonger be an alternative. We adopted SFAS No. 123(R) on May 1,2006, the first day of our fiscal 2007. Compensation expense for the unvestedawards will be measured based on the fair value of the awards previouslycalculated in developing the pro forma disclosures in accordance with theprovisions of SFAS No. 123. Our pro forma stock compensation expense was$2.0 million for fiscal 2006. Adoption of this accounting standard will have amaterial adverse impact on our consolidated financial statements. We arecurrently evaluating our stock-based compensation programs to determine whatour alternatives may be to reduce this expense in the future. If we choose notto issue stock options at the levels we have in the past, we believe we mayface more difficulties in attracting and retaining employees.

***We depend on asmall number of suppliers for our supply of wafers and we may be unable to meetcustomer demand due to our inability to obtain wafers.***

We do notmanufacture or process the semiconductor wafers used for our products. In 1985,we began a relationship with our principal foundry supplier. Since 1987, thatfoundry has supplied wafers to us and has been our principal foundry source. Infiscal 2000, an additional foundry began to provide products to us. Weprimarily use our principal foundry supplier for fabricating our memoryproducts and our other foundry supplier for fabricating our analog/mixed-signalproducts. We do not presently have a wafer supply agreement with our foundrysuppliers and instead purchase wafers on a purchase order and acceptance basis.Our reliance on these independent foundries involves a number of risks,including:

·       inadequate wafer suppliesto meet our production needs;

·       increased prices charged bythese independent foundries;

·       reduced control overdelivery schedules, manufacturing yields and costs; and

·       any other circumstancescausing a significant interruption in our supply of semiconductor wafers.

***We may forecastincorrectly and produce excess or insufficient inventories of particularproducts, which may adversely affect our results 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 be sold in a reasonableperiod of time. During recent fiscal years, as a result of reductions inestimated demand for our various products, we have taken charges for write downof inventories for certain products, primarily our EEPROM products. Forexample, we recorded inventory write-down charges of $1.0 million, $1.1 millionand $853,000 in fiscal 2006, fiscal 2005 and fiscal 2004, respectively, whichwere partially offset by benefits of $794,000, $1.0 million and $2.0 million,relating to products that were written off in prior periods and 

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soldduring these fiscal years, respectively. We may suffer reductions in values ofour inventories in the future and we may be unable to liquidate our inventoryat acceptable prices. To the extent we have excess inventories of particularproducts, our operating results could be adversely affected by charges to costof revenues that we would be required to recognize due to significantreductions in demand for our products or rapid declines in the market value ofinventory, resulting in inventory write downs or other related factors.

***We may be unable tofulfill all our customers’ orders according to the schedule originallyrequested due to the constraints in our wafer supply and processing time fromdie bank to finished goods, which could result in reduced revenues or higherexpenses.***

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 toanticipate pending orders and maintain an adequate supply of wafers andcommunicate to our customers delivery dates that we believe we can reasonablyexpect to meet, our customers may not accept the alternative delivery date ormay cancel their outstanding orders. Reductions in orders received orcancellation of outstanding orders would result in lower net revenues andreduced operating results, excess inventories and increased inventory reserves.We may also be required to pay substantially higher per wafer prices toreplenish 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 ondistributors and resellers for a substantial portion of our net revenues and ifour relationships with one or more of those distributors or resellers were toterminate, our operating results 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 2006, sales toAvnet, Inc., an international distributor, represented 12% of our netrevenues. For fiscal 2005, none of our direct or indirect customers represented10% or more of our net revenues. For fiscal 2004, sales to ALR CompanyLimited, a reseller in China, represented 11% of our net revenues.

In addition, we have experienced and may continue toexperience lower margins on sales to distributors and resellers as a result ofvolume pricing arrangements. We also do not typically enter into long-termarrangements with our distributors and resellers and we cannot be certain as tofuture order levels from our distributors and resellers. When we do enter intolong-term arrangements, the contracts are generally terminable at theconvenience of either party and it may be difficult to replace that source ofrevenues in the short-term upon cancellation.

Our business depends onthese third parties to sell our products. As a result, our operating resultsand financial condition could be materially adversely affected by the loss ofone or more of our current distributors or resellers, additional volume pricingarrangements, order cancellations, delay in shipment by one of our distributorsor resellers or the failure of our distributors or sellers to successfully sellour products.

***We face risks fromfailures in our manufacturing processes and the processes of our foundries andvendors.***

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 

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rejector be unable to sell a substantial percentage of wafers or the components on agiven wafer because of:

·       minute impurities;

·       difficulties in thefabrication process, such as failure of special equipment, operator error orpower outages;

·       defects in the masks usedto imprint circuits on a wafer;

·       nonconforming electricaland/or optical performance;

·       breakage of wafers; or

·       other factors.

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 maintainingacceptable manufacturing yields in the future.

In addition, themaintenance of our outsourced fabrication, manufacturing and assembly model issubject to risks, including:

·       the demands of managing andcoordinating workflow between geographically separate production facilities;

·       disruption of production inone facility as a result of a slowdown or shutdown in another facility; and

·       higher operating costs frommanaging geographically separate manufacturing facilities.

We depend on certainvendors for foundry services, materials, 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 thirdparty subcontractors to sort, assemble, test and ship our products tocustomers, which reduces our control over quality, delivery schedules andcapacity.***

We outsource all or aportion 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.

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***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.

It may be difficult to design and implement effectiveinternal control over financial reporting for combined operations anddifferences in existing controls of acquired businesses may result inweaknesses that require remediation when internal control over financialreporting are combined. 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 tofile this Annual Report on Form 10-K by the original due datewithout unreasonable expense or effort. Our ability to manage our operationsand growth will require us to improve our operations, financial and managementcontrols, as well as our internal control over financial reporting. We may notbe able to implement improvements to our internal control over financialreporting in an efficient and timely manner and may discover deficiencies andweaknesses in existing systems and controls; especially when such systems andcontrols are tested by increased scale of growth.

As a result, we expect tocontinue to incur related expenses and to devote additional resources to Section 404compliance. In addition, it is difficult for us to predict how long it willtake to complete the assessment of the effectiveness of our internal controlover financial reporting each year and we may not be able to complete theprocess on a timely basis. In the event that our chief executive officer, chieffinancial officer or independent registered public accounting firm determinethat our internal control over financial reporting is not effective as definedunder Section 404, we cannot predict how regulators will react or how themarket prices of our shares will be affected.

***We expect torelocate our principal executive offices in August 2006, and thetransition of our principal executive offices may cause delays that may harmour future operating results***

Our existing principalexecutive offices are located in Sunnyvale, California. Our lease in theSunnyvale facility expires in July 2006 and will become a monthly rentobligation for the remainder of our occupancy. In anticipation of theexpiration of this lease, we began renovations of a new headquarters in April 2006in a building we purchased in Santa Clara, California in March 2006. Therecan be no assurance that we will be able to successfully transition all of ouradministrative operations to the new facility without incurring significantadditional costs from extending our lease on a month to month basis for theSunnyvale facility or that we will not experience any delays in establishingthe required infrastructure to operate the business effectively. We may alsoexperience network, telecommunications and other infrastructure disruptions inconnection with our move to the new facility, which may limit our ability tocomplete sales and other transactions until the disruptions are resolved andwould negatively affect our operating results. The transition of administrativeoperations to the new facility could place significant strain on our managementand engineering resources and result in diversion of management attention fromthe day to day operation of our business. In addition, the customer andinternal qualification of our wafer testing facilities at the Santa Claralocation may not occur in a timely manner, if at all, which may increase ouroperating expenses and force us to operate two facilities until we successfullyqualify the Santa Clara facility. There can be no assurance that we will beable to hire additional management, engineering and other personnel, as needed,to manage effectively, the transition to the new facility, which may harm ourfuture operating results.

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***International salescomprise a significant portion of our product sales, which exposes us toforeign political and economic risks.***

For each offiscal 2006, fiscal 2005 and fiscal 2004, sales outside the United Statesaccounted for approximately 88% of our net revenues. We expect that salesoutside of the United States will continue to represent a significant portionof our net revenues in the future. However, our international operations may beadversely 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; and

·       changesin regulatory requirements.

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. We are in the process of forming asubsidiary in Thailand that will hire personnel and own certain equipmentlocated in that country in addition to our current operations.

***We may faceincreased management costs and other risks due to the establishment of ourproduct development group in Romania.***

In January 2003,we formed a wholly owned subsidiary in Romania to provide engineering servicesfor current products and the development of potential new products. In August 2004,we purchased a building in Bucharest for use by our Romanian engineering groupat a cost of $2.1 million. We have no prior experience in establishing oroperating engineering services outside of our headquarters in Sunnyvale,California. The expansion of our engineering design operations to remotelysituated offices presents a number of substantial risks that could increase ouroperating expenses and adversely affect our operating results, financial conditionand ability to deliver our products and grow our business, including:

·       difficulties in staffingand managing foreign operations, in particular attracting and retainingpersonnel qualified to provide high quality engineering services;

·       difficulties incoordinating our engineering operations in Romania with those in California;

·       diversion of managementattention;

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·       political and economicinstability, which may have an adverse impact on foreign exchange rates of theRomanian leu relative to the U.S. dollar and could impair our ability toconduct our business in Romania;

·       difficulties in maintaininguniform standards, controls, procedures and policies with our Romaniansubsidiary relative to those of our other locations, including productdevelopment management and financial consolidation;

·       difficulties in owning andoperating real property in Romania; and

·       inadequacy of the localinfrastructure to support our needs.

***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. Competition for these personnel,particularly for highly skilled design, process and test engineers, is intenseand we may not be able to retain these personnel or attract other highlyqualified personnel. Our business, financial condition and results ofoperations could be materially adversely affected by the loss of or failure toattract and retain highly qualified personnel.

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

A significant portion ofour net revenues have been and continue to be derived from sales of low densityflash memory products. Flash memory products represented 8.3%, 9.6% and 9.4% ofour net revenues in fiscal 2006, fiscal 2005 and fiscal 2004, respectively.In general, the market for flash memory products has been characterized bycompeting technologies, migration of demand to larger memory sizes and intenseoverall competition. Other flash memory vendors continue to design, develop andsell flash memory devices with larger memory in reaction to changes in marketdemand. This transition to larger flash memory sizes is resulting in a limitedand shrinking market for the low density flash memory products that wecurrently offer. We have decided not to develop any of the higher density flashmemory devices due to the extreme competition in the medium and high densityflash memory market and the considerable costs of development associated withit. Due to these and other factors, we may experience declining net revenuesfrom our low-density flash memory products, which could harm our operatingresults.

***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. Principalcompetitors for 

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ourEEPROM products currently include Atmel, STMicroelectronics and MicrochipTechnology. Principal competitors for our low density flash products includeSilicon Storage Technology and Integrated Silicon Solution. Principalcompetitors for our analog/mixed-signal products include FairchildSemiconductor, Intersil, Linear Technology, Maxim Integrated Products, NationalSemiconductor and Texas Instruments.

***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. These types of downturns have occurred numerous times in the past,most recently, in calendar year 2005. During such downturns, we experiencereduced product demand and production overcapacity which result in competitivepricing pressures leading to accelerated erosion of average selling prices andreduced gross margins. These downturns may occur for extended periods. Accordingly,we may experience substantial period-to-period fluctuations in operatingresults.

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.

***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 patents granted and pending in the United States andintend to seek further United States and international patents on ourtechnology. We cannot be certain that patents will be issued from any of ourpending applications, that patents will be issued in all countries where ourproducts can be sold or that any issued patents will be of sufficient scope orstrength 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 sold,may 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.

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***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 could causeus 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:

·       pay substantial damages;

·       pay amounts to indemnifyour customers;

·       stop the manufacture andsale of the infringing products;

·       expend significantresources to develop non-infringing technology;

·       discontinue the use of certainprocesses; or

·       obtain licenses to thetechnology.

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.

***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 in acquiringlicenses to use proprietary technologies of third parties to expand our productlines. We may 

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havedifficulty integrating the acquired products, personnel or technologies of anyacquisition we might make. These difficulties could disrupt our ongoingbusiness, limit our future growth, distract our management and employees andincrease 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:

·       quarterly variations in ourresults of operations;

·       announcements oftechnological innovations or new products by us, our customers or competitors;

·       our failure to achieve theoperating results anticipated by analysts or investors;

·       sales or the perception inthe market of possible sales of a large number of shares of our common stock byour directors, officers, employees or principal stockholders;

·       international political,socioeconomic and financial instability, including instability associated withmilitary action in Afghanistan, Iraq or other conflicts;

·       releases or reports by orchanges in security analysts’ recommendations; and

·       developments or disputesconcerning patents or proprietary rights or other events.

For example, duringfiscal 2004, fiscal 2005, fiscal 2006 and to date in fiscal 2007, thetrading price of our common stock on the Nasdaq National Market has ranged froma high of $9.75 per share to a low of $2.51 per share. If our net revenues andresults of operations are below the expectations of investors, significantfluctuations in the market price of our common stock could occur. In addition,the securities markets have, from time to time, experienced significant priceand volume fluctuations, which have particularly affected the market prices forhigh technology companies and often are unrelated and disproportionate to theoperating performance of particular companies. These broad market fluctuations,as well as general economic, political and market conditions, may negativelyaffect the market price of our common 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 of directors has the authority to issue upto 2,000,000 shares of preferred stock and to determine the rights,preferences, privileges and restrictions, including voting rights, of theshares without any further vote or action by our stockholders. If we issue anyof these shares of preferred stock in the future, the rights of shareholders ofour common stock may be negatively affected. If we issue preferred stock, achange of control of our company could be delayed, deferred or prevented. Wehave no current plans to issue shares of preferred stock.

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Section 203 ofthe Delaware General Corporation Law restricts certain business combinationswith any “interested stockholder” as defined by that statute. In addition, ourcertificate of incorporation and bylaws contain certain other provisions thatmay have the effect of delaying, deferring or preventing a change of control. Theseprovisions include:

·       the classification of ourboard so that only a portion of our directors are elected each year and eachdirector serves a three year term;

·       the elimination of actionsby written consent of stockholders; and

·       the establishment of anadvance notice procedure and a minimum holding requirement for stockholderproposals and director nominations to be acted upon at annual meetings of thestockholders.

In 1996, our board of directors adopted a stockholderrights plan with an initial term of ten years which will expire in December 2006.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 thesubject of securities class action litigation due to future stock pricevolatility.***

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.   *Unresolved Staff Comments***

Not Applicable.

**Item 2.   *Properties***

Our principal administrative, sales, marketing,research & development and sort facility is currently located in abuilding of approximately 42,500 square feet in Sunnyvale, California. Thefacility has a lease commitment through July 2006 and is under a month tomonth arrangement thereafter. On March 16, 2006, we purchased a 41,965square-foot building in Santa Clara, California which will house our principalheadquarters currently located in Sunnyvale, California. We are scheduled tomove in August 2006.

In addition, we purchasedour research and development facility in Bucharest, Romania, consisting of25,800 square feet, in August 2004 and we lease sales office space in EastDundee, Illinois; Shanghai and Shenzhen, China; Oxford, United Kingdom; Munich,Germany; Yokohama, Japan; Singapore; Seoul, 

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SouthKorea; and Taipei, Taiwan; and an operations office in Bangpa-in, Thailand. Webelieve that our existing facilities are adequate to meet our current needs andthat additional or alternative space will be available in the future oncommercially reasonable terms.

**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 30, 2006.

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**PART II**

**Item 5.**              *Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities*

**Common Stock MarketPrices and Dividends**

Ourcommon stock is quoted on the NASDAQ Global Market under the symbol “CATS.”  The following table sets forth, for theperiods indicated, the high and low sale prices per share of our common stockas reported on the NASDAQ Global Market.

| ** **                                 | ** ** | **Price Range** | ** ** |
|--------------------------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **High**             | ** ** | **Low** | ** ** |
| **Fiscal year ended  April 30, 2005** |       |                 |       |   |   |
| First Quarter                              |       | $                    | 8.40       |   | $ | 5.40 |   |
| Second Quarter                             |       | 6.20                 |       | 4.30 |   |
| Third Quarter                              |       | 6.42                 |       | 5.06 |   |
| Fourth Quarter                             |       | 5.44                 |       | 4.13 |   |
| **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 30, 2006,there were approximately 151 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 2006.

| **Period**         | ** ** | ** ** | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number of  Shares That May Yet  Be Purchased  Under the Plans  or Programs** | ** ** |
|--------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| February 2006 |       |       | 196,410    |                                             |       |                                         | $          | 4.96                                                                                                                                |       |                                                                                                                                |       | 196,410 |   |   |   | 333,555 |   |   |
| March 2006    |       |       | 191,774    |                                             |       |                                         | 4.93       |                                                                                                                                |       |                                                                                                                                | 191,774    |   |   |   | 141,781 |   |   |
| April 2006    |       |       | —     |                                             |       |                                         |       |                                                                                                                                |       |                                                                                                                                |       |   |   |   | 141,781 |   |   |
| Total              |       |       | 388,184    |                                             |       |                                         | $          | 4.95                                                                                                                                |       |                                                                                                                                |       | 388,184 |   |   |   |   |   |   |

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(1)          InSeptember 2005, the board of directors authorized a new stock repurchaseprogram under which we may repurchase up to 1.0 million shares of its commonstock. Prior to September 2005, the board of directors authorized therepurchase of 3.5 million shares. Through April 30, 2006, we haverepurchased an aggregate of 4,358,219 shares under the board of director’sauthorized repurchase plans. See “Note 7—Stockholders’ Equity” in Part IV,Item 15(a)(1) of this Annual Report on Form 10-K.

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**Item 6.**              *Selected Consolidated 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.

| ** **                                   | ** ** | **Years Ended April 30,**                           | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statements of  Income Data:** |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net revenues                                 |       | $                                                                  | 60,217     |   | $ | 62,320 |   | $ | 63,538 |   | $ | 48,221 |   | $ | 42,791 |   |
| Cost of revenues                             |       | 36,900                                                             |       | 35,852 |   | 37,375 |   | 28,396 |   | 27,158 |   |
| Gross profit                                 |       | 23,317                                                             |       | 26,468 |   | 26,163 |   | 19,825 |   | 15,633 |   |
| Research and  development                    |       | 7,472                                                              |       | 7,910 |   | 7,130 |   | 5,223 |   | 4,380 |   |
| Selling, general  and administrative         |       | 13,445                                                             |       | 13,696 |   | 11,453 |   | 10,020 |   | 10,652 |   |
| Income from operations                       |       | 2,400                                                              |       | 4,862 |   | 7,580 |   | 4,582 |   | 601 |   |
| Interest income  and other, net              |       | 1,175                                                              |       | 732 |   | 379 |   | 382 |   | 663 |   |
| Income before  income taxes                  |       | 3,575                                                              |       | 5,594 |   | 7,959 |   | 4,964 |   | 1,264 |   |
| Income tax  provision (benefit)              |       | 1,019                                                              |       | 1,773 |   | (1,408 | ) | (1,354 | ) | 494 |   |
| Net income(1)                                |       | $                                                                  | 2,556      |   | $ | 3,821 |   | $ | 9,367 |   | $ | 6,318 |   | $ | 770 |   |
| Net income per share:                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                        |       | $                                                                  | 0.15       |   | $ | 0.22 |   | $ | 0.57 |   | $ | 0.38 |   | $ | 0.04 |   |
| Diluted                                      |       | $                                                                  | 0.14       |   | $ | 0.20 |   | $ | 0.48 |   | $ | 0.34 |   | $ | 0.04 |   |
| Weighted average common  shares:             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                        |       | 16,685                                                             |       | 17,507 |   | 16,567 |   | 16,721 |   | 17,829 |   |
| Diluted                                      |       | 18,220                                                             |       | 19,485 |   | 19,411 |   | 18,339 |   | 20,439 |   |

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(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 which is now zero.

| ** **                                                 | ** ** | **April 30,**                                                 | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Balance Sheet  Data:**                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and short-term investments         |       | $                                                                  | 29,139     |   | $ | 33,793 |   | $ | 33,809 |   | $ | 27,906 |   | $ | 26,295 |   |
| Total working  capital                                     |       | 43,268                                                             |       | 48,084 |   | 46,338 |   | 39,017 |   | 36,180 |   |
| Total assets                                               |       | 70,420                                                             |       | 70,061 |   | 66,865 |   | 50,588 |   | 47,924 |   |
| Total current  liabilities                                 |       | 12,890                                                             |       | 12,193 |   | 12,877 |   | 8,235 |   | 9,296 |   |
| Total long-term  liabilities and capital lease obligations |       | —                                                             |       | — |   | — |   | — |   | 3,262 |   |
| Stockholders’ equity                                  |       | 57,530                                                             |       | 57,868 |   | 53,988 |   | 42,353 |   | 35,366 |   |
|                                                            |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**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’s Discussionand Analysis of Financial Condition and Results of Operations” areforward-looking statements. These forward-looking statements containedherein are based on current expectations and involve various risks anduncertainties that could cause actual results to differ materially from thoseexpressed in the forward-looking statements. See the risks and uncertaintiesidentified in ““Part I. Item 1A. Risk Factors” below and in the documentsfiled by us from time to time with the Securities and Exchange Commission. Weundertake no obligation to revise or update publicly any forward-lookingstatements 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. We have been a committed long-term supplier of memory productsincluding through periods of tight manufacturing capacity and cyclical marketdownturns.

The market for our non-volatile memory is highlycompetitive and market participants have relatively weak pricing power. Althoughour average selling prices of our non-volatile memory products have declinedover time, prices are sensitive to conditions in our OEM customers’ targetmarkets. For example, in fiscal 2005, we experienced a downward trend inaverage selling prices and unit volumes for our non-volatile memoryproducts due to weakening market demand, which continued in fiscal 2006. Ingeneral, we expect the average selling price for a given memory product todecline in the future, primarily due to market competition, productavailability and manufacturing capacity. In response to that trend, we continueto work with our foundries and other vendors to increase the manufacturingefficiency 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 and developmentteam by establishing our own development center in Bucharest, Romania and byhiring additional engineers in Romania and in our Sunnyvale, Californiaheadquarters. In fiscal 2006, we purchased a building in Santa Clara,California that will house our principal offices and our principal wafer testoperation, which are presently located in Sunnyvale, California. The move isexpected to provide employees with modern facilities and make efficient use ofspace while reducing our occupancy costs. In addition, in fiscal 2005, wepurchased a new building in Bucharest for our Romanian product development team.We continue to make substantial investments in research and development toadvance our non-volatile memory products, as well as develop broader solutionswith our line of analog/mixed-signal products. We are in the process of forminga subsidiary in Thailand that will perform a portion of the inventorymanagement and processing functions that are currently subcontracted toTrio-Tech. This is expected to reduce our expenses and improve our control overthe personnel and assets now located in Thailand.

Sales of our analog/mixed-signal products continue totrend upwards, reaching 7.6% of net revenues in fiscal 2006 as compared to4.7% of net revenues in fiscal 2005. 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 

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long-term relationshipswith our suppliers to ensure stability in our supply of products at acompetitive cost. In addition, in an effort to alleviate any potential wafer capacityconstraints, we maintain a supply of wafers in a die bank for selectedproducts.

We market and sell our products directly through oursales force and sales representatives to OEMs and indirectly throughdistributors and resellers who sell to their end customers. Indirect sales werea majority of our total net revenues in fiscal 2006, fiscal 2005 andfiscal 2004, representing 52% of net revenues in fiscal 2006. Our totalcustomer base, including OEMs and end-customers of our distributors and resellers,is relatively diverse and during fiscal 2006 consisted of more than 3,400customers. We have approximately 40 distributors and resellers.

In fiscal 2006, one customer represented 12% of ournet revenues. For fiscal 2005, no one customer accounted for 10% or more of ournet revenues. For fiscal 2004, one customer represented 11% of our netrevenues.

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 comprisedthe 88% of our net revenues for each of fiscal 2006, fiscal 2005 and fiscal2004. Substantially all sales of our products are denominated inU.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 inrecognition of revenue and gross margin for the inventories held by suchresellers. We did not have similar benefits in fiscal 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 as well as compensation and associated costs related to manufacturingsupport, inbound freight shipments and quality assurance personnel. It also caninclude, on occasion, adjustments to inventory valuations based on demand andaverage selling prices expected in future periods.

*Researchand Development.**  *Researchand development expense consists primarily of compensation and associated costsfor engineering, technical and support personnel, contract engineeringservices, depreciation of equipment and cost of wafers and mask sets used toevaluate new products and new versions of current products.

*Selling, General andAdministrative.**  *Selling,general and administrative expense consists primarily of compensation andassociated costs for sales, marketing and administrative personnel,commissions, promotional activities, bad debt expense, outbound freightshipments, professional fees and director and officer insurance.

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**Critical AccountingPolicies and Estimates**

The preparation of ourconsolidated financial statements and related disclosures in conformity with generallyaccepted accounting principles in the United States requires us to makeestimates and judgments that affect the amounts reported in our financialstatements and accompanying notes. We evaluate our estimates and judgmentsbased on historical experience and apply them on a consistent basis. Theseestimates and judgments primarily relate to inventory valuation and warrantyliabilities, which affects our cost of sales and gross margin; and thevaluation of deferred income taxes and income taxes payable, which affects ourincome tax expense and benefit. We also have other key accounting policies,such as our policies for revenue recognition and allowance for doubtfulaccounts receivable and sales returns reserves. The methods, estimates andjudgments we use in applying these critical accounting policies have asignificant impact on the results we report in our financial statements. Webelieve that consistent application results in financial statements andaccompanying notes that fairly represent our financial condition, operatingresults and cash flows for all periods presented. However, any factual errorsor errors in these estimates and judgments may have a material impact on ourfinancial conditions, operating results 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 delivered the products and 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 that sell to their end customers. We recognize revenues upon deliveryto OEM customers and resellers who have no product return rights and no priceprotection rights. We deem that delivery occurs when legal title and the riskof loss transfers to the customer. Delivery is generally defined by thecustomers’ shipping terms, as stated in the related purchase order. If thecustomers’ purchase orders do not define the shipping terms, the shipping termswill be Ex-Works as defined in our invoice. We record an estimated allowancefor returns from OEM customers and resellers, based on a percentage of ourrevenues. This estimate is based on historical averages.

We sell to some of our distributors under agreementswhich provide for product return and price protection rights. These agreementsgenerally permit the distributor to return up to 10% by value of the totalproducts that the distributor has purchased from us in specified six monthperiods. We defer recognition of revenues until such time as the distributorresells the product to their end customer, at which time the sales pricebecomes fixed. On a monthly basis, we receive point of sales and endinginventory information from each distributor. Using this information, wedetermine the amount of revenues to recognize. For distributors who haveproduct return rights, we also record an inventory reserve to address the costof products we anticipate that we will not be able to resell after their returnby the distributors. For distributors who have price protection rights,distributors may take the associated credits immediately and in general, weprocess the credits one or two months after the credit is taken by thedistributor. We record a reserve to cover the estimated liability of thoseunprocessed credits. We re-evaluate our revenue recognition policiesperiodically and no less often than annually.

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We defer the recognitionof revenue for certain resellers who have no product return rights and no priceprotection rights. In accordance with our policy, we will generally defer therecognition of revenue for certain resellers based on their high dollar volumeof purchases. 

***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 usage may differ from actualinventory use. The lives of our products are usually long and obsolescence hasnot been a significant factor historically in the valuation of our inventories.

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 establish a new costbasis and accordingly we do not reverse inventory provisions until theassociated inventory has been sold or physically scrapped.

***Allowance for Doubtful Accounts Receivable***

We estimate thecollectibility of our accounts receivable at the end of each reporting period. Weanalyze the aging of accounts receivable and bad debt history, payment history,customer concentration, customer credit worthiness and current economic trendswhen evaluating the adequacy of the allowance for doubtful accounts. Wemaintain an allowance for doubtful accounts, which is created by charges toselling, general and administrative expense. Our accounts receivable balancewas $9.5 million, net of allowance for doubtful accounts of $138,000, asof April 30, 2006.

***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 ourcurrent tax exposure and assessing temporary differences resulting fromdiffering treatment of items, such as deferred revenues, for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included on our balance sheet on a net basis. We then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome and to the extent we establish a valuation allowance or increase thisallowance in a period; we will include an additional tax provision in thestatement of income.

We reassess and may adjust the estimated tax ratequarterly. We apply the current tax rate to our year to date income and our taxprovision and related accrual is adjusted accordingly. Our effective income taxrate was 28.5% for fiscal 2006.

We make significant judgments in determining ourprovision for income taxes, our deferred tax assets and any valuation allowancerecorded against our net deferred tax asset. As of April 30, 2006, ourgross 

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deferred tax assets,consisting primarily of net operating loss carryforwards, tax creditcarryforwards and nondeductible reserves and accruals, were valued at$7.5 million and our valuation allowance was zero.

We have concluded that all of our deferred tax assetswill be realizable, based on available objective evidence and our history ofincome before taxes. 

The calculation of taxliabilities involves dealing with uncertainties in the application of complexglobal tax regulations. We recognize potential liabilities for anticipated taxaudit issues in the U.S. and other tax jurisdictions based on our estimate ofwhether, and the extent to which, additional taxes will be due. If payment ofthese amounts ultimately proves to be unnecessary, the reversal of theliabilities would result in tax benefits being recognized in the period whenthe Company determines the liabilities are no longer necessary. If the estimateof tax liabilities proves to be less than the ultimate assessment, a furthercharge to expense would result.

**Results ofOperations**

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

| ** **                          | ** ** | **Years Ended April 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenues                        |       | 100.0                                    | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                    |       | 61.3                                     |       | 57.5 |   | 58.8 |   |
| Gross profit                        |       | 38.7                                     |       | 42.5 |   | 41.2 |   |
| Operating expenses:                 |       |                                     |       |   |   |   |   |
| Research and development            |       | 12.4                                     |       | 12.7 |   | 11.2 |   |
| Selling, general and administrative |       | 22.3                                     |       | 22.0 |   | 18.0 |   |
| Income from operations              |       | 4.0                                      |       | 7.8 |   | 12.0 |   |
| Interest income  and other, net     |       | 2.0                                      |       | 1.2 |   | 0.5 |   |
| Income before income taxes          |       | 6.0                                      |       | 9.0 |   | 12.5 |   |
| Income tax provision (benefit)      |       | 1.8                                      |       | 2.9 |   | (2.2 | ) |
| Net income                          |       | 4.2                                      | %          | 6.1 | % | 14.7 | % |

 

***Comparison of the Fiscal Years Ended April 30,2006 and 2005***

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

| ** **          | ** ** | **Years Ended April 30,** | ** ** |
|---------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| EEPROM              |       | $                                        | 50,597     |   | 84.1 | % | $ | 53,397 |   | 85.7 | % | $ | 56,239 |   | 88.5 | % |
| Flash               |       | 5,016                                    |       | 8.3 |   | 5,983 |   | 9.6 |   | 5,988 |   | 9.4 |   |
| Analog/mixed-signal |       | 4,604                                    |       | 7.6 |   | 2,940 |   | 4.7 |   | 1,311 |   | 2.1 |   |
| Net revenues        |       | $                                        | 60,217     |   | 100.0 | % | $ | 62,320 |   | 100.0 | % | $ | 63,538 |   | 100.0 | % |

 

*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 

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customer base. While weexperienced an improved market demand that resulted in a 9% increase in totalunit volume sold to end customers in fiscal 2006, net revenues decreasedoverall because the increase in total unit volume was off-set by increasedmarket competition in the more recent period resulting in a 11% decrease inoverall average selling prices.

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% 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 our average balance of cash, cash equivalents and short-term investmentswas approximately 3.4% in fiscal 2006 and approximately 1.8% infiscal 2005. The change was due to higher average interest ratesexperienced in fiscal 2006 compared to fiscal 2005, partially offset by lowerinvestable 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 statue oflimitations. Although extension of the federal tax credit provision is expectedduring 2006, the federal tax law authorizing such credits expired in December 2005.As a result, we cannot reflect the benefit of credits until the related lawsare enacted.

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***Comparison of the Fiscal Years Ended April 30,2005 and 2004***

*NetRevenues.**  *Ournet revenues decreased $1.2 million, or 1.9%, to $62.3 million forfiscal 2005 from $63.5 million for fiscal 2004. The decrease innet revenues was primarily due to a decrease in EEPROM unit volume sold,resulting in a decline of net revenues from our EEPROM products of$2.8 million. This decrease was partially offset by an increase in netrevenues from our analog/mixed-signal products of $1.6 million, or 124% to$2.9 million for fiscal 2005 from $1.3 million forfiscal 2004, which resulted from the introduction of new products andincreased sales to our existing OEM customer base. Net revenues from our flashmemory products remained constant at $6.0 million for bothfiscal 2005 and fiscal 2004.

Net revenues in fiscal 2005 benefited by approximately$1.0 million from the termination of price adjustment and stock rotation rightsof certain small regional resellers that had not historically used thoserights, which resulted in recognition of revenues and gross margin for theinventories held by such resellers.

Sales to customers outside the United Statesrepresented approximately 88% of net revenues in both fiscal 2005 andfiscal 2004.

*GrossProfit.**  *Grossprofit increased $305,000, or 1.2%, to $26.5 million for fiscal 2005from $26.2 million for fiscal 2004. Gross margin, which equals grossprofit divided by net revenues, was 42.5% for fiscal 2005 and 41.2% forfiscal 2004. The $305,000 improvement in gross profit in fiscal 2005from fiscal 2004 was primarily due to a decline in inventory costs and areduction in our cost of revenues as a result of a $1.4 million royaltyexpense we recognized in fiscal 2004 in connection with the settlement ofdisputed royalty obligations with Philips Electronics. We also benefited fromhigher average selling prices for our flash memory and analog/mixed signalproducts in fiscal 2005. These benefits to our gross profit in fiscal 2005were partially offset by the unfavorable impact of movements in our inventoryreserves in fiscal 2005 as compared to fiscal 2004. The benefit from salesof previously reserved inventory was $1.0 million for fiscal 2005 and$2.0 million for fiscal 2004, and provisions for excess and obsoleteinventory were $1.1 million for fiscal 2005 and $853,000 for fiscal 2004. Thenet impact of these inventory provisions was a decrease in gross profit of$83,000 in fiscal 2005 as compared to an increase in gross profit of $1.1 millionin fiscal 2004.

*Researchand Development.**  *Researchand development expense increased $780,000, or 10.9%, to $7.9 million forfiscal 2005 from $7.1 million for fiscal 2004. As a percentageof net revenues, research and development expense was 12.7% in fiscal 2005and 11.2% in fiscal 2004. The increase in research and development expensein fiscal 2005 was primarily attributable to a $435,000 increase inpurchases of developmental mask sets and wafer fabrication related to productdevelopment and to a $383,000 increase in personnel-related expenses, primarilyas a result of an increase in headcount to support our product developmentefforts. These increases were partially offset by a reduction in professionalservices and depreciation expenses. 

*Selling,General and Administrative.**  *Selling, general and administrative expense increased$2.2 million, or 19.6%, to $13.7 million for fiscal 2005 from$11.5 million for fiscal 2004. As a percentage of net revenues,selling, general and administrative expense was 22.0% in fiscal 2005 and 18.0%in fiscal 2004. These increases were primarily attributable to a$1.5 million increase in fees paid primarily to consultants andaccountants related to compliance with the Sarbanes-Oxley Act of 2002 and a$519,000 increase in sales and marketing personnel-related expenses.

*InterestIncome and Other, net.**  *Weearned interest income and other, net, of $732,000 in fiscal 2005 ascompared to interest income and other, net, of $379,000 in fiscal 2004. Ourrate of return on our average balance of cash, cash equivalents and short-terminvestments was approximately 1.8% in fiscal 2005 and approximately 1.2%in fiscal 2004. The change was due to higher average interest ratesexperienced in fiscal 2005 compared to fiscal 2004 due to improved marketconditions.

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*Income Tax Provision(Benefit).**  *Theeffective income tax rate was a provision of 31.7% in fiscal 2005, ascompared to a benefit of 17.7% in fiscal 2004. The difference between ourfiscal 2005 and fiscal 2004 effective tax rates was primarilyattributable to the reversal of our valuation allowance recorded against ournet deferred tax asset in fiscal 2004.

**Liquidity andCapital Resources**

At April 30, 2006, wehad cash, cash equivalents and short-term investments of $29.1 million. Ourhistorical sources of cash and capital expenditures have come from ouroperating activities. During fiscal 2006, we repurchased 912,943 shares ofcommon stock for approximately $4.5 million and purchased a building in SantaClara, California for $3.7 million, which will serve as our principalheadquarters when we relocate in August 2006. Additionally, employeesexercised stock options to generate $1.1 million during fiscal 2006. We investour excess cash in short-term financial instruments to generate interest income.These instruments are U.S. government debt securities, the majority of whichhave maturities that are less than one year. They are highly liquid and can beconverted to cash at any time. 

***Net Cash from Operating Activities***

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 increase in gross inventory of $3.0 million due tofaster delivery times from our suppliers, and an increase in our deferred grossprofit on shipments to distributors.

In fiscal 2005, we had cash from operatingactivities of $4.9 million, which resulted from net income of$3.8 million, adjusted for non-cash charges including depreciation andamortization of $1.6 million, a net charge of $1.1 million for movements ininventory 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. 

In fiscal 2004, wehad cash from operating activities of $10.7 million, which resulted fromnet income of $9.4 million, adjusted for non-cash charges includingdepreciation and amortization of $1.4 million, additions to inventoryreserves of $853,000, a reduction of gross inventories of $2.6 million, anincrease in accounts payable of $1.3 million primarily due to the timingand amount of inventory purchases, an increase in accrued expenses and otherliabilities of $891,000 related primarily to the tax provision and an increaseof $2.7 million for deferred gross profit on distributor sales due toincreased distributor inventories. These increases were partially offset byreleases of inventory reserves of $2.0 million resulting from shipments ofpreviously reserved inventory and an increase in gross accounts receivable of$4.7 million due to increased shipments.

***Net Cash from Investing Activities***

In fiscal 2006, cash used by investing activitieswas $4.3 million. During fiscal 2006 our short-term investmentsdecreased by $1.4 million. We used $5.7 million to acquire propertyand equipment, of which 

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$3.7 million was used forthe purchase of a building in Santa Clara, California, which will replace theleased principal headquarters in Sunnyvale, California

In fiscal 2005, cash used by investing activitieswas $10.4 million. During fiscal 2005, our short-term investmentsincreased by $6.3 million as we transferred those funds from cash and cashequivalents. We also used $4.1 million, which was primarily for thepurchase of our new building for our R&D operations in Romania and forcontinuing investments in our new enterprise resource planning and supply chainmanagement systems.

In fiscal 2004,investing activities provided $1.7 million. During fiscal 2004, ourshort-term investments declined by $3.5 million as we transferred thosefunds to cash and cash equivalents. We also used $1.7 million primarilyfor the acquisition of test equipment.

***Net Cash from Financing Activities***

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, cash used by financing activitieswas $724,000, consisting of $9.6 million for the repurchase of anaggregate of 1,901,176 shares of common stock on the open market, at an averageprice per share of $5.02, which was partially offset by $8.0 million innet proceeds from our public offering of 1,450,000 shares of common stock in July 2004and $843,000 in proceeds from the sale of common stock through the exercise ofstock options by employees.

In fiscal 2004, cashused by financing activities was $3.0 million. In a private transaction wepurchased 600,000 shares from Elex N.V., our largest stockholder, for $6.77 pershare and an aggregate of $4.1 million, which represented a 13% discountfrom the closing market price on the Nasdaq National Market on the last tradingdate prior to the approval of the transaction by our Board of Directors. Separately,we purchased 74,000 shares of our common stock from the open market as part ofour open market repurchase program. We also received $1.3 million ofproceeds upon the exercise of stock options by employees.

***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, theboard of directors amended the program and authorized the purchase up to anaggregate of 3,500,000 shares. Upon reaching the maximum number of sharesauthorized under this program, the board of directors authorized a new stockrepurchase program of up to 1.0 million shares in September 2005.Thepurpose of these share repurchase programs are to reduce the long-termpotential dilution in earnings per share that might result from issuances underour stock option plans. The following table summarizes the activity of the openmarket repurchase programs for fiscal 2006, fiscal 2005 and fiscal 2004 anddoes not include our repurchases of shares from Elex N.V.:

| ** **                         | ** ** | **Years Ended April 30,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **Total**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Shares  repurchased in open market |       | 2,888,119                                |       | 912,943 |   | 1,901,176 |   | 74,000 |   |
| Total cost of  shares              |       | $                                        | 14,272,000 |   | $ | 4,503,000 |   | $ | 9,553,000 |   | $ | 216,000 |   |
| Average cost per share             |       | $                                        | 4.94       |   | $ | 4.93 |   | $ | 5.02 |   | $ | 2.92 |   |

 

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Through April 30,2006 (excluding repurchases of shares from Elex N.V.) we have repurchased4,358,219 shares under the board of director’s authorized repurchase plans at atotal cost of $17,922,088 or an average cost per share of $4.11 per share.

***Contractual Obligations and Commercial Commitments***

Thefollowing table summarizes our contractual obligations as of April 30,2006 and the effects these obligations and commitments are expected to have onour liquidity and cash flows in future periods (in thousands):

| ** **                          | ** ** | **Years Ended April 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | ** **                               | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More Than** | ** ** |
| ** **                          | ** ** | **Total**                                | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| *Contractual cash obligations*      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases(1)                 |       | $                                        | 1,706      |   |   | $ | 424 |   |   |   | $ | 1,002 |   |   |   | $ | 280 |   |   |   | $ | — |   |   |
| Wafer purchases                     |       | 5,472                                    |       |   | 5,472 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other purchase commitments          |       | 694                                      |       |   | 694 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total contractual  cash obligations |       | $                                        | 7,872      |   |   | $ | 6,590 |   |   |   | $ | 1,002 |   |   |   | $ | 280 |   |   |   | $ | — |   |   |

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(1)          OnMarch 16, 2006, we purchased a building in Santa Clara, California for$3.7 million, which will replace the leased principal headquarters inSunnyvale, California that expires July 2006. 

***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-balancesheet arrangements or other contractually narrow or limited purpose. As of April 30,2006, 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 current plans, nor are we currentlynegotiating, to obtain additional financing. Our long-term plan is to financeour core business operations with cash we generate from operations. However, fromtime to time we may raise additional capital through a variety of sources,including the public equity market, private financings, collaborativearrangements and debt. The additional capital we raise could be used forworking capital purposes, to fund our research and development activities orour capital expenditures or to acquire complementary businesses or technologies.If we raise additional capital through the issuance of equity or securitiesconvertible into equity, our stockholders may experience dilution. Thosesecurities may have rights, preferences or privileges senior to those of theholders of the common stock. Additional financing may not be available to us onfavorable terms, if at all. If we are unable to obtain financing, or to obtainit on acceptable terms, we may be unable to successfully support our businessrequirements.

**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 

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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 2006, fiscal 2005 and fiscal 2004, we purchased $2.5million, $2.4 million and $3.7 million of wafers, respectively, fromX-FAB. As of April 30, 2006 and 2005, the total amount owed X-FABby us was $143,000 and $314,000, respectively. In the first quarter of fiscal2005, Elex reduced its holdings from 3,578,700 shares, or 21.8% of ouroutstanding shares as of April 30, 2004, to 728,700 shares, or 4.4% of theoutstanding shares of the Company as of April 30, 2005.

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

**Recent AccountingPronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)SFAS No. 123 (revised 2004),*“Share-BasedPayment,”* or SFAS No. 123(R). SFAS No. 123(R) eliminatesthe alternative of applying the intrinsic value measurement provisions ofAccounting Principals Board (“APB”) Opinion No. 25, or APB 25, tostock compensation awards issued to employees. The new standard requiresenterprises to measure the cost of employee services received in exchange foran award of equity instruments based on the fair value of the award on the dateof grant. That cost will be recognized over the period during which an employeeis required to provide services in exchange for the award, usually the vestingperiod.

The pro forma effects on net income and earnings pershare as if we had applied the fair value recognition provisions of originalSFAS No. 123 on stock compensation awards (rather than applying theintrinsic value measurement provisions of APB 25) are in the Notes toConsolidated Financial Statements (see Note 1). Although the pro formaeffects of applying original SFAS No. 123 may be indicative of the effectsof adopting SFAS No. 123(R), the provisions of these two statements differin some important respects. The actual effects of adopting SFAS No. 123(R) willbe dependent on numerous factors including, but not limited to, the valuationmodel chosen by us to value stock-based awards; the assumed award forfeiturerate; the accounting policies adopted concerning the method of recognizing thefair value of awards over the requisite service period; and the transitionmethod chosen for adopting SFAS No. 123(R). Adoption of thisaccounting standard will have a material adverse impact on our consolidatedfinancial statements. SFAS No. 123(R) will be effective for ourfiscal quarter ending July 31, 2006.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” The amendmentsmade by SFAS No. 151 are intended to improve financial reporting byclarifying that abnormal amounts of idle facility expense, freight, handlingcosts and wasted materials (spoilage) should be recognized as current-periodcharges and by requiring the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities. Theguidance is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The adoption of SFAS No. 151 is notexpected to have a material impact on our condensed consolidated financialstatements.

On May 30, 2005, the FASB issued SFAS No. 154,*“Accounting Changes and Err or Corrections,”*a replacement of APB Opinion No. 20 and FASB Statement No. 3, whichchanges the requirements for the accounting and reporting of a change in accountingprinciple effective for fiscal years beginning after December 15, 2005. SFASNo. 154 applies to all voluntary changes in accounting principle as wellas to changes required by an accounting pronouncement that does not includespecific transition provisions. SFAS No. 154 eliminates the requirement inAPB Opinion No. 20,*“AccountingChanges,”* to include the cumulative effect of changes in accountingprinciple in the income statement in the period of change. 

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Instead, to enhance thecomparability of prior period financial statements, SFAS No. 154 requiresthat changes in accounting principles be applied retrospectively. Underretrospective application, the new accounting principle is applied as of thebeginning of the first period presented as if that principle had always beenused. Under SFAS No. 154, a change in reporting entity is also appliedretrospectively as of the beginning of the first period presented. A change inaccounting estimate continues to be accounted for in the period of change andfuture periods if necessary. We are currently assessing the impact of adoptingSFAS No. 154 and believe the new standard will not have a material impacton its financial statements.

In July 2006, theFinancial Accounting Standards Board (FASB) released its final Interpretationon uncertain tax positions, FIN 48, *Accountingfor Uncertainty in Income Taxes**—aninterpretation of FAS 109.*ThisInterpretation clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordancewith FASB Statement No. 109, *Accountingfor Income Taxes.*This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. The guidancewill become effective as of the beginning of a company’s fiscal year beginningafter December 15, 2006. The Company is currently assessing the impact ofadopting this standard.

**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 debtsecurities and cash deposits. Our policy is to place these investments ininstruments that meet high credit quality standards and have maturities of lessthan two years with an overall average maturity of less than one year. Thesesecurities are subject to interest rate risk and could decline in value ifinterest rates fluctuate. Due to the short duration of the securities in whichwe invest and the conservative nature of our investment portfolio, a 10% changein interest rates would have an immaterial effect on our financial position,results of operations 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***

The Consolidated Financial Statements required by thisItem are set forth at the pages indicated in Part IV, Item 15(a).

40

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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. 30,  2006**                                                             | ** ** | **Jan. 31,  2006** | ** ** | **Oct. 31,  2005** | ** ** | **July 31,  2005** | ** ** | **Apr. 30,  2005** | ** ** | **Jan. 31,  2005** | ** ** | **Oct. 31,  2004** | ** ** | **July 31,  2004** | ** ** |   |
| ** **                    | ** ** | **(Unaudited) (In thousands, except per share data)** | ** ** |                    |
| Net revenues                  |       |                                                                                | $          | 14,187                  |   |   |   | $ | 14,423 |   |   |   | $ | 16,931 |   |   |   | $ | 14,676 |   |   |   | $ | 16,325 |   |   |   | $ | 13,680 |   |   |   | $ | 15,604 |   |   |   | $ | 16,711 |   |   |
| Gross profit                  |       |                                                                                | 4,946      |                    |   |   | 6,215 |   |   |   | 6,438 |   |   |   | 5,718 |   |   |   | 6,185 |   |   |   | 5,248 |   |   |   | 6,360 |   |   |   | 8,675 |   |   |
| Income (loss) from operations |       |                                                                                | (283       | )                       |   |   | 1,041 |   |   |   | 1,110 |   |   |   | 532 |   |   |   | 507 |   |   |   | (55 | ) |   |   | 1,036 |   |   |   | 3,374 |   |   |
| Net income(1)                 |       |                                                                                | $          | 270                     |   |   |   | $ | 864 |   |   |   | $ | 927 |   |   |   | $ | 495 |   |   |   | $ | 516 |   |   |   | $ | 107 |   |   |   | $ | 1,004 |   |   |   | $ | 2,194 |   |   |
| Net income per  share:        |       |                                                                                |       |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                         |       |                                                                                | $          | 0.02                    |   |   |   | $ | 0.05 |   |   |   | $ | 0.05 |   |   |   | $ | 0.03 |   |   |   | $ | 0.03 |   |   |   | $ | 0.01 |   |   |   | $ | 0.06 |   |   |   | $ | 0.13 |   |   |
| Diluted                       |       |                                                                                | $          | 0.02                    |   |   |   | $ | 0.05 |   |   |   | $ | 0.05 |   |   |   | $ | 0.03 |   |   |   | $ | 0.03 |   |   |   | $ | 0.01 |   |   |   | $ | 0.05 |   |   |   | $ | 0.12 |   |   |

----

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

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

None.

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

**Evaluation ofDisclosure Controls and Procedures**

Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this Annual Report on Form 10-K. Based uponthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures are effective to ensurethat information we are required to disclose in reports that we file or submitunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission 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 30, 2006. 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 30, 2006, our internal control over financial reportingwas effective.

Management’s assessment ofthe effectiveness of our internal control over financial reporting as of April 30,2006, has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report which appears herein.

41

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**Changes in InternalControl Over Financial Reporting**

During the three monthsended October 31, 2005, we implemented a new supply chain management, orSCM, system designed to provide additional operational and financial reporting functionalityby allowing users to monitor inventory and business activities at a greaterlevel of detail and with increased timeliness. During the three months endedJanuary 31, 2006, we completed the SCM system implementation.

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

None.

42

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**PART III**

Certain informationrequired by Part III is incorporated by reference from the Company’s 2006definitive proxy statement to be filed not later than 120 days following theclose of the 2006 fiscal year (“2006 Definitive Proxy Statement”).

**Item 10.   *Directors and Executive Officers of the Registrant***

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

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2006Definitive Proxy Statement.

**Item 11.   *Executive Compensation***

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2006Definitive 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 2006Definitive Proxy Statement.

**Item 13.   *Certain Relationships and Related Transactions***

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2006Definitive Proxy Statement.

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

The information requiredunder this Item is hereby incorporated by reference from the Company’s 2006Definitive 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.

**(b)   *Exhibits***

| Exhibit No. | ** ** | ** **                                          | ** ** | **Description** |
|------------------|------------|-----------------------------------------------------|------------|-----------------|
| 3.2(7)           |       | Restated Certificate of Incorporation of Registrant |
| 3.4(6)           |       | Bylaws of Registrant                                |
| 4.1(12)          |       | Specimen Stock  Certificate                         |

43

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| 4.2(3)      |   | Preferred Shares Rights Agreement, dated as of  December 3,1996, between Catalyst Semiconductor, Inc. and  FirstNational Bank of Boston                    |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2.1(10)   |   | Amendment No. 1 to  Preferred Shares Rights Agreement dated as of May 22, 1998 between  Registrant and BankBoston, N.A., as rights agent                   |
| 4.2.2(10)   |   | Amendment No. 2 to  Preferred Shares Rights Agreement dated as of September 14, 1998 between  Registrant and BankBoston, N.A., as rights agent             |
| 4.2.3(9)    |   | Amendment No. 3 to  Preferred Shares Rights Agreement dated as of September 27, 2001 between  Registrant and Equiserve Trust Company N.A., as rights agent |
| 4.2.4(10)   |   | Amendment No. 4 to  Preferred Shares Rights Agreement dated as of July 17, 2002 between  Registrant and Equiserve Trust Company N.A., as rights agent      |
| 4.2.5(13)   |   | Amendment No. 5 to  Preferred Shares Rights Agreement dated as of April 22, 2004 between the  Registrant and Equiserve Trust Company, as rights agent      |
| 4.2.6(14)   |   | Amendment No. 6 to  Preferred Shares Rights Agreement dated as of June 18, 2004 between the  Registrant and Equiserve Trust Company, as rights agent       |
| 4.6(11)     |   | 2003 Stock Incentive  Plan                                                                                                                                           |
| 4.6.1(24)   |   | Form of Stock  Option Agreement under 2003 Stock Incentive Plan.                                                                                                |
| 4.7(11)     |   | 2003 Director Stock  Option Plan                                                                                                                                     |
| 4.7.1(24)   |   | Form of 2003  Director Option Plan (same as 4.6.1)                                                                                                              |
| 4.8(8)      |   | 1998 Special Equity  Incentive Plan                                                                                                                                  |
| 10.27(1)*   |   | Form of  Indemnification Agreement entered into by Registrant with each of its  directors and executive officers.                                               |
| 10.38(2)    |   | Standard Industrial  Lease dated March 22, 1996 between Marin County Employees Retirement  Association and Registrant                                           |
| 10.61(4)    |   | Standstill Agreement  dated as of May 26, 1998 between the Registrant and Elex N.V.                                                                             |
| 10.61.1(5)  |   | Amended and Restated  Standstill Agreement dated as of September 14, 1998 between the  Registrant and Elex N.V.                                                 |
| 10.61.2(13) |   | Amendment No. 1 to  Amended and Restated Standstill Agreement dated as of April 22, 2004                                                                   |
| 10.61.3(13) |   | Second Amended and  Restated Standstill Agreement dated as of June 10, 2004                                                                                     |
| 10.83(9)    |   | Stock Purchase Agreement  dated April 19, 2002 between Elex NV and Registrant                                                                                   |
| 10.84(10)*  |   | Form of Change of  Control Agreement between Registrant and its non-employee directors                                                                          |
| 10.85(15)*  |   | Employment Agreement  dated May 23, 2003 between Gelu Voicu and Registrant                                                                                      |
| 10.86(13)   |   | Stock Transfer Agreement  dated as of April 22, 2004 between the Registrant and Elex N.V.                                                                  |
| 10.87(17)*  |   | Severance Agreement  dated October 14, 2002 between George Smarandoiu and Registrant                                                                            |
| 10.88(16)   |   | Sale-Purchase Promissory  Agreement dated November 6, 2003 between Registrant and S.C. Hathor  Impex SRL                                                        |
| 10.89(4)    |   | Common Stock Purchase  Agreement dated as of May 26, 1998 between Registrant and Elex N.V.                                                                      |

44

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| 10.90(5)   |   | Common Stock Purchase Agreement dated as of  September 14, 1998 between Registrant and Elex N.V.                                                                                        |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                                                                                                             |
| 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(25) |   | Lease Agreement entered  into on March 6, 2006 by and between Catalyst Semiconductor  International, Inc. 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 47)                                                                                                                                                |
| 31.1       |   | Certification of Chief  Executive Officer pursuant to U.S.C. Section 302 of the  Sarbanes-Oxley Act of 2002                                                                        |
| 31.2       |   | Certification of Chief  Financial Officer pursuant to U.S.C. Section 302 of the  Sarbanes-Oxley Act of 2002                                                                        |
| 32         |   | Certification of Chief  Executive Officer and Chief 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 S-1 filedwith the Securities and Exchange Commission on May 11, 1993 (File No. 33-60132),as amended.

(2)          Incorporated byreference to Registrant’s Form 10-K filed with the Securities andExchange Commission for the year ended April 30, 1996.

(3)          Incorporated byreference to Registrant’s Form 8-A filed with the Securities andExchange Commission on January 22, 1997.

(4)          Incorporated byreference to Registrant’s Form 10-K filed with the Securities andExchange Commission for the year ended May 3, 1998.

(5)          Incorporated byreference to Registrant’s Form 10-Q filed with the Securities andExchange Commission for the quarter ended August 2, 1998.

(6)          Incorporated byreference to Registrant’s Form 10-Q/A filed with the Securities andExchange Commission for the quarter ended November 1, 1998.

(7)          Incorporated byreference to an Appendix to Registrant’s Definitive Proxy Statement filed withthe Securities and Exchange Commission on December 18, 1998.

45

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

(9)          Incorporated byreference to Registrant’s Form 10-Q filed with the Securities andExchange Commission for the quarter ended October 28, 2001.

(10)   Incorporated by reference toRegistrant’s Form 10-K filed with the Securities and ExchangeCommission for the year ended April 30, 2002.

(11)   Incorporated by reference toRegistrant’s Registration Statement on Form S-8 filed with theSecurities and Exchange Commission on December 24, 2002 (File No. 333-102201).

(12)   Incorporated by reference toRegistrant’s Registration Statement on Form 8-A/A filed with theSecurities and Exchange Commission on April 29, 1993.

(13)   Incorporated by reference toRegistrant’s Registration Statement on Form S-3 filed with theSecurities and Exchange Commission on June 14, 2004 (File No. 333-116425).

(14)   Incorporated by reference toRegistrant’s Registration Statement on Form S-3/A filed with theSecurities and Exchange Commission on June 22, 2004 (File No. 333-116425).

(15)   Incorporated by reference toRegistrant’s Form 10-K filed with the Securities and ExchangeCommission for the year ended April 27, 2003.

(16)   Incorporated by reference toRegistrant’s Form 10-Q filed with the Securities and ExchangeCommission for the quarter ended February 1, 2004.

(17)   Incorporated by reference toRegistrant’s Form 10-K filed with the Securities and ExchangeCommission for the year ended May 2, 2004.

(18)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on August 5, 2005.

(19)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on August 26, 2005.

(20)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on September 7, 2005.

(21)   Incorporated by reference toRegistrant’s Form 10-Q filed with the Securities and ExchangeCommission for the quarter ended July 31, 2005.

(22)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on October 11, 2005.

(23)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on February 9, 2006.

(24)   Incorporated by reference toRegistrant’s Registration Statement on Form S-8 filed with theSecurities and Exchange Commission on March 3, 2006 (File No. 333-132204).

(25)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and Exchange Commissionon March 10, 2006.

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

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

46

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**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 Sunnyvale andState of California, on July 31, 2006.
|          |       | 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 and ThomasE. Gay III, and each of them, as his attorneys-in-fact, with the fullpower of substitution, for him in any and all capacities, to sign anyamendments to this Report on Form 10-K and to file the same withexhibits thereto and other documents in connection therewith with theSecurities and Exchange Commission, hereby ratifying and confirming all thatsaid attorneys-in-fact, or his substitute or substitutes may do or cause to bedone 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 31, 2006.
| By:    | ** ** | /s/ GELU VOICU                      |   | President, Chief Executive Officer and                             |   | July 31, 2006 |
|--------|------------|-------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------|
|   | ** ** | Gelu Voicu                          |   | Director *(Principal Executive Officer)*                           |   |               |
| By:    | ** ** | /s/  THOMAS E. GAY III         |   | Vice President of  Finance and  Administration and Chief Financial |   | July 31, 2006 |
|   | ** ** | Thomas  E. Gay III             |   | Officer *(Principal Financial and  Accounting Officer)*            |   |               |
| By:    | ** ** | /s/  ROLAND M. DUCHÂTELET |   | Director                                                           |   | July 31, 2006 |
|   |       | Roland M.  Duchâtelet          |   |                                                               |   |               |
| By:    | ** ** | /s/  GARRETT GARRETTSON             |   | Director                                                           |   | July 31, 2006 |
|   |       | Garrett  Garrettson                 |   |                                                               |   |               |
| By:    | ** ** | /s/  HENRY C. MONTGOMERY       |   | Chairman of the Board                                              |   | July 31, 2006 |
|   |       | Henry C.  Montgomery                |   |                                                               |   |               |
| By:    | ** ** | /s/  GLEN G. POSSLEY           |   | Director                                                           |   | July 31, 2006 |
|   |       | Glen G. Possley                     |   |                                                               |   |               |

 

47

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**CATALYST SEMICONDUCTOR, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                                        | ** ** | **Pages** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|
| Report of Independent  Registered Public Accounting Firm                                                                               |       | F-2       |
| Consolidated Balance Sheets as of  April 30, 2006 and 2005                                                                        |       | F-4       |
| Consolidated Statements of  Income for the years ended April 30, 2006, 2005 and 2004                                              |       | F-5       |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Income for the years ended  April 30, 2006, 2005 and 2004 |       | F-6       |
| Consolidated Statements of  Cash Flows for the years ended April 30, 2006, 2005 and 2004                                          |       | F-7       |
| Notes to Consolidated  Financial Statements                                                                                            |       | F-8       |
| Schedule  II—Valuation and Qualifying Accounts                                                                                    |       | F-25      |

 

F-1

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**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 fiscal 2006 and 2005consolidated financial statements and of its internal control over financialreporting as of April 30, 2006, and an audit of its 2004 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

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

In our opinion, the consolidated financial statements listed inthe index appearing under Item 15(a)(1) present fairly, in allmaterial respects, the financial position of Catalyst Semiconductor, Inc.and its subsidiaries at April 30, 2006 and May 1, 2005, and theresults of their operations and their cash flows for each of the three years inthe period ended April 30, 2006 in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed inthe index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements. These financial statements and financial statement scheduleare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit of financial statements includes examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

***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 30, 2006 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 30, 2006, 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 allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother 

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, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (ii) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.
| PricewaterhouseCoopers LLP |
|----------------------------|
| San Jose,  California      |
| July 31,  2006        |

 

F-3

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

| ** **                                                                                                                                                                                                                | ** ** | **April 30,**                                                               | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                                                                                                                                                                                                                | ** ** | **(In thousands  except per share amounts)**                 | ** ** |
| **ASSETS**                                                                                                                                                                                                                |       |                                                                             |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                                           |       |                                                                             |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                 |       |                                                                             | $          | 7,730 |   |   |   | $ | 10,978 |   |   |
| Short-term investments                                                                                                                                                                                                    |       |                                                                             | 21,409     |   |   |   | 22,815 |   |   |
| Accounts receivable, net                                                                                                                                                                                                  |       |                                                                             | 9,502      |   |   |   | 9,966 |   |   |
| Inventories                                                                                                                                                                                                               |       |                                                                             | 14,262     |   |   |   | 11,455 |   |   |
| Deferred tax assets                                                                                                                                                                                                       |       |                                                                             | 2,771      |   |   |   | 4,188 |   |   |
| Other current assets                                                                                                                                                                                                      |       |                                                                             | 484        |   |   |   | 875 |   |   |
| Total current assets                                                                                                                                                                                                      |       |                                                                             | 56,158     |   |   |   | 60,277 |   |   |
| Property and equipment,  net                                                                                                                                                                                              |       |                                                                             | 9,408      |   |   |   | 5,582 |   |   |
| Deferred tax  assets                                                                                                                                                                                                      |       |                                                                             | 4,759      |   |   |   | 4,128 |   |   |
| Other assets                                                                                                                                                                                                              |       |                                                                             | 95         |   |   |   | 74 |   |   |
| Total assets                                                                                                                                                                                                              |       |                                                                             | $          | 70,420 |   |   |   | $ | 70,061 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                             |       |                                                                             |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                      |       |                                                                             |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                                          |       |                                                                             | $          | 7,453 |   |   |   | $ | 5,755 |   |   |
| Accounts payable—related parties                                                                                                                                                                                     |       |                                                                             | 143        |   |   |   | 314 |   |   |
| Accrued expenses                                                                                                                                                                                                          |       |                                                                             | 3,002      |   |   |   | 4,245 |   |   |
| Deferred gross profit on shipments to distributors                                                                                                                                                                        |       |                                                                             | 2,292      |   |   |   | 1,879 |   |   |
| Total current liabilities                                                                                                                                                                                                 |       |                                                                             | 12,890     |   |   |   | 12,193 |   |   |
| Commitments and  contingencies (Notes 5 and 9)                                                                                                                                                                            |       |                                                                             |       |   |   |   |   |   |   |
| 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; 22,808 shares issued and 16,350 shares outstanding at  April 30, 2006 and 22,135 shares issued and 16,590 shares outstanding at  April 30, 2005 |       |                                                                             | 23         |   |   |   | 22 |   |   |
| Additional paid-in-capital                                                                                                                                                                                                |       |                                                                             | 70,461     |   |   |   | 68,872 |   |   |
| Treasury stock, 6,458 shares at April 30, 2006  and 5,545 shares at  April 30, 2005                                                                                                                             |       |                                                                             | (26,672    | ) |   |   | (22,169 | ) |   |
| Retained earnings                                                                                                                                                                                                         |       |                                                                             | 13,759     |   |   |   | 11,203 |   |   |
| Accumulated other comprehensive loss                                                                                                                                                                                      |       |                                                                             | (41        | ) |   |   | (60 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                           |       |                                                                             | 57,530     |   |   |   | 57,868 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                          |       |                                                                             | $          | 70,420 |   |   |   | $ | 70,061 |   |   |

 

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

F-4

----

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

| ** **                                   | ** ** | **Years Ended April 30,**                  | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(In thousands,  except per share data)** | ** ** |
| Net revenues                                 |       | $                                                         | 60,217     |   | $ | 62,320 |   | $ | 63,538 |   |
| Cost of revenues                             |       | 36,900                                                    |       | 35,852 |   | 37,375 |   |
| Gross profit                                 |       | 23,317                                                    |       | 26,468 |   | 26,163 |   |
| Operating expenses:                          |       |                                                      |       |   |   |   |   |
| Research and development                     |       | 7,472                                                     |       | 7,910 |   | 7,130 |   |
| Selling, general and administrative          |       | 13,445                                                    |       | 13,696 |   | 11,453 |   |
| Income from  operations                      |       | 2,400                                                     |       | 4,862 |   | 7,580 |   |
| Interest income  and other, net              |       | 1,175                                                     |       | 732 |   | 379 |   |
| Income before  income taxes                  |       | 3,575                                                     |       | 5,594 |   | 7,959 |   |
| Income tax  provision (benefit)              |       | 1,019                                                     |       | 1,773 |   | (1,408 | ) |
| Net income                                   |       | $                                                         | 2,556      |   | $ | 3,821 |   | $ | 9,367 |   |
| Net income per  share:                       |       |                                                      |       |   |   |   |   |
| Basic                                        |       | $                                                         | 0.15       |   | $ | 0.22 |   | $ | 0.57 |   |
| Diluted                                      |       | $                                                         | 0.14       |   | $ | 0.20 |   | $ | 0.48 |   |
| Weighted average  common shares outstanding: |       |                                                      |       |   |   |   |   |
| Basic                                        |       | 16,685                                                    |       | 17,507 |   | 16,567 |   |
| Diluted                                      |       | 18,220                                                    |       | 19,485 |   | 19,411 |   |

 

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

F-5

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**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  April 30,   2003               |       |                    | 16,276     |           |       |        | $          | 19           |       |             |       | $                                                          | 52,632     |   |   |   | $ | (8,340 | ) |   |   | $ | (1,985 | ) |   |   | $ | 27 |   |   |   | $ | 42,353 |   |   |
| Exercise of stock   options                     |       |                    | 811        |           |       |        | 1          |         |       |             | 1,536      |                                                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,537 |   |   |
| Purchase of stock  for   treasury               |       |                    | (674       | )              |       |        | —     |         |       |             | —     |                                                       |       |   | (4,276 | ) |   |   | — |   |   |   | — |   |   |   | (4,276 | ) |   |
| Tax benefits of  stock options                  |       |                    | —     |           |       |        | —     |         |       |             | 5,060      |                                                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,060 |   |   |
| Unrealized losses  on investments, net of taxes |       |                    | —     |           |       |        | —     |         |       |             | —     |                                                       |       |   | — |   |   |   | — |   |   |   | (53 | ) |   |   | — |   |   |
| Net income                                      |       |                    | —     |           |       |        | —     |         |       |             | —     |                                                       |       |   | — |   |   |   | 9,367 |   |   |   | — |   |   |   | — |   |   |
| Comprehensive  income                           |       |                    | —     |           |       |        | —     |         |       |             | —     |                                                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 9,314 |   |   |
| Balance at  April 30, 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  April 30, 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 |   |   |

 

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

F-6

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**CATALYST SEMICONDUCTOR, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **Years Ended April 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                       | ** ** |
| **Cash flows from operating  activities:**                                         |       |                                     |       |   |   |   |   |
| Net income                                                                         |       | $                                        | 2,556      |   | $ | 3,821 |   | $ | 9,367 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                     |       |   |   |   |   |
| Depreciation of property and equipment                                             |       | 1,891                                    |       | 1,621 |   | 1,442 |   |
| Benefit from sale of inventory previously written  down                            |       | (794                                     | )          | (1,002 | ) | (1,976 | ) |
| Provision for excess and obsolete inventory                                        |       | 1,026                                    |       | 1,085 |   | 853 |   |
| Loss on disposal of property and equipment                                         |       | 11                                       |       | 257 |   | 39 |   |
| Tax benefits of options                                                            |       | 505                                      |       | 817 |   | 5,060 |   |
| Changes in deferred tax assets                                                     |       | 786                                      |       | 806 |   | (7,208 | ) |
| Changes in assets  and liabilities:                                                |       |                                     |       |   |   |   |   |
| Accounts receivable                                                                |       | 464                                      |       | 2,581 |   | (4,684 | ) |
| Inventories                                                                        |       | (3,039                                   | )          | (4,578 | ) | 2,586 |   |
| Other assets                                                                       |       | 370                                      |       | 144 |   | 298 |   |
| Accounts payable (including related parties)                                       |       | 1,527                                    |       | 1,053 |   | 1,324 |   |
| Accrued expenses                                                                   |       | (1,243                                   | )          | 463 |   | 891 |   |
| Deferred gross profit on shipments to distributors                                 |       | 413                                      |       | (2,200 | ) | 2,662 |   |
| Net cash provided by operating activities                                          |       | 4,473                                    |       | 4,868 |   | 10,654 |   |
| **Cash  flows from investing activities:**                                         |       |                                     |       |   |   |   |   |
| Purchases of short-term investments                                                |       | (24,114                                  | )          | (47,292 | ) | (43,191 | ) |
| Proceeds from sales and maturities of short-term  investments                      |       | 25,539                                   |       | 41,007 |   | 46,652 |   |
| Acquisition of property and equipment                                              |       | (5,728                                   | )          | (4,126 | ) | (1,724 | ) |
| Net cash provided by (used in) investing activities                                |       | (4,303                                   | )          | (10,411 | ) | 1,737 |   |
| **Cash  flows from financing activities:**                                         |       |                                     |       |   |   |   |   |
| Common stock issuances                                                             |       | 1,085                                    |       | 843 |   | 1,302 |   |
| Net proceeds from secondary public offering                                        |       | —                                   |       | 7,986 |   | — |   |
| Treasury stock purchases                                                           |       | (4,503                                   | )          | (9,553 | ) | (4,276 | ) |
| Net cash used in financing activities                                              |       | (3,418                                   | )          | (724 | ) | (2,974 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | (3,248                                   | )          | (6,267 | ) | 9,417 |   |
| Cash and cash  equivalents at beginning of the period                              |       | 10,978                                   |       | 17,245 |   | 7,828 |   |
| Cash and cash  equivalents at end of the period                                    |       | $                                        | 7,730      |   | $ | 10,978 |   | $ | 17,245 |   |
| Non-cash  financing activity:                                                      |       |                                     |       |   |   |   |   |
| Deferred compensation on exercised stock options                                   |       | $                                        | —     |   | $ | — |   | $ | 235 |   |
| Supplemental cash flow  disclosures:                                               |       |                                     |       |   |   |   |   |
| Cash paid during  the year for:                                                    |       |                                     |       |   |   |   |   |
| Income taxes                                                                       |       | $                                        | 43         |   | $ | 100 |   | $ | 51 |   |

 

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 2006, 2005 and 2004 endedon April 30, 2006, May 1, 2005 and May 2, 2004, respectively. Fiscal 2006and 2005 were comprised of 52 weeks. Fiscal 2004 was comprised of 53 weeks withthe extra week added to the third quarter. For presentation purposes only, thefinancial information has been presented as ending on the last day of thenearest calendar month.

***Principles of Consolidation***

The consolidated financialstatements include the accounts of Catalyst Semiconductor, Inc. and itswholly owned subsidiaries, Nippon Catalyst KK (“NCKK”), a sales organization inYokohama, Japan and Catalyst Semiconductor Romania SRL (“CSR”), a productdevelopment center in Bucharest, Romania. All significant intercompany accountsand transactions are eliminated in consolidation.

***Uses of Estimates***

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States (“US GAAP”) requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Estimates in these financial statementsinclude inventory valuation, deferral of gross profit on shipments of inventorynot sold by the distributor 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.

***Stock-Based Compensation***

The Company has elected to measure employeestock-based compensation costs using the intrinsic value method prescribed bythe Accounting Principles Board Opinion (“ABP”) No. 25, *“Accounting for Stock Issued to Employees.”*  Accordingly, no compensation expense has beenrecorded for stock options granted with exercise prices greater than or equalto the fair value of the underlying common stock at the option grant date.

Pro forma information regarding net income and earningsper share is required by Statement of Financial Accounting Standards (“SFAS”) No. 123,*“Accounting for Stock-Based Compensation.”*as amended by SFAS No. 148, *“Accountingfor Stock-Based Compensation—Transition and Disclosure.”*  SFAS No. 123 requires thedisclosure of pro forma net income and earnings per share as if the Company hadadopted the fair value method. Stock-based compensation to employees under SFASNo. 123 is based on the fair value of the option, estimated using theBlack-Scholes Option Pricing Model on the date of grant. The relatedstock-based compensation expense is recognized over the vesting period.

F-8

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

Thefollowing table summarizes the weighted-average assumptions used in the SFAS No. 123calculation:

| ** **                | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------------|------------|----------|------------|------------|------------|----------|------------|
| Expected term (in  years) |       | 3.8      |       | 4.0  - 5.3 |       | 4.0      |       |
| Risk-free  interest rate  |       | 4.74     | %          | 3.90%      |       | 2.69     | %          |
| Volatility                |       | 48       | %          | 66%  - 68% |       | 69       | %          |
| Dividend yield            |       | —   | %          | —%    |       | —   | %          |

 

Thefollowing table illustrates the effect on net income and net income per shareif the Company had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation:

| ** **                                                                                                              | ** ** | **Years Ended April 30,**                          | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                              | ** ** | **(In thousands, except  per share amounts)** | ** ** |
| Reported net  income                                                                                                    |       | $                                                                 | 2,556      |   | $ | 3,821 |   | $ | 9,367 |   |
| 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 tax |       | (2,026                                                            | )          | (2,085 | ) | (2,835 | ) |
| As adjusted net  income                                                                                                 |       | $                                                                 | 530        |   | $ | 1,736 |   | $ | 6,532 |   |
| As adjusted net  income per share:                                                                                      |       |                                                              |       |   |   |   |   |
| Basic                                                                                                                   |       | $                                                                 | 0.03       |   | $ | 0.10 |   | $ | 0.39 |   |
| Diluted                                                                                                                 |       | $                                                                 | 0.03       |   | $ | 0.09 |   | $ | 0.34 |   |
| Reported net  income per share:                                                                                         |       |                                                              |       |   |   |   |   |
| Basic                                                                                                                   |       | $                                                                 | 0.15       |   | $ | 0.22 |   | $ | 0.57 |   |
| Diluted                                                                                                                 |       | $                                                                 | 0.14       |   | $ | 0.20 |   | $ | 0.48 |   |

 

During the periods presented, the Company accountedfor compensation cost related to employee stock options in accordance with theprovisions of APB No. 25 and related interpretations. As such,compensation expense would be recorded on the date of grant only if the currentmarket prices of the underlying stock exceeded the exercise price. The Companyapplies SFAS No. 123, which allows entities to continue to apply theprovision of APB No. 25 and provide pro forma net income and pro formaearnings per share disclosures for employee stock option grants as if the fairvalue based method defined in SFAS No. 123 had been applied.

The accounting for stock-based compensation involves anumber of estimates about the expected lives of stock options, interest rates,stock volatility and assumptions as well as the selection of a valuation model.The Company has elected to use the Black-Scholes option valuation model tovalue its stock-based compensation. A change in any of the estimates used inthe model, or the selection of a different option pricing model, could have amaterial impact on the Company’s pro forma net income (loss) disclosures in theperiods presented and on its financial statements in future periods.

The weighted-averagegrant-date fair value of options granted during fiscal 2006, fiscal 2005and fiscal 2004 was $2.72, $2.83 and $3.11, respectively.

F-9

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

**Note 2—SignificantAccounting Policies**

***Cash and Cash Equivalents***

All highly liquidinvestments purchased with a remaining maturity of three months 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 4 for details related toavailable-for-sale securities.

***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 consolidated statement of income.

***Fair Value of Financial Instruments***

The Company measures itsfinancial assets and liabilities in accordance with accounting principlesgenerally accepted in the United States. For financial instruments, includingcash and cash equivalents, short-term investments, accounts receivable,accounts payable and accrued expenses, the carrying amounts approximate fairvalue due to their short maturities.

***Foreign Currency Translation***

The Company uses theU.S. dollar as its functional currency. All of the Company’s sales and asubstantial majority of its costs are transacted in U.S. dollars. TheCompany purchases wafers and has test and assembly activities in Asia andsupports sales and marketing activities in various countries outside of theUnited States. Most of these costs are paid for with U.S. dollars. Researchand development personnel costs in Romania are tracked against the euro whileall other activities are paid in Romanian leu. Foreign currency transactiongains and losses, resulting from remeasuring local currency to theU.S. dollar, are included in determining net income for the period. Theforeign exchange gains and losses were not material 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 andsells products directly through its sales force and sales representatives tooriginal equipment manufacturers (“OEM”) and indirectly through distributorsand resellers. Revenues are recognized upon delivery to OEMs and resellers whohave no, or limited, product return rights and no 

F-10

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

priceprotection rights. Reserves for estimated returns and allowances are providedagainst net revenues at the time of recognition of revenues. The Company alsosells products to certain distributors under agreements that allow certainrights to return the product and provides for price protection rights. Theseagreements generally permit the distributor to return up to 10%, by value, ofthe total products they purchased from the Company every six months. As aresult, the Company defers recognition of revenues until the time thedistributor sells the product to an end-customer. Upon shipment to adistributor, the Company records an account receivable from the distributor,relieves inventory for the cost of the product shipped, and records the grossprofit, which equals revenues less the cost of revenues, on the consolidatedbalance sheet as “deferred gross profit on shipments to distributors” untilsuch time as the inventory is resold by the distributor to its end-customers.

***Inventories***

Inventory is stated at thelower 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 reserves once establishedare not reversed until the related inventory has been sold or physicallyscrapped. Purchases of inventory from two of the Company’s vendors represented43% of total purchases of inventory for fiscal 2006.

***Shipping and Handling Costs***

The Company chargesinbound freight shipments within the supply chain and associated handling coststo the “cost of revenues” on its consolidated statements of income. The Companycharges outbound freight shipments and associated handling costs to “selling,general and administrative” on its consolidated statements of income. Suchoutbound freight costs aggregated to $658,000, $516,000 and $624,000 in fiscal 2006,fiscal 2005 and fiscal 2004, 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 mask sets which aredepreciated over two years. Computer hardware is depreciated over three years. Computersoftware is depreciated over three or five years. Buildings are generallydepreciated over 30 years. Amortization of leasehold improvements is computedon a straight-line basis and amortized over the shorter of the remaining leaseterm 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.

F-11

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

As of April 30, 2006, and based on the tax lawsin effect at that time, the Company intended to continue to indefinitelyreinvest undistributed foreign earnings and accordingly, no deferred taxliability had been recorded on these undistributed foreign earnings.

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 the Companyto 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 principallyin North America, Europe and Asia. The Company performs ongoing creditevaluations of its customers and generally does not require collateral.

As of April 30, 2006no single customer accounted for greater than 10% of gross accounts receivable.As of April 30, 2005, one customer accounted for 12% of gross accountsreceivable.

***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 to advertisingand promotional expenditures are charged to “selling, general andadministrative” on the Company’s consolidated statements of income. Costsrelated to advertising and promotional expenditures were less than $125,000 foreach of fiscal 2006, fiscal 2005 and fiscal 2004.

***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.

F-12

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

***Segment Reporting***

The Company reports inaccordance with SFAS No. 131,*“Disclosuresabout Segments of an Enterprise and Related Information”* (“SFAS No. 131”).SFAS No. 131 requires the management approach in identifying reportablesegments. The management approach designates the internal organization that isused by management for making operating decisions and assessing performance asthe source of the company’s reportable segments. Based on its operatingstructure and management reporting, the Company has concluded it has onereporting segment: the semiconductor segment.

***Recently Issued Accounting Standards***

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)SFAS No. 123 (revised 2004),*“Share-BasedPayment,”* or SFAS No. 123(R). SFAS No. 123(R) eliminatesthe alternative of applying the intrinsic value measurement provisions ofAccounting Principals Board (“APB”) Opinion No. 25, or APB 25, tostock compensation awards issued to employees. The new standard requiresenterprises to measure the cost of employee services received in exchange foran award of equity instruments based on the fair value of the award on the dateof grant. That cost will be recognized over the period during which an employeeis required to provide services in exchange for the award, usually the vestingperiod.

The pro forma effects on net income and earnings pershare as if the Company had applied the fair value recognition provisions oforiginal SFAS No. 123 on stock compensation awards (rather than applyingthe intrinsic value measurement provisions of APB 25) are in the Notes toConsolidated Financial Statements (see Note 1). Although the pro formaeffects of applying original SFAS No. 123 may be indicative of the effectsof adopting SFAS No. 123(R), the provisions of these two statements differin some important respects. The actual effects of adopting SFAS No. 123(R) willbe dependent on numerous factors including, but not limited to, the valuationmodel chosen by the Company to value stock-based awards; the assumed awardforfeiture rate; the accounting policies adopted concerning the method ofrecognizing the fair value of awards over the requisite service period; and thetransition method chosen for adopting SFAS No. 123(R). Adoption ofthis accounting standard will have a material adverse impact on itsconsolidated financial statements. SFAS No. 123(R) will be effectivefor the Company’s fiscal quarter ending July 31, 2006.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an Amendment of ARB No. 43, Chapter 4.”  The amendments made by SFAS No. 151 areintended to improve financial reporting by clarifying that abnormal amounts ofidle facility expense, freight, handling costs and wasted materials (spoilage)should be recognized as current-period charges and by requiring the allocationof fixed production overheads to inventory based on the normal capacity of theproduction facilities. The guidance is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151is not expected to have a material impact on the Company’s condensedconsolidated financial statements.

On May 30, 2005, the FASB issued SFAS No. 154,*“Accounting Changes and Error Corrections,”*a replacement of APB Opinion No. 20 and FASB Statement No. 3, whichchanges the requirements for the accounting and reporting of a change in accountingprinciple effective for fiscal years beginning after December 15, 2005. SFASNo. 154 applies to all voluntary changes in accounting principle as wellas to changes required by an accounting pronouncement that does not includespecific transition provisions. SFAS No. 154 eliminates the requirement inAPB Opinion No. 20,*“AccountingChanges,”* to include the cumulative effect of changes in accountingprinciple in the income statement in the period of change. 

F-13

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

Instead, to enhance thecomparability of prior period financial statements, SFAS No. 154 requiresthat changes in accounting principle be retrospectively applied. Underretrospective application, the new accounting principle is applied as of thebeginning of the first period presented as if that principle had always beenused. Under SFAS No. 154, a change in reporting entity is alsoretrospectively applied as of the beginning of the first period presented. Achange in accounting estimate continues to be accounted for in the period ofchange and future periods if necessary. The Company is currently assessing theimpact of adopting SFAS No. 154 and believes the new standard will nothave a material impact on its financial statements.

In July 2006, theFinancial Accounting Standards Board (FASB) released its final Interpretationon uncertain tax positions, FIN 48, *Accountingfor Uncertainty in Income Taxes—**aninterpretation of FAS 109.*ThisInterpretation clarifiesthe accounting for uncertainty in income taxes recognized in anenterprise’s financialstatements 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, accounting in interim periods,disclosure, and transition. The guidance will become effective as of thebeginning of a company’s fiscal year beginning after December 15, 2006. TheCompany is currently assessing the impact of adopting this standard.

**Note 3—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 and potentially dilutive commonshares outstanding during the period under the treasury stock option method. Incomputing diluted net income per share, the average stock price for the periodis used in determining the number of shares assumed to be purchased from theexercise of stock options. A reconciliation of the basic and diluted per sharecomputations is as follows (in thousands, except per share data):

| ** **               | ** ** | **Years Ended April 30,** | ** ** |
|--------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **               | ** ** | **Net  Income**                          | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** |
| Basic                    |       | $                                        | 2,556      |   | 16,685 |   |   | $ | 0.15 |   |   | $ | 3,821 |   | 17,507 |   |   | $ | 0.22 |   |   | $ | 9,367 |   | 16,567 |   |   | $ | 0.57 |   |   |
| Effect of stock  options |       | —                                   |       | 1,535 |   |   | (0.01 | ) |   | — |   | 1,978 |   |   | (0.02 | ) |   | — |   | 2,844 |   |   | (0.09 | ) |   |
| Diluted                  |       | $                                        | 2,556      |   | 18,220 |   |   | $ | 0.14 |   |   | $ | 3,821 |   | 19,485 |   |   | $ | 0.20 |   |   | $ | 9,367 |   | 19,411 |   |   | $ | 0.48 |   |   |

 

Options to purchase 2,278,000 shares of common stockat a weighted average exercise price of $6.30 per share outstanding duringfiscal 2006 were not included in the computation of diluted income pershare because their option price was greater than the average fair market valuefor the period.

Options to purchase 1,822,000 shares of common stockat a weighted average exercise price of $6.79 per share outstanding duringfiscal 2005 were not included in the computation of diluted income pershare because their option price was greater than the average fair market valuefor the period.

F-14

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

Options to purchase508,000 shares of common stock at a weighted average exercise price of $6.60per share outstanding during fiscal 2004 were not included in thecomputation of diluted income per share because their option price was greaterthan the average fair market value for the period.

**Note 4—Balance Sheet Components**

| ** **                                                               | ** ** | **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 less than one year |       | $                            | 21,474     |   |   | $ | — |   |   |   | $ | (65 | ) |   |   | $ | 21,409 |   |   |
|                                                                          |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theunrealized losses as of April 30, 2006 are recorded in accumulated othercomprehensive income (loss) of the consolidated statements of stockholders’equity and comprehensive income, net of tax of $19,000.

| ** **                                                               | ** ** | **April 30, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                               | ** ** | **Cost**                     | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Estimated  Fair Market  Value** | ** ** |
| ** **                                                               | ** ** | **(In thousands)**      | ** ** |
| Investments  available-for-sale:                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government debt securities with maturities  less than one year |       | $                            | 20,901     |   |   | $ | — |   |   |   | $ | (88 | ) |   |   | $ | 20,813 |   |   |
| U.S. government debt securities with maturities  over one year      |       | 2,008                        |       |   | — |   |   |   | (6 | ) |   |   | 2,002 |   |   |
| Total investments  available-for-sale                                    |       | $                            | 22,909     |   |   | $ | — |   |   |   | $ | (94 | ) |   |   | $ | 22,815 |   |   |

 

The unrealized losses as of April 30, 2005 arerecorded in accumulated other comprehensive income (loss) of the consolidatedstatements of stockholders’ equity and comprehensive income, net of tax of$34,000.

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 (in thousands).

| ** **                            | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **(In thousands)**  | ** ** |
| Accounts  receivable:                 |       |                     |       |                     |       |   |   |
| Accounts receivable                   |       |                     | $          | 9,640                    |       |   | $ | 10,104 |   |
| Less: Allowance for doubtful accounts |       |                     | (138       | )                        |       | (138 | ) |
|                                  |       |                     | $          | 9,502                    |       |   | $ | 9,966 |   |

 

F-15

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

Baddebts in aggregate of $0, $0 and $87,000 were written off to the allowance fordoubtful accounts in fiscal 2006, fiscal 2005 and fiscal 2004,respectively.

| ** **                                      | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**  | ** ** |
| Inventories:                                    |       |                     |       |                     |       |
| Work-in-process                                 |       | $                        | 9,220      |                     | $          | 7,450 |   |
| Finished goods                                  |       | 5,042                    |       | 4,005                    |       |
|                                            |       | $                        | 14,262     |                     | $          | 11,455 |   |
| Property and  equipment:                        |       |                     |       |                     |       |
| Building                                        |       | $                        | 2,045      |                     | $          | 2,046 |   |
| Engineering and test equipment                  |       | 9,962                    |       | 8,198                    |       |
| Computer software                               |       | 1,779                    |       | 1,240                    |       |
| Computer hardware                               |       | 589                      |       | 1,201                    |       |
| Land                                            |       | 165                      |       | 165                      |       |
| Leasehold improvements                          |       | 671                      |       | 672                      |       |
| Furniture and office equipment                  |       | 838                      |       | 867                      |       |
| Construction in progress                        |       | 3,746                    |       | —                   |       |
| Vehicles                                        |       | 69                       |       | —                   |       |
|                                            |       | 19,864                   |       | 14,389                   |       |
| Less: accumulated depreciation and amortization |       | (10,456                  | )          | (8,807                   | )          |
|                                            |       | $                        | 9,408      |                     | $          | 5,582 |   |

 

Software amortization expense for fiscal 2006,fiscal 2005 and fiscal 2004 was $308,000, $220,000 and $159,000,respectively.

On March 16,2006, the Company purchased a building in Santa Clara, California for $3.7million, which will replace the principal headquarters currently leased underan operating lease in Sunnyvale, California.

| ** **                    | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** |
|-------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **(In thousands)**  | ** ** |
| Accrued expenses:             |       |                     |       |                     |       |   |   |   |   |
| Accrued employee compensation |       |                     | $          | 866                      |       |   |   | $ | 1,671 |   |   |
| Accrued income taxes          |       |                     | 733        |                     |       |   | 1,075 |   |   |
| Other                         |       |                     | 1,403      |                     |       |   | 1,499 |   |   |
|                          |       |                     | $          | 3,002                    |       |   |   | $ | 4,245 |   |   |

 

**Note 5—Leases**

The Company leases its office facilities underoperating leases which have various expiration dates. The lease commitment forthe Company’s primary business office in Sunnyvale expires in July 2006,and is under a month to month arrangement thereafter. The Company is scheduledto move into its newly purchased business office in August 2006 (see Note4).

F-16

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

Totalrent expense under these leases was $623,000, $601,000 and $703,000 forfiscal 2006, fiscal 2005 and fiscal 2004, respectively. Theaggregate future minimum lease payments, by fiscal year, under operating leaseswith initial terms of one year or more as of April 30, 2006 are as follows(in thousands):

| ** **       | ** ** | **Years Ended April 30,** | ** ** |
|------------------|------------|------------------------------------------|------------|
| ** **       | ** ** | **Total**                                | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| Operating leases |       | $                                        | 1,706      |   | $ | 424 |   | $ | 334 |   | $ | 334 |   | $ | 334 |   | $ | 280 |   |
|                  |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 6—Income Taxes**

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

| ** **                            | ** ** | **Years Ended April 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                              |       |                                     |       |   |   |   |   |
| Federal                               |       | $                                        | 143        |   | $ | 360 |   | $ | 1,743 |   |
| State                                 |       | 24                                       |       | (237 | ) | 11 |   |
| Foreign                               |       | 66                                       |       | 14 |   | 81 |   |
| Total current income taxes            |       | 233                                      |       | 137 |   | 1,835 |   |
| Deferred:                             |       |                                     |       |   |   |   |   |
| Federal                               |       | 868                                      |       | 1,498 |   | 1,004 |   |
| State                                 |       | (82                                      | )          | 138 |   | 434 |   |
| Reversal of valuation allowance       |       | —                                   |       | — |   | (4,681 | ) |
| Total deferred income taxes           |       | 786                                      |       | 1,636 |   | (3,243 | ) |
| Provision (benefit) for  income taxes |       | $                                        | 1,019      |   | $ | 1,773 |   | $ | (1,408 | ) |

 

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):

| ** **                          | ** ** | **Years Ended April 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statutory federal  tax rate         |       | $                                        | 1,216      |   | 34.0 | % | $ | 1,902 |   | 34.0 | % | $ | 2,786 |   | 35.0 | % |
| State taxes                         |       | 77                                       |       | 2.2 |   | (99 | ) | (1.8 | ) | 289 |   | 3.6 |   |
| Research credits                    |       | (232                                     | )          | (6.5 | ) | (144 | ) | (2.5 | ) | (96 | ) | (1.2 | ) |
| Foreign                             |       | 66                                       |       | 1.8 |   | — |   | — |   | 81 |   | 1.0 |   |
| Reversal of  valuation  allowance   |       | —                                   |       | — |   | — |   | — |   | (4,681 | ) | (58.8 | ) |
| Deferred tax  asset rate adjustment |       | —                                   |       | — |   | 168 |   | 3.0 |   | — |   | — |   |
| Other                               |       | (108                                     | )          | (3.0 | ) | (54 | ) | (1.0 | ) | 213 |   | 2.7 |   |
| Total                               |       | $                                        | 1,019      |   | 28.5 | % | $ | 1,773 |   | 31.7 | % | $ | (1,408 | ) | (17.7 | )% |

 

Income before income taxes includes income (losses)relating to non-U.S. operations of $47,000, $99,000 and $13,s000 infiscal 2006, fiscal 2005 and fiscal 2004, 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-17

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**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 30, 2006 and 2005 consist of (inthousands):

| ** **                                 | ** ** | **April 30,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2006**           | ** ** | **2005** | ** ** |
| Deferred tax assets:                       |       |               |       |   |   |
| Capitalized research                       |       | $                  | 337        |   | $ | 812 |   |
| Non-deductible reserves and accruals       |       | 944                |       | 822 |   |
| Credit carryforwards                       |       | 3,643              |       | 3,315 |   |
| Loss carryforwards                         |       | 1,699              |       | 2,721 |   |
| Deferred income and sales returns reserves |       | 829                |       | 693 |   |
| Other                                      |       | 78                 |       | 35 |   |
| Gross deferred tax assets                  |       | 7,530              |       | 8,398 |   |
| Deferred tax  liabilities:                 |       |               |       |   |   |
| Fixed assets                               |       | (—            | )          | (82 | ) |
| Other                                      |       | —             |       | — |   |
| Gross deferred tax liabilities             |       | (—            | )          | (82 | ) |
| Total net  deferred tax assets             |       | $                  | 7,530      |   | $ | 8,316 |   |

 

Based on available objective evidence and the recenthistory of profits, in fiscal 2004 management concluded that all of theCompany’s net deferred tax assets will be realizable. Accordingly, the Companyreleased the remaining $8.6 million of its valuation allowance as ofApril 30, 2004. Approximately $3.9 million of the valuation allowancethat reversed in fiscal 2004 was attributable to certain carryforwards,resulting from the exercise of employee stock options, and was accounted for asa credit to additional paid-in-capital rather than a reduction of the incometax provision. In addition, approximately $1.2 million of the benefitattributable to the fiscal 2004 employee stock option activity was alsocredited to additional paid-in-capital.

At April 30, 2006, the Company had a federal netoperating loss carryforward of approximately $5.0 million available tooffset future taxable income that expires between fiscal 2018 and 2025 if notutilized.

At April 30, 2006, the Company had approximately$2.4 million and $1.6 million of federal and state credit carryovers,respectively, available to offset future taxable income. The federal creditsexpire between fiscal 2009 and 2026 if not utilized. The state creditscarryovers are indefinite.

Under the Internal Revenue Code, the amounts of andbenefits from net operating loss and tax credit carryforwards may be impairedor limited in certain circumstances. Events which cause limitations in theamount of net operating losses and tax credit carryforwards that the Companymay utilize in any one year include, but are not limited to, a cumulativeownership change of more than 50%, as defined, over a three-year period.

During the year, 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.

F-18

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

**Note 7—Stockholders’Equity**

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.

***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 the powers,preferences, rights and the qualifications, limitations or restrictions grantedto or imposed upon any wholly unissued shares of undesignated preferred stock,without any further vote or action by the Company’s shareholders.

***2003 Stock Incentive Plan***

In October 1989, theCompany adopted a founder stock plan for incentive stock options andnon-statutory stock options. The founder stock plan was amended and restated inMarch 1993 as the Stock Option Plan, which had the effect of extending itsexpiration date to March 2003. In January 1999 and September 2000,the stockholders authorized an additional 1.8 million shares and2.5 million shares, respectively, to be reserved under the Stock OptionPlan. In December 2002, the stockholders approved an amendment andrestatement of the Stock Option Plan, renaming it the 2003 Stock Incentive Plan(“SIP”) extending its expiration date to November 2012, authorized anadditional 1.0 million shares and a provision to automatically authorize annualadditions to the plan on the first day of each fiscal year of 1.0 millionshares or 5% of the then outstanding shares, whichever is less. A total of 7.4million shares of Common Stock have been reserved for issuance under the SIP. Optionsgranted under the SIP are for periods not to exceed 10 years. Incentive stockoption and non-statutory stock option grants under the SIP generally must be atprices equal to 100% of the fair market value of the stock at the date of grant.Options generally vest over four-year periods.

***2003 Director Stock Option Plan***

During 1993, the Companyadopted the 1993 Director Stock Option Plan, which provides for the grant ofnonstatutory stock options to non-employee directors. In November 1999 andSeptember 2000, the stockholders authorized an additional 100,000 and450,000 shares, respectively, to be reserved under the 1993 Director StockOption Plan. In December 2002, the stockholders approved an amendment andrestatement of the 1993 Director Stock Option Plan, renaming it the 2003Director Stock Option Plan (“Director SOP”) and extending its expiration to November 2012.A total of 770,000 shares of Common Stock have been reserved for issuance underthe Director SOP. Options granted under the Director SOP prior to May 1,2000 were for periods not to exceed five years and not to exceed a period of 10years for grants made thereafter. Option grants under the 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 December 2002 vest immediately asof the date of the grant. As of April 30, 2006, a total of 210,000 optionsat exercise prices ranging from $2.49 to $7.49 per share are outstanding underthe Director SOP, all of which were exercisable.

F-19

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

***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 ten years. Optionsgenerally vest over four year periods. During fiscal 1999, optionstotaling 3.0 million shares were granted under the plan when the market pricewas $0.125 per share and subsequently approved by the Company’s shareholderswhen the market price was at $0.33 per share. As a result, an aggregate of$483,000 of compensation expense was recognized over the four-year vestingperiod of the options. All compensation expense was fully recognized by January 31,2003.

Asummary of activity under the 2003 Stock Incentive Plan, the 2003 DirectorStock Option Plan and the 1998 Special Equity Incentive Plan is as follows (inthousands):

| ** **                      | ** ** | **Options  Available for  Grant** | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average Price  Per Share** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|--------------------------|------------|--------------------------------------------------|------------|
| Balance at  April 30, 2003 |       |                                   | 1,436      |                     |       |                                             | 5,150      |   |   |   | $ | 2.62 |   |   |
| Additional shares  authorized   |       |                                   | 814        |                     |       |                                             | —     |   |   |   | — |   |   |
| Granted                         |       |                                   | (1,514     | )                        |       |                                             | 1,514      |   |   |   | $ | 5.85 |   |   |
| Canceled                        |       |                                   | 90         |                     |       |                                             | (90        | ) |   |   | $ | 2.17 |   |   |
| Expired                         |       |                                   | 45         |                     |       |                                             | (45        | ) |   |   | $ | 8.34 |   |   |
| Exercised                       |       |                                   | —     |                     |       |                                             | (811       | ) |   |   | $ | 1.61 |   |   |
| Balance at April 30, 2004  |       |                                   | 871        |                     |       |                                             | 5,718      |   |   |   | $ | 3.58 |   |   |
| Additional shares  authorized   |       |                                   | 821        |                     |       |                                             | —     |   |   |   | — |   |   |
| Granted                         |       |                                   | (1,363     | )                        |       |                                             | 1,363      |   |   |   | $ | 4.69 |   |   |
| Canceled                        |       |                                   | 86         |                     |       |                                             | (86        | ) |   |   | $ | 4.44 |   |   |
| Expired                         |       |                                   | 40         |                     |       |                                             | (40        | ) |   |   | $ | 4.96 |   |   |
| Exercised                       |       |                                   | —     |                     |       |                                             | (628       | ) |   |   | $ | 1.35 |   |   |
| Balance at April 30, 2005  |       |                                   | 455        |                     |       |                                             | 6,327      |   |   |   | $ | 4.02 |   |   |
| Additional shares  authorized   |       |                                   | 829        |                     |       |                                             | —     |   |   |   | — |   |   |
| Granted                         |       |                                   | (568       | )                        |       |                                             | 568        |   |   |   | $ | 4.75 |   |   |
| Canceled                        |       |                                   | 327        |                     |       |                                             | (327       | ) |   |   | $ | 4.90 |   |   |
| Expired                         |       |                                   | 233        |                     |       |                                             | (233       | ) |   |   | $ | 6.66 |   |   |
| Exercised                       |       |                                   | —     |                     |       |                                             | (673       | ) |   |   | $ | 1.61 |   |   |
| Balance at  April 30, 2006 |       |                                   | 1,276      |                     |       |                                             | 5,662      |   |   |   | $ | 4.22 |   |   |

 

F-20

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

Thetable below summarizes information regarding stock options outstanding at April 30,2006. The options exercisable as of April 30, 2005 and April 30, 2004were 3,674,914 and 3,208,128, respectively.

| ** **                                  | ** **               | **Options Outstanding**                                   | ** ** | **Options Exercisable**                                  | ** ** |
|---------------------------------------------|--------------------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Actual  Range of  Exercise  Prices** | ** **               | **Number  Outstanding at  April 30, 2006** | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable At  April 30, 2006** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| ** **                                  | ** **               | ** **                                                | ** ** | **(Years)**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                        | $0.13 - 0.13             |                                                      |       | 63,038                                                   |       |   |   | 2.5 |   |   |   | $ | 0.13 |   |   |   | 63,038 |   |   |   | $ | 0.13 |   |   |
|                                        |   0.25  - 0.33 |                                                      |       | 128,142                                                  |       |   |   | 2.9 |   |   |   | 0.29 |   |   |   | 128,142 |   |   |   | 0.29 |   |   |
|                                        |   1.73  - 2.49 |                                                      |       | 1,709,787                                                |       |   |   | 6.1 |   |   |   | 2.04 |   |   |   | 1,547,565 |   |   |   | 2.02 |   |   |
|                                        |   2.67  - 3.85 |                                                      |       | 269,378                                                  |       |   |   | 7.0 |   |   |   | 2.75 |   |   |   | 216,022 |   |   |   | 2.74 |   |   |
|                                        |   4.07  - 6.07 |                                                      |       | 2,235,074                                                |       |   |   | 7.9 |   |   |   | 4.83 |   |   |   | 959,092 |   |   |   | 5.13 |   |   |
|                                        |   6.38  - 8.22 |                                                      |       |                                                     | 1,256,523  |   |   |   | 6.8 |   |   |   | 7.04 |   |   |   | 901,717 |   |   |   | 7.08 |   |   |
|                                        | $0.13 - 8.22             |                                                      |       | 5,661,942                                                |       |   |   | 6.9 |   |   |   | $ | 4.22 |   |   |   | 3,815,576 |   |   |   | $ | 3.95 |   |   |
|                                             |                          |                                                           |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***1996 Shareholders’ Rights Plan***

In December 1996, theCompany implemented the Preferred Shares Rights Agreement. Under the PreferredShares Rights Agreement, each share of the Company’s outstanding common stockcarries one preferred share purchase right (“Right”). The Right entitles theholder, subject to certain conditions, to purchase one one-thousandth of ashare of Series A Participating Preferred Stock and, under certaincircumstances, to instead purchase shares of common stock of the Company or itsacquirer at a discounted price. The rights are redeemable by the Company andwill expire in December 2006.

***2001 Common Stock Repurchase Program***

In September 2001, our board of directorsauthorized a program for the open market repurchase of up to 1.5 millionshares of our common stock. In subsequent periods, the board of directorsamended the program and authorized the purchase up to an aggregate of 3,500,000shares. Upon reaching the maximum number of shares authorized under thisprogram, the board of directors authorized a new stock repurchase program in September 2005.Under the new repurchase program, the Company may repurchase up to 1.0 millionshares of its common stock. The purpose of these share repurchase programs areto reduce the long-term potential dilution in earnings per share that mightresult from issuances under our stock option plans and to take advantage of therelatively low price of our common stock. During fiscal 2006,fiscal 2005 and fiscal 2004, respectively, total shares repurchasedunder the Repurchase Program were 912,943, 1,901,176 and 74,000, for a cost of$4.5 million, $9.6 million and $216,000.

In fiscal 2004, the Board authorized the Companyto purchase 600,000 shares from Elex N.V. for $6.77 per share for an aggregatepurchase price of $4.1 million, which represented a 13% discount from theclosing market price on the Nasdaq National Market on the last trading dateprior to the approval of the transaction by the Company’s Board of Directors.

The Company accounts fortreasury stock using the cost method.

***Other Employee Benefit Plans***

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 2006, fiscal 2005 

F-21

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

and fiscal 2004,the Company made matching contributions of $190,000, $192,000 and $63,000,respectively.

**Note 8—SegmentReporting**

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

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

| ** **          | ** ** | **Years Ended April 30,** | ** ** |
|---------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| EEPROM              |       | $                                        | 50,597     |   | $ | 53,397 |   | $ | 56,239 |   |
| Flash               |       | 5,016                                    |       | 5,983 |   | 5,988 |   |
| Analog/mixed-signal |       | 4,604                                    |       | 2,940 |   | 1,311 |   |
| Total net  revenues |       | $                                        | 60,217     |   | $ | 62,320 |   | $ | 63,538 |   |

 

Netrevenues by geography were as follows (in thousands):

| ** **          | ** ** | **Years Ended April 30,** | ** ** |
|---------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States       |       | $                                        | 7,127      |   | $ | 7,470 |   | $ | 7,320 |   |
| Hong Kong/China     |       | 17,901                                   |       | 14,513 |   | 12,876 |   |
| Japan               |       | 8,716                                    |       | 11,724 |   | 11,288 |   |
| Taiwan              |       | 8,344                                    |       | 8,960 |   | 8,704 |   |
| Europe              |       | 6,977                                    |       | 8,160 |   | 7,432 |   |
| South Korea         |       | 5,886                                    |       | 6,947 |   | 6,316 |   |
| Other Far East      |       | 4,807                                    |       | 2,531 |   | 6,068 |   |
| Other Americas      |       | 459                                      |       | 2,015 |   | 3,534 |   |
| Total net  revenues |       | $                                        | 60,217     |   | $ | 62,320 |   | $ | 63,538 |   |

 

Distributors and resellers have accounted for asignificant portion of the Company’s net revenues in the past. For fiscal 2006,sales to Avnet, an international distributor, represented 12% of our netrevenues. For fiscal 2005, none of the Company’s customers represented 10% ormore of the Company’s net revenues. For fiscal 2004, sales to ALR CompanyLimited, a reseller in China, represented 11% of the Company’s net revenues.

F-22

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

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

| ** **                                       | ** ** | **Years Ended April 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                 | ** ** | **2005** | ** ** |
| United States                                    |       | $                                        | 12,010     |   | $ | 7,659 |   |
| Thailand                                         |       | 2,695                                    |       | 2,277 |   |
| Romania                                          |       | 2,874                                    |       | 2,764 |   |
| Japan                                            |       | 2,191                                    |       | 1,650 |   |
| Other                                            |       | 94                                       |       | 39 |   |
|                                             |       | 19,864                                   |       | 14,389 |   |
| Less: accumulated  depreciation and amortization |       | (10,456                                  | )          | (8,807 | ) |
| Total net  property and equipment                |       | $                                        | 9,408      |   | $ | 5,582 |   |

 

**Note 9—Commitmentsand Contingencies**

***Purchase Commitments***

Purchase commitments foropen purchase orders at April 30, 2006 and April 30, 2005 for whichgoods and services had not been received were approximately $6.2 million and$3.9 million, respectively.

***Contingencies***

In the normal course of business, the Companyperiodically receives notification of threats of legal action in relation toclaims of patent infringement by the Company. Currently there are no suchactive actions. Although no assurances can be given as to the results of suchclaims, management does not believe that any such results will have a materialadverse impact on the Company’s financial condition, results of operations, orcash flows.

In November 2002, theFASB issued FASB Interpretation No. 45, *“Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”* (FIN 45). The Companyapplies the disclosure provisions of FIN 45 to its agreements that containguarantee or indemnification clauses. FIN 45 requires that a liability berecorded in the guarantor’s balance sheet upon issuance of a guarantee. Inaddition, FIN 45 requires disclosures about the guarantees that an entityhas issued, including a reconciliation of changes in the entity’s productwarranty liabilities. These disclosure provisions expand those required by SFASNo. 5, *“Accounting for Contingencies,”*by requiring that guarantors disclose certain types of guarantees, even if thelikelihood of requiring the guarantor’s performance is remote. The following isa description of significant arrangements through which the Company is aguarantor:

***Indemnification Obligations***

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 

F-23

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

some instances, theCompany may have recourse against third parties for certain payments made by itunder 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.

***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 the anticipatedexpenditures over the balance of the obligation period. Adjustments are madewhen actual claim experience differs from estimates. Warranty costs were lessthan $100,000 for each of fiscal 2006, fiscal 2005 and fiscal 2004.

**Note 10—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 2006, fiscal 2005and fiscal 2004, the Company purchased $2.5 million, $2.4 million and$3.7 million of wafers, respectively, from X-FAB. As of April 30,2006 and 2005, the total amount owed X-FAB by the Company was $143,000and $314,000, respectively. In the first quarter of fiscal 2005, Elex reducedits holdings from 3,578,700 shares, or 21.8% of the outstanding shares of theCompany as of April 30, 2004, to 728,700 shares, or 4.4% of theoutstanding shares of the Company as of April 30, 2005.

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

F-24

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**ScheduleII—Valuation and Qualifying Accounts**

| **Year Ended April 30,**      | ** ** | ** **              | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Year** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| ***2006***                                   |       |                    |       |                                         |       |                                                     |       |           |       |                                   |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts receivable  |       |                    | $          | 138                                          |       |                                                     |       | $              | —     |                                   |       |   | $ | — |   |   |   | $ | 138 |   |   |
| OEM sales returns  allowance                 |       |                    | $          | 107                                          |       |                                                     |       | $              | 87         |                                   |       |   | $ | (84 | ) |   |   | $ | 110 |   |   |
| ***2005***                                   |       |                    |       |                                         |       |                                                     |       |           |       |                                   |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts receivable  |       |                    | $          | 138                                          |       |                                                     |       | $              | —     |                                   |       |   | $ | — |   |   |   | $ | 138 |   |   |
| OEM sales returns  allowance                 |       |                    | $          | 39                                           |       |                                                     |       | $              | 147        |                                   |       |   | $ | (79 | ) |   |   | $ | 107 |   |   |
| ***2004***                                   |       |                    |       |                                         |       |                                                     |       |           |       |                                   |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts receivable  |       |                    | $          | 225                                          |       |                                                     |       | $              | —     |                                   |       |   | $ | (87 | ) |   |   | $ | 138 |   |   |
| Valuation  allowance for deferred tax assets |       |                    | $          | 8,646                                        |       |                                                     |       | $              | (8,646     | )                                      |       |   | $ | — |   |   |   | $ | — |   |   |
| OEM sales returns  allowance                 |       |                    | $          | 154                                          |       |                                                     |       | $              | 46         |                                   |       |   | $ | (161 | ) |   |   | $ | 39 |   |   |

 

 

F-25

----

**EXHIBITINDEX**
| Exhibit No.      | ** ** | ** **                                                                                                                                                            | ** ** | ** ** | **Description** |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------|
|   3.2(7)    |       | Restated Certificate of  Incorporation of Registrant                                                                                                                  |
|   3.4(6)    |       | Bylaws of  Registrant                                                                                                                                                 |
|   4.1(12)   |       | Specimen Stock  Certificate                                                                                                                                           |
|   4.2(3)    |       | Preferred Shares  Rights Agreement, dated as of December 3, 1996 between Catalyst  Semiconductor, Inc. and FirstNational Bank of Boston                     |
|   4.2.1(10) |       | Amendment  No. 1 to Preferred Shares Rights Agreement dated as of May 22, 1998  between Registrant and BankBoston, N. A., as rights agent                   |
|   4.2.2(10) |       | Amendment  No. 2 to Preferred Shares Rights Agreement dated as of  September 14, 1998 between Registrant and BankBoston, N. A., as rights  agent            |
|   4.2.3(9)  |       | Amendment  No. 3 to Preferred Shares Rights Agreement dated as of  September 27, 2001 between Registrant and Equiserve Trust Company N.A.,  as rights agent |
|   4.2.4(10) |       | Amendment  No. 4 to Preferred Shares Rights Agreement dated as of July 17,  2002 between Registrant and Equiserve Trust Company N.A., as rights agent       |
|   4.2.5(13) |       | Amendment  No. 5 to Preferred Shares Rights Agreement dated as of April 22,  2004 between the Registrant and Equiserve Trust Company, as rights agent       |
|   4.2.6(14) |       | Amendment  No. 6 to Preferred Shares Rights Agreement dated as of June 18,  2004 between the Registrant and Equiserve Trust Company, as rights agent        |
|   4.6(11)   |       | 2003 Stock  Incentive Plan                                                                                                                                            |
|   4.6.1(24) |       | Form of  Stock Option Agreement under 2003 Stock Incentive Plan.                                                                                                 |
|   4.7(11)   |       | 2003 Director  Stock Option Plan                                                                                                                                      |
|   4.7.1(24) |       | Form of 2003  Director Option Plan (same as 4.6.1)                                                                                                               |
|   4.8(8)    |       | 1998 Special  Equity Incentive Plan                                                                                                                                   |
| 10.27(1)*             |       | Form of  Indemnification Agreement entered into by Registrant with each of its  directors and executive officers.                                                |
| 10.38(2)              |       | Standard  Industrial Lease dated March 22, 1996 between Marin County Employees  Retirement Association and Registrant                                            |
| 10.61(4)              |       | Standstill  Agreement dated as of May 26, 1998 between the Registrant and Elex N.V.                                                                              |
| 10.61.1(5)            |       | Amended and  Restated Standstill Agreement dated as of September 14, 1998 between the  Registrant and Elex N.V.                                                  |
| 10.61.2(13)           |       | Amendment  No. 1 to Amended and Restated Standstill Agreement dated as of  April 22, 2004                                                                   |
| 10.61.3(13)           |       | Second Amended  and Restated Standstill Agreement dated as of June 10, 2004                                                                                      |
| 10.83(9)              |       | Stock Purchase  Agreement dated April 19, 2002 between Elex NV and Registrant                                                                                    |
| 10.84(10)*            |       | Form of  Change of Control Agreement between Registrant and its non-employee directors                                                                           |
| 10.85(15)*            |       | Employment  Agreement dated May 23, 2003 between Gelu Voicu and Registrant                                                                                       |
| 10.86(13)             |       | Stock Transfer  Agreement dated as of April 22, 2004 between the Registrant and Elex N.V.                                                                   |
| 10.87(17)*            |       | Severance  Agreement dated October 14, 2002 between George Smarandoiu and  Registrant                                                                            |
| 10.88(16)             |       | Sale-Purchase Promissory  Agreement dated November 6, 2003 between Registrant and S.C. Hathor  Impex SRL                                                         |

----

 
| 10.89(4)   |   | Common Stock Purchase  Agreement dated as of May 26, 1998 between Registrant and Elex N.V.                                                                                              |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.90(5)   |   | Common Stock  Purchase Agreement dated as of September 14, 1998 between Registrant and  Elex N.V.                                                                                       |
| 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                                                                                                             |
| 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(25) |   | Lease Agreement  entered into on March 6, 2006 by and between Catalyst Semiconductor  International, Inc. 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 47)                                                                                                                                                |
| 31.1       |   | Certification of  Chief Executive Officer pursuant to U.S.C. Section 302 of the  Sarbanes-Oxley Act of 2002                                                                        |
| 31.2       |   | Certification of  Chief Financial Officer pursuant to U.S.C. Section 302 of the  Sarbanes-Oxley Act of 2002                                                                        |
| 32         |   | Certification of Chief  Executive Officer and Chief 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 S-1 filedwith the Securities and Exchange Commission on May 11, 1993 (File No. 33-60132),as amended.

(2)          Incorporated byreference to Registrant’s Form 10-K filed with the Securities andExchange Commission for the year ended April 30, 1996.

(3)          Incorporatedby reference to Registrant’s Form 8-A filed with the Securities andExchange Commission on January 22, 1997.

(4)          Incorporated byreference to Registrant’s Form 10-K filed with the Securities andExchange Commission for the year ended May 3, 1998.

(5)          Incorporated byreference to Registrant’s Form 10-Q filed with the Securities andExchange Commission for the quarter ended August 2, 1998.

(6)          Incorporated byreference to Registrant’s Form 10-Q/A filed with the Securities andExchange Commission for the quarter ended November 1, 1998.

(7)          Incorporated byreference to an Appendix to Registrant’s Definitive Proxy Statement filed withthe Securities and Exchange Commission on December 18, 1998.

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

----

(9)          Incorporated byreference to Registrant’s Form 10-Q filed with the Securities andExchange Commission for the quarter ended October 28, 2001.

(10)   Incorporated by reference toRegistrant’s Form 10-K filed with the Securities and ExchangeCommission for the year ended April 30, 2002.

(11)   Incorporated by reference toRegistrant’s Registration Statement on Form S-8 filed with theSecurities and Exchange Commission on December 24, 2002 (File No. 333-102201).

(12)   Incorporated by reference toRegistrant’s Registration Statement on Form 8-A/A filed with theSecurities and Exchange Commission on April 29, 1993.

(13)   Incorporated by reference toRegistrant’s Registration Statement on Form S-3 filed with theSecurities and Exchange Commission on June 14, 2004 (File No. 333-116425).

(14)   Incorporated by reference toRegistrant’s Registration Statement on Form S-3/A filed with theSecurities and Exchange Commission on June 22, 2004 (File No. 333-116425).

(15)   Incorporated by reference toRegistrant’s Form 10-K filed with the Securities and ExchangeCommission for the year ended April 27, 2003.

(16)   Incorporated by reference toRegistrant’s Form 10-Q filed with the Securities and ExchangeCommission for the quarter ended February 1, 2004.

(17)   Incorporated by reference toRegistrant’s Form 10-K filed with the Securities and ExchangeCommission for the year ended May 2, 2004.

(18)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on August 5, 2005.

(19)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on August 26, 2005.

(20)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on September 7, 2005.

(21)   Incorporated by reference toRegistrant’s Form 10-Q filed with the Securities and ExchangeCommission for the quarter ended July 31, 2005.

(22)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on October 11, 2005.

(23)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and ExchangeCommission on February 9, 2006.

(24)   Incorporated by reference toRegistrant’s Registration Statement on Form S-8 filed with theSecurities and Exchange Commission on March 3, 2006 (File No. 333-132204).

(25)   Incorporated by reference toRegistrant’s Form 8-K filed with the Securities and Exchange Commissionon March 10, 2006.

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

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

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