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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A

Amendment No. 2



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period from  to

Commission File Number 000-50553



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LOGO

STAKTEK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 56-2354935                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

8900 Shoal Creek Blvd., Austin, TX 78757

(Address of principal executive offices) (Zip Code)

Registrants telephone number, including area code:

(512) 454-9531



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Securities registered pursuant
to Section 12(b) of the Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|Common Stock        |  | NASDAQ                                   

Securities registered pursuant to Section 12(g) of the Act:

None.



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    YES ̈NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    YES  x    NO ̈

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    YES  x    NO ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    YES ̈NO  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    YES ̈NO  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES ̈NO  x

The aggregate market
value of voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold as of June 30, 2005, the end of the registrants second fiscal quarter, was approximately
$31,296,981 (assuming, for this purpose, that directors, executive officers and the investment funds affiliated with Austin Ventures, L.P. are deemed affiliates).

The number of shares of the registrants common stock, $0.001 par value, outstanding as of March 1, 2006, was 48,451,848.

Documents Incorporated by Reference

None.



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EXPLANATORY NOTE

We are providing this Amendment No. 2 (this Amendment) to our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 8,
2006 (as amended, the Original 10-K) as amended by Amendment No. 1 filed with the Securities and Exchange Commission on July 19, 2006 (Amendment No. 1). This Amendment amends the Original 10-K solely for the purpose
of correcting the inadvertent omission of our auditors signature on its Report of Independent Registered Public Accounting Firm in Item 8. At the time of filing of the Original 10-K, we had on-hand (i) a manually signed and dated
Report of Independent Registered Public Accounting Firm, (ii) a manually signed and dated Consent of Independent Registered Public Accounting Firm and (iii) manually signed and dated certifications of the principal executive officer and
principal financial officer pursuant to Exchange Act Rule 13a-14(a).

This amendment does not reflect events occurring after the filing of
the Original 10-K and does not modify or update the disclosure in the Original 10-K, other than (i) the addition of our auditors signature on its Report of Independent Registered Public Account Firm in Item 8, and (ii) the
filing of certifications of our chief executive officer and chief financial officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002. The full text of Item 8 of the Original
10-K is set forth below with the addition of our auditors signature on its Report of Independent Registered Public Account Firm in Item 8 and replaces Item 8 of the Original 10-K in its entirety.

PART II

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

Set forth below are our audited consolidated financial statements for the year ended December 31, 2005, the
year ended December 31, 2004, the period from inception to December 31, 2003, and the period from January 1, 2003 to August 20, 2003.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | 3   
|Consolidated Balance Sheets                             |  | 4   
|Consolidated Statements of Operations                   |  | 5   
|Consolidated Statements of Stockholders Equity         |  | 6   
|Consolidated Statements of Cash Flows                   |  | 8   
|Notes to Consolidated Financial Statements              |  | 10  



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and
Stockholders of Staktek Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Staktek Holdings, Inc. (the Company) as of
December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the two years ended December 31, 2005 and for the period from May 9, 2003 (inception) to
December 31, 2003; and the accompanying consolidated statements of operations, stockholders equity, and cash flows of Staktek Corporation (Predecessor Company) for the period from January 1, 2003 to August 20, 2003. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of Staktek Holdings, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for
each of the two years ended December 31, 2005 and for the period from May 9, 2003 (inception) to December 31, 2003; and the consolidated statements of operations, stockholders equity, and cash flows of Staktek Corporation
(Predecessor Company) for the period from January 1, 2003 to August 20, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Austin, Texas

February 15, 2006



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STAKTEK HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                          |  | December 31,2005 |         |   | December 31,2004 |  
|ASSETS                                                                                                                                                                                                                                    |  |                  |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                                                                           |  |                  |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                 |  | $                | 38,011  |   |                  | $ | 39,984  |  
|Investments                                                                                                                                                                                                                               |  |                  | 35,696  |   |                  |   | 37,434  |  
|Accounts receivable                                                                                                                                                                                                                       |  |                  | 5,062   |   |                  |   | 4,493   |  
|Inventories                                                                                                                                                                                                                               |  |                  | 706     |   |                  |   | 833     |  
|Other current assets                                                                                                                                                                                                                      |  |                  | 4,008   |   |                  |   | 3,231   |  
|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                                                                      |  |                  | 83,483  |   |                  |   | 85,975  |  
|Property, plant and equipment, net                                                                                                                                                                                                        |  |                  | 9,443   |   |                  |   | 10,162  |  
|Goodwill                                                                                                                                                                                                                                  |  |                  | 28,081  |   |                  |   | 28,466  |  
|Other intangibles, net                                                                                                                                                                                                                    |  |                  | 17,041  |   |                  |   | 30,447  |  
|Other assets                                                                                                                                                                                                                              |  |                  | 301     |   |                  |   | 421     |  
|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                                                              |  | $                | 138,349 |   |                  | $ | 155,471 |  
|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                      |  |                  |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                                                                      |  |                  |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                                                                          |  | $                | 403     |   |                  | $ | 714     |  
|Accrued liabilities                                                                                                                                                                                                                       |  |                  | 3,282   |   |                  |   | 2,568   |  
|Deferred revenue                                                                                                                                                                                                                          |  |                  | 283     |   |                  |   | 629     |  
|Current maturities of capitalized lease obligations                                                                                                                                                                                       |  |                  |        |   |                  |   | 53      |  
|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                                                                 |  |                  | 3,968   |   |                  |   | 3,964   |  
|Other accrued liabilities                                                                                                                                                                                                                 |  |                  | 246     |   |                  |   | 190     |  
|Deferred tax liabilities                                                                                                                                                                                                                  |  |                  | 2,851   |   |                  |   | 9,510   |  
|                                                                                                                                                                                                                                          |  |                 
|Redeemable preferred stock; $0.001 par value; 5,000,000 shares authorized                                                                                                                                                                 |  |                  |        |   |                  |   |        |  
|                                                                                                                                                                                                                                          |  |                 
|Stockholders equity:                                                                                                                                                                                                                     |  |                  |         |   |                  |   |         |  
|Common stock; $0.001 par value; 100,000,000 shares and 200,000,000 shares authorized at December 31, 2005 and 2004, respectively;
51,809,007 shares and 51,102,215 shares issued at December 31, 2005 and December 31, 2004, respectively |  |                  | 51      |   |                  |   | 49      |  
|Additional paid-in capital                                                                                                                                                                                                                |  |                  | 156,252 |   |                  |   | 155,810 |  
|Treasury stock, at cost; 3,413,020 shares and 473,000 shares at December 31, 2005 and 2004, respectively                                                                                                                                  |  |                  | (12,572 | ) |                  |   | (1,982  | )
|Deferred stock-based compensation                                                                                                                                                                                                         |  |                  | (6,332  | ) |                  |   | (13,462 | )
|Accumulated other comprehensive loss                                                                                                                                                                                                      |  |                  | (32     | ) |                  |   | (2      | )
|Retained earnings (accumulated deficit)                                                                                                                                                                                                   |  |                  | (6,083  | ) |                  |   | 1,394   |  
|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                                                                |  |                  | 131,284 |   |                  |   | 141,807 |  
|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                |  | $                | 138,349 |   |                  | $ | 155,471 |  
|                                                                                                                                                                                                                                          |  |                  |         |   |                  |   |         |  

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



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STAKTEK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | -------------------------------------- | - | ------ | ------------------- | ---------------------------------------- | - | ------ | - |  | - | ------ | -
|                                                                                                                 |  | Staktek Holdings, Inc.  |         |   |                                        |  
|                                                                                                                 |  | Year Ended December 31, |         |   | Period from Inception to Dec. 31, 2003 |   |        | Predecessor Company |                                         
|                                                                                                                 |  | 2005                    |         |   | 2004                                   |   |        |                     | Period from Jan. 1,2003 to Aug. 20, 2003 |  
|Revenue:                                                                                                         |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Services                                                                                                         |  | $                       | 33,641  |   |                                        | $ | 41,047 |                     |                                          | $ | 21,020 |   |  | $ | 31,509 |  
|License                                                                                                          |  |                         | 18,885  |   |                                        |   | 32,579 |                     |                                          |   | 6,202  |   |  |   | 12,624 |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Total revenue                                                                                                    |  |                         | 52,526  |   |                                        |   | 73,626 |                     |                                          |   | 27,222 |   |  |   | 44,133 |  
|Cost of revenue:                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Services                                                                                                         |  |                         | 27,274  |   |                                        |   | 26,104 |                     |                                          |   | 9,763  |   |  |   | 19,813 |  
|Amortization of acquisition intangibles                                                                          |  |                         | 12,938  |   |                                        |   | 15,785 |                     |                                          |   | 4,584  |   |  |   |       |  
|Amortization of deferred stock-based compensation and stock compensation expense                                 |  |                         | 543     |   |                                        |   | 601    |                     |                                          |   | 1,935  |   |  |   | 20     |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Total cost of revenue                                                                                            |  |                         | 40,755  |   |                                        |   | 42,490 |                     |                                          |   | 16,282 |   |  |   | 19,833 |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Gross profit                                                                                                     |  |                         | 11,771  |   |                                        |   | 31,136 |                     |                                          |   | 10,940 |   |  |   | 24,300 |  
|Operating expenses:                                                                                              |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Selling, general and administrative (1)                                                                          |  |                         | 10,071  |   |                                        |   | 8,431  |                     |                                          |   | 3,397  |   |  |   | 3,085  |  
|Research and development (1)                                                                                     |  |                         | 5,344   |   |                                        |   | 2,563  |                     |                                          |   | 854    |   |  |   | 1,560  |  
|Business restructuring and acquisition                                                                           |  |                         | 982     |   |                                        |   |       |                     |                                          |   | 2,452  |   |  |   | 3,376  |  
|In-process research and development                                                                              |  |                         |        |   |                                        |   |       |                     |                                          |   | 700    |   |  |   |       |  
|Amortization of acquisition intangibles                                                                          |  |                         | 1,013   |   |                                        |   | 1,855  |                     |                                          |   | 1,058  |   |  |   |       |  
|Amortization of deferred stock-based compensation and stock compensation expense                                 |  |                         | 6,638   |   |                                        |   | 4,376  |                     |                                          |   | 3,734  |   |  |   | 22     |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Total operating expenses                                                                                         |  |                         | 24,048  |   |                                        |   | 17,225 |                     |                                          |   | 12,195 |   |  |   | 8,043  |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Income (loss) from operations                                                                                    |  |                         | (12,277 | ) |                                        |   | 13,911 |                     |                                          |   | (1,255 | ) |  |   | 16,257 |  
|Other income (expense):                                                                                          |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Interest income                                                                                                  |  |                         | 1,816   |   |                                        |   | 401    |                     |                                          |   | 29     |   |  |   | 102    |  
|Interest expense                                                                                                 |  |                         | (7      | ) |                                        |   | (1,210 | )                   |                                          |   | (3,107 | ) |  |   | (12    | )
|Other, net                                                                                                       |  |                         | (83     | ) |                                        |   | (28    | )                   |                                          |   | (285   | ) |  |   | (10    | )
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Total other income (expense), net                                                                                |  |                         | 1,726   |   |                                        |   | (837   | )                   |                                          |   | (3,363 | ) |  |   | 80     |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Income (loss) before income taxes                                                                                |  |                         | (10,551 | ) |                                        |   | 13,074 |                     |                                          |   | (4,618 | ) |  |   | 16,337 |  
|Provision (benefit) for income taxes                                                                             |  |                         | (3,074  | ) |                                        |   | 5,268  |                     |                                          |   | 656    |   |  |   | 6,861  |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Net income (loss)                                                                                                |  |                         | (7,477  | ) |                                        |   | 7,806  |                     |                                          |   | (5,274 | ) |  |   | 9,476  |  
|Preferred stock dividends                                                                                        |  |                         |        |   |                                        |   | (266   | )                   |                                          |   | (872   | ) |  |   |       |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Income (loss) available to common stockholders                                                                   |  | $                       | (7,477  | ) |                                        | $ | 7,540  |                     |                                          | $ | (6,146 | ) |  | $ | 9,476  |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Earnings (loss) per share:                                                                                       |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Basic                                                                                                            |  | $                       | (0.15   | ) |                                        | $ | 0.16   |                     |                                          | $ | (0.17  | ) |  | $ | 5.16   |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Diluted                                                                                                          |  | $                       | (0.15   | ) |                                        | $ | 0.15   |                     |                                          | $ | (0.17  | ) |  | $ | 4.86   |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Shares used in computing earnings (loss) per share:                                                              |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|Basic                                                                                                            |  |                         | 48,579  |   |                                        |   | 47,234 |                     |                                          |   | 36,647 |   |  |   | 1,836  |  
|Diluted                                                                                                          |  |                         | 48,579  |   |                                        |   | 50,996 |                     |                                          |   | 36,647 |   |  |   | 1,949  |  
|__________                                                                                                       |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|(1)    Excludes the amortization of deferred stock-based compensation and stock compensation
expense as follows: |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|                                                                                                                 |  |                         |         |  
|Selling, general and administrative                                                                              |  | $                       | 6,231   |   |                                        | $ | 4,313  |                     |                                          | $ | 3,718  |   |  | $ | 22     |  
|Research and development                                                                                         |  |                         | 407     |   |                                        |   | 63     |                     |                                          |   | 16     |   |  |   |       |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  
|                                                                                                                 |  | $                       | 6,638   |   |                                        | $ | 4,376  |                     |                                          | $ | 3,734  |   |  | $ | 22     |  
|                                                                                                                 |  |                         |         |   |                                        |   |        |                     |                                          |   |        |   |  |   |        |  

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



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STAKTEK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share amounts)



|                                                                            |        |                        |        |                            |    |                |   |                                   |  |   |                                      |  |                             |         |   |                            |   |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- | ------ | ---------------------- | ------ | -------------------------- | -- | -------------- | - | --------------------------------- |  | - | ------------------------------------ |  | --------------------------- | ------- | - | -------------------------- | - | - |  | - | ------ | - |  | - | ------ | -
|                                                                            |        | Predecessor Company    |       
|                                                                            |        | Common Stock           |        | Additional Paid-In Capital |    | Treasury Stock |   | Deferred Stock-Based Compensation |  |   | Accumulated Other Comprehensive Loss |  | Retained Earnings (Deficit) |         |   | Total Stockholders Equity |  
|                                                                            | Shares |                        | Amount |                            |    |                |   |                                   | 
|Balances at December 31, 2002                                               |        | 1,824,776              |        | $                          | 18 |                | $ | 4,374                             |  | $ |                                     |  | $                           | (2      | ) |                            | $ |  |  | $ | 40,029 |   |  | $ | 44,419 |  
|                                                                            |        |                        |        |                            |    |                |   |                                  
|Exercise of stock options                                                   |        | 12,645                 |        |                            |   |                |   | 128                               |  |   |                                     |  |                             |        |   |                            |   |  |  |   |       |   |  |   | 128    |  
|Effect of variable stock option grants                                      |        |                       |        |                            |   |                |   | 41                                |  |   |                                     |  |                             | 1       |   |                            |   |  |  |   |       |   |  |   | 42     |  
|Tax benefit from disqualifying disposition of incentive stock option shares |        |                       |        |                            |   |                |   | 2,078                             |  |   |                                     |  |                             |        |   |                            |   |  |  |   |       |   |  |   | 2,078  |  
|Net income                                                                  |        |                       |        |                            |   |                |   |                                  |  |   |                                     |  |                             |        |   |                            |   |  |  |   | 9,476  |   |  |   | 9,476  |  
|                                                                            |        |                        |        |                            |    |                |   |                                   |  |   |                                      |  |                             |         |   |                            |   |   |  |   |        |   |  |   |        |  
|Balances at August 20, 2003                                                 |        | 1,837,421              |        | $                          | 18 |                | $ | 6,621                             |  | $ |                                     |  | $                           | (1      | ) |                            | $ |  |  | $ | 49,505 |   |  | $ | 56,143 |  
|                                                                            |        |                        |        |                            |    |                |   |                                   |  |   |                                      |  |                             |         |   |                            |   |   |  |   |        |   |  |   |        |  
|                                                                            |       
|                                                                            |        | Staktek Holdings, Inc. |       
|                                                                            |        | Common Stock           |        | Additional Paid-In Capital |    | Treasury Stock |   | DeferredStock-Based Compensation  |  |   | AccumulatedOtherComprehensive Loss   |  | RetainedEarnings (Deficit)  |         |   | TotalStockholders Equity  |  
|                                                                            |        | Shares                 |        | Amount                     |    |                |   |                                   |  |  
|Issuance of common stock at May 9, 2003 (inception)                         |        | 36,549,999             |        | $                          | 37 |                | $ | 463                               |  | $ |                                     |  | $                           |        |   |                            | $ |  |  | $ |       |   |  | $ | 500    |  
|                                                                            |        |                        |        |                            |    |                |   |                                  
|Issuance of stock options                                                   |        |                       |        |                            |   |                |   | 24,345                            |  |   |                                     |  |                             | (24,345 | ) |                            |   |  |  |   |       |   |  |   |       |  
|Exercise of stock options                                                   |        | 435,880                |        |                            |   |                |   | 292                               |  |   |                                     |  |                             |        |   |                            |   |  |  |   |       |   |  |   | 292    |  
|Exercise of stock options (shares subject to repurchase)                    |        | 3,391,517              |        |                            |   |                |   |                                  |  |   |                                     |  |                             |        |   |                            |   |  |  |   |       |   |  |   |       |  
|Issuance of warrant to purchase common stock                                |        |                       |        |                            |   |                |   | 225                               |  |   |                                     |  |                             |        |   |                            |   |  |  |   |       |   |  |   | 225    |  
|Amortization of deferred stock- based compensation                          |        |                       |        |                            |   |                |   |                                  |  |   |                                     |  |                             | 5,444   |   |                            |   |  |  |   |       |   |  |   | 5,444  |  
|Dividends on preferred stock                                                |        |                       |        |                            |   |                |   |                                  |  |   |                                     |  |                             |        |   |                            |   |  |  |   | (872   | ) |  |   | (872   | )
|Net loss                                                                    |        |                       |        |                            |   |                |   |                                  |  |   |                                     |  |                             |        |   |                            |   |  |  |   | (5,274 | ) |  |   | (5,274 | )
|                                                                            |        |                        |        |                            |    |                |   |                                   |  |   |                                      |  |                             |         |   |                            |   |   |  |   |        |   |  |   |        |  
|Balances at December 31, 2003                                               |        | 40,377,396             |        | $                          | 37 |                | $ | 25,325                            |  | $ |                                     |  | $                           | (18,901 | ) |                            | $ |  |  | $ | (6,146 | ) |  | $ | 315    |  
|                                                                            |        |                        |        |                            |    |                |   |                                   |  |   |                                      |  |                             |         |   |                            |   |   |  |   |        |   |  |   |        |  

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



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STAKTEK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (CONTINUED)

(in thousands, except share
amounts)



|                                                                                                            |  |                        |   |                            |        |    |                |   |         |                                   |  |   |                                      |   |  |                             |         |   |                            |   |     |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | -------------------------- | ------ | -- | -------------- | - | ------- | --------------------------------- |  | - | ------------------------------------ | - |  | --------------------------- | ------- | - | -------------------------- | - | --- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                            |  | Staktek Holdings, Inc. |  
|                                                                                                            |  | Common Stock           |   | Additional Paid-In Capital |        |    | Treasury Stock |   |         | Deferred Stock-Based Compensation |  |   | Accumulated Other Comprehensive Loss |   |  | Retained Earnings (Deficit) |         |   | Total Stockholders Equity |  
|                                                                                                            |  | Shares                 |   |                            | Amount |    |                |   |         |                                   | 
|Balances at December 31, 2003                                                                               |  | 40,377,396             |   |                            | $      | 37 |                | $ | 25,325  |                                   |  | $ |                                     |   |  | $                           | (18,901 | ) |                            | $ |    |   |  | $ | (6,146 | ) |  | $ | 315     |  
|                                                                                                            |  |                        |   |                            |        |    |                |  
|Issuance of common shares                                                                                   |  | 11,190,000             |   |                            |        | 11 |                |   | 135,276 |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | 135,287 |  
|Costs of initial public offering                                                                            |  |                       |   |                            |        |   |                |   | (1,942  | )                                 |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | (1,942  | )
|Dividends on preferred stock                                                                                |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   | (266   | ) |  |   | (266    | )
|Write-off of deferred stock-based compensation due to the repurchase of unvested excercisable stock options |  |                       |   |                            |        |   |                |   | (463    | )                                 |  |   |                                     |   |  |                             | 463     |   |                            |   |    |   |  |   |       |   |  |   |        |  
|Share repurchases                                                                                           |  |                       |   |                            |        |   |                |   |        |                                   |  |   | (4,408                               | ) |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | (4,408  | )
|Exercise of stock options                                                                                   |  | 181,793                |   |                            |        |   |                |   | 2       |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | 2       |  
|Vesting of previously exercised unvested stock options                                                      |  |                       |   |                            |        | 1  |                |   | 38      |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | 39      |  
|Amortization of deferred stock- based compensation                                                          |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             | 4,976   |   |                            |   |    |   |  |   |       |   |  |   | 4,976   |  
|Retirement of treasury stock                                                                                |  | (646,974               | ) |                            |        |   |                |   | (2,426  | )                                 |  |   | 2,426                                |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   |        |  
|Net income                                                                                                  |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   | 7,806  |   |  |   | 7,806   |  
|Unrealized loss on investment securities                                                                    |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             |        |   |                            |   | (2  | ) |  |   |       |   |  |   | (2      | )
|                                                                                                            |  |                        |   |                            |        |    |                |   |         |                                   |  |   |                                      |   |  |                             |         |   |                            |   |     |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                  |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | 7,804   |  
|                                                                                                            |  |                        |   |                            |        |    |                |   |         |                                   |  |   |                                      |   |  |                             |         |   |                            |   |     |   |  |   |        |   |  |   |         |  
|Balances at December 31, 2004                                                                               |  | 51,102,215             |   |                            |        | 49 |                |   | 155,810 |                                   |  |   | (1,982                               | ) |  |                             | (13,462 | ) |                            |   | (2  | ) |  |   | 1,394  |   |  |   | 141,807 |  
|                                                                                                            |  |                        |   |                            |        |    |                |  
|ESPP purchases                                                                                              |  | 20,240                 |   |                            |        |   |                |   | 86      |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | 86      |  
|Share repurchases                                                                                           |  |                       |   |                            |        |   |                |   |        |                                   |  |   | (10,590                              | ) |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | (10,590 | )
|Exercise of stock options                                                                                   |  | 686,552                |   |                            |        | 1  |                |   | 227     |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | 228     |  
|Vesting of previously exercised unvested stock options                                                      |  |                       |   |                            |        | 1  |                |   | 78      |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | 79      |  
|Amortization of deferred stock- based compensation                                                          |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             | 7,181   |   |                            |   |    |   |  |   |       |   |  |   | 7,181   |  
|Addition to deferred stock-based compensation, net                                                          |  |                       |   |                            |        |   |                |   | 51      |                                   |  |   |                                     |   |  |                             | (51     | ) |                            |   |    |   |  |   |       |   |  |   |        |  
|Net loss                                                                                                    |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   | (7,477 | ) |  |   | (7,477  | )
|Unrealized loss on investment securities, net of tax                                                        |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             |        |   |                            |   | (30 | ) |  |   |       |   |  |   | (30     | )
|                                                                                                            |  |                        |   |                            |        |    |                |   |         |                                   |  |   |                                      |   |  |                             |         |   |                            |   |     |   |  |   |        |   |  |   |         |  
|Total comprehensive loss                                                                                    |  |                       |   |                            |        |   |                |   |        |                                   |  |   |                                     |   |  |                             |        |   |                            |   |    |   |  |   |       |   |  |   | (7,507  | )
|                                                                                                            |  |                        |   |                            |        |    |                |   |         |                                   |  |   |                                      |   |  |                             |         |   |                            |   |     |   |  |   |        |   |  |   |         |  
|Balances at December 31, 2005                                                                               |  | 51,809,007             |   |                            | $      | 51 |                | $ | 156,252 |                                   |  | $ | (12,572                              | ) |  | $                           | (6,332  | ) |                            | $ | (32 | ) |  | $ | (6,083 | ) |  | $ | 131,284 |  
|                                                                                                            |  |                        |   |                            |        |    |                |   |         |                                   |  |   |                                      |   |  |                             |         |   |                            |   |     |   |  |   |        |   |  |   |         |  

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



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STAKTEK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                           |  |                         |        |   |                                      |   |        |                     |                                          |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | - | ------------------------------------ | - | ------ | ------------------- | ---------------------------------------- | - | ------ | - |  | - | ------ | -
|                                                                                           |  | Staktek Holdings, Inc.  |        |   |                                      |  
|                                                                                           |  | Year Ended December 31, |        |   | Period fromInception
toDec. 31, 2003 |   |        | Predecessor Company |                                         
|                                                                                           |  | 2005                    |        |   | 2004                                 |   |        |                     | Period from Jan. 1,2003 to Aug. 20, 2003 |  
|Cash flows from operating activities:                                                      |  |                         |        |   |                                      |   |        |                     |                                          |   |        |   |  |   |        |  
|Net income (loss)                                                                          |  | $                       | (7,477 | ) |                                      | $ | 7,806  |                     |                                          | $ | (5,274 | ) |  | $ | 9,476  |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:   |  |                         |        |   |                                      |   |        |                     |                                          |   |        |   |  |   |        |  
|Depreciation                                                                               |  |                         | 5,127  |   |                                      |   | 4,620  |                     |                                          |   | 1,439  |   |  |   | 2,287  |  
|Amortization of intangibles and write-off of purchased in-process research and development |  |                         | 14,099 |   |                                      |   | 17,713 |                     |                                          |   | 6,342  |   |  |   | 53     |  
|Amortization of deferred stock-based compensation and stock compensation expense           |  |                         | 7,181  |   |                                      |   | 4,977  |                     |                                          |   | 5,669  |   |  |   | 42     |  
|Deferred income taxes                                                                      |  |                         | (6,651 | ) |                                      |   | (6,779 | )                   |                                          |   | (1,196 | ) |  |   | (583   | )
|Other                                                                                      |  |                         | 111    |   |                                      |   | 18     |                     |                                          |   | 234    |   |  |   |       |  
|Changes in operating assets and liabilities, net of acquisitions:                          |  |                         |        |   |                                      |   |        |                     |                                          |   |        |   |  |   |        |  
|Accounts receivable                                                                        |  |                         | (569   | ) |                                      |   | 9,508  |                     |                                          |   | 1,218  |   |  |   | (3,842 | )
|Inventories                                                                                |  |                         | 127    |   |                                      |   | (338   | )                   |                                          |   | 29     |   |  |   | 639    |  
|Other current assets                                                                       |  |                         | (60    | ) |                                      |   | 1,156  |                     |                                          |   | 338    |   |  |   | (44    | )
|Income tax receivable/payable                                                              |  |                         | (221   | ) |                                      |   | 822    |                     |                                          |   | (181   | ) |  |   | (884   | )
|Accounts payable                                                                           |  |                         | (311   | ) |                                      |   | (5,494 | )                   |                                          |   | 2,222  |   |  |   | (5,022 | )
|Accrued liabilities                                                                        |  |                         | 944    |   |                                      |   | (3,528 | )                   |                                          |   | (437   | ) |  |   | 1,014  |  
|Deferred revenue                                                                           |  |                         | (346   | ) |                                      |   | 629    |                     |                                          |   |       |   |  |   |       |  
|                                                                                           |  |                         |        |   |                                      |   |        |                     |                                          |   |        |   |  |   |        |  
|Net cash provided by operating activities                                                  |  | $                       | 11,954 |   |                                      | $ | 31,110 |                     |                                          | $ | 10,403 |   |  | $ | 3,136  |  
|                                                                                           |  |                         |        |   |                                      |   |        |                     |                                          |   |        |   |  |   |        |  

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



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STAKTEK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

(in thousands)



|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|------------------------------------------------------------ |  | ----------------------- | ------- | - | ------------------------------------ | - | ------- | ------------------- | ---------------------------------------- | - | ------- | - |  | - | ------ | -
|                                                             |  | Staktek Holdings, Inc.  |         |   |                                      |  
|                                                             |  | Year Ended December 31, |         |   | Period fromInception
toDec. 31, 2003 |   |         | Predecessor Company |                                         
|                                                             |  | 2005                    |         |   | 2004                                 |   |         |                     | Period from Jan. 1,2003 to Aug. 20, 2003 |  
|Cash flows from investing activities:                        |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Purchases of investments                                     |  | $                       | (93,482 | ) |                                      | $ | (45,564 | )                   |                                          | $ |        |   |  | $ |       |  
|Sales of investments                                         |  |                         | 95,062  |   |                                      |   | 8,125   |                     |                                          |   |        |   |  |   |       |  
|Additions to property, plant and equipment                   |  |                         | (4,446  | ) |                                      |   | (4,802  | )                   |                                          |   | (1,302  | ) |  |   | (5,269 | )
|Proceeds from sale of equipment                              |  |                         | 55      |   |                                      |   |        |                     |                                          |   |        |   |  |   |       |  
|Acquisition of Staktek Corporation, net of cash acquired     |  |                         |        |   |                                      |   |        |                     |                                          |   | (85,788 | ) |  |   |       |  
|Purchase of assets from DPAC                                 |  |                         |        |   |                                      |   | (734    | )                   |                                          |   |        |   |  |   |       |  
|Patent application costs                                     |  |                         | (693    | ) |                                      |   | (437    | )                   |                                          |   | (30     | ) |  |   | (113   | )
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Net cash used in investing activities                        |  |                         | (3,504  | ) |                                      |   | (43,412 | )                   |                                          |   | (87,120 | ) |  |   | (5,382 | )
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Cash flows from financing activities:                        |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Proceeds from senior term loans                              |  |                         |        |   |                                      |   |        |                     |                                          |   | 30,000  |   |  |   |       |  
|Proceeds from senior revolving credit notes                  |  |                         |        |   |                                      |   |        |                     |                                          |   | 10,000  |   |  |   |       |  
|Proceeds from short-term loan                                |  |                         |        |   |                                      |   |        |                     |                                          |   | 5,000   |   |  |   |       |  
|Proceeds from subordinated loan from related party           |  |                         |        |   |                                      |   |        |                     |                                          |   | 34,500  |   |  |   |       |  
|Proceeds from issuance of redeemable preferred stock         |  |                         |        |   |                                      |   |        |                     |                                          |   | 29,500  |   |  |   |       |  
|Net proceeds from the issuance of common stock               |  |                         | 345     |   |                                      |   | 133,781 |                     |                                          |   | 792     |   |  |   | 128    |  
|Repayment of notes payable and long-term debt                |  |                         |         |   |                                      |   | (43,125 | )                   |                                          |   | (1,875  | ) |  |   |       |  
|Repayment of subordinated loan from related party            |  |                         |         |   |                                      |   | (34,500 | )                   |                                          |   |        |   |  |   |       |  
|Redemption of redeemable preferred stock                     |  |                         |         |   |                                      |   | (30,638 | )                   |                                          |   |        |   |  |   |       |  
|Share repurchases                                            |  |                         | (10,668 | ) |                                      |   | (4,284  | )                   |                                          |   |        |   |  |   |       |  
|Repurchase of exercised unvested shares                      |  |                         | (47     | ) |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Payments on capitalized lease obligations                    |  |                         | (53     | ) |                                      |   | (113    | )                   |                                          |   | (35     | ) |  |   | (81    | )
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Net cash provided by (used in) financing activities          |  |                         | (10,423 | ) |                                      |   | 21,121  |                     |                                          |   | 107,882 |   |  |   | 47     |  
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Net increase (decrease) in cash and cash equivalents         |  |                         | (1,973  | ) |                                      |   | 8,819   |                     |                                          |   | 31,165  |   |  |   | (2,199 | )
|Cash and cash equivalents at beginning of period             |  |                         | 39,984  |   |                                      |   | 31,165  |                     |                                          |   |        |   |  |   | 31,449 |  
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Cash and cash equivalents at end of period                   |  | $                       | 38,011  |   |                                      | $ | 39,984  |                     |                                          | $ | 31,165  |   |  | $ | 29,250 |  
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Supplemental disclosure of cash flows information:           |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Cash paid during the period for interest                     |  | $                       | 1       |   |                                      | $ | 3,739   |                     |                                          | $ | 333     |   |  | $ | 11     |  
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Cash paid during the period for income taxes, net of refunds |  | $                       | 3,798   |   |                                      | $ | 11,226  |                     |                                          | $ | 1,007   |   |  | $ | 6,243  |  
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Noncash operating and investing activities:                  |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  
|Changes in goodwill                                          |  | $                       | 385     |   |                                      | $ | 1,260   |                     |                                          | $ |        |   |  | $ |       |  
|                                                             |  |                         |         |   |                                      |   |         |                     |                                          |   |         |   |  |   |        |  

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



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STAKTEK HOLDINGS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Staktek Holdings,
Inc. (we and our) was originally formed by two investment funds affiliated with Austin Ventures in May 2003 for the purpose of acquiring Staktek Corporation (the Predecessor Company), which was incorporated in
Texas in June 1990. As a result of this merger, Staktek Corporation became our wholly owned subsidiary. We did not have any operations prior to August 21, 2003, other than in connection with the Staktek acquisition.

We provide manufacturing services to deliver memory solutions and also offer licenses of our technologies to our customers to enable them to manufacture
memory products. In addition, we offer a broad range of services to support our customers needs, including design of custom memory assemblies, electrical modeling assistance and component inventory management. We have production facilities in
Austin, Texas and Reynosa, Mexico.

2. Basis of Presentation and Significant Accounting Policies

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated statements of operations, stockholders equity and cash flows for the period from January 1, 2003 to August 20, 2003 represent the results of operations, changes in
stockholders equity and cash flows of the Predecessor Company and its wholly owned subsidiaries. The accompanying consolidated balance sheets as of December 31, 2004 and December 31, 2005, and the accompanying consolidated statements
of operations, stockholders equity and cash flows for the period from inception to December 31, 2003, the year ended December 31, 2004, and the year ended December 31, 2005 represent the financial position, results of
operations, changes in stockholders equity and cash flows of the Company and its wholly owned subsidiaries.

Our consolidated
financial statements and those of the Predecessor Company include the accounts of Staktek Holdings, Inc. and its wholly owned subsidiaries and the accounts of the Predecessor Company and its wholly owned subsidiaries, respectively. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosure of assets and liabilities. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications
have been made to the prior years consolidated financial statements to conform to the current year presentation.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
At December 31, 2005 and 2004, our cash equivalents included funds in demand deposit accounts, money market accounts, municipal bonds and commercial paper.



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Investments

Marketable short-term investments are classified as available-for-sale. Short-term investments consist primarily of U.S. government debt securities, municipal government securities and commercial paper instruments. We
classify auction rate securities and securities with hard put features and maturities in excess of one year as short-term investments.

Investments with original maturities in excess of one year may be classified as short term due to their highly liquid nature and to the fact we do not hold investments with the intent of long-term investment, but rather with the short-term
objective of maximizing interest earnings on surplus cash intended for operations.

All of these investments are carried at fair value with
unrealized gains and losses, if any, included as a component of accumulated other comprehensive income (loss). Fair value is determined as the market value of the security at the measurement date. Interests, dividends and realized gains and losses
are included in interest and other income. Realized gains and losses are recognized based on the specific identification method.

Inventory Held for
Others

Inventory held for others consists of memory products purchased from a customer or a vendor specified by the customer that
will be stacked by us and sold to the customer at a price equal to the price paid by us plus a fee for the stacking process. We record revenue related to the sale of memory packages net of the price paid by us for the purchased memory (net
basis). We record memory packages purchased as Inventory Held for Others rather than Inventory because the costs of these packages are not recorded to Cost of Services Revenue. Inventory Held for Others increases when we purchase memory
products to be stacked and decreases when these products have been stacked and shipped to our customers. We report Inventory Held for Others in Other Current Assets in the accompanying Consolidated Balance Sheets.

Inventories

Inventories consist of materials
purchased and labor and overhead incurred for product that has not yet been shipped. Inventories are stated at the lower of cost or market (estimated realizable value) using the first-in, first-out (FIFO) method.

Property, Plant and Equipment

We carry
property, plant and equipment, including leasehold improvements, at cost less accumulated depreciation. Depreciation of property, plant and equipment is computed using the straight-line method over the useful lives of the assets, ranging from three
to 20 years. We amortize leasehold improvements over the shorter of the related lease term or the estimated life of the improvements. We amortize equipment under capital leases over the lease term, and this amortization is included in the
depreciation of property, plant and equipment.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess purchase price over the fair value of net assets acquired in the acquisition of the Predecessor Company. We periodically
assess our goodwill for indications of impairment. We have a single reporting unit at an enterprise level and allocate goodwill to this reporting unit for goodwill impairment testing.

We assess whether goodwill and indefinite-lived intangible assets (trademarks) are impaired on an annual basis. Upon determining the existence of
goodwill and/or trademarks impairment, we measure that impairment based on the amount by which the book value of goodwill and/or trademarks exceeds its fair value. Additional impairment assessments may be performed on an interim basis if we
encounter events or changes in circumstances that would indicate that, more likely than not, the book value of goodwill and/or trademarks has been impaired. In connection with our annual assessment on October 1, 2005, we determined that no
impairment of goodwill and/or trademarks existed.

Intangible Assets

Amounts allocated to acquired technology, a customer contract and customer relationships are being amortized over the respective assets estimated
useful lives of five to six years using a method of amortization that reflects the pattern in which their economic benefits are consumed based upon the initial estimated contribution to discounted cash flows during the period. Amounts allocated to
non-compete agreements are



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being amortized over their estimated useful lives of four years using the straight-line method. Amortization of acquired
technology and a customer contract is included in Amortization of acquisition intangibles in cost of revenue in the accompanying Consolidated Statements of Operations. Amortization of customer relationships and non-compete agreements is
included in Amortization of acquisition intangibles in operating expenses in the accompanying Consolidated Statements of Operations. We periodically review the estimated useful lives of our identifiable intangible assets, taking into
consideration any events or circumstances that might result in a diminished fair value or revised useful life.

We capitalize third-party
costs associated with patent registration. Capitalized patent costs are amortized over the estimated useful life of 12 years. At the time patent registration is deemed unsuccessful, the related costs are written off.

Impairment of Long-lived Assets

Long-lived
assets consist primarily of property, plant and equipment and intangible assets. We evaluate property, plant and equipment and other intangible assets held and used by us for impairment whenever events or changes in circumstances indicate that their
carrying value may not be recoverable. When these factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the future use and disposal of the related asset or group of assets to their respective
carrying amounts. Impairment, if any, is measured as the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the
determination is made.

Fair Value of Financial Instruments

The fair values of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying values due to their short maturities.

Concentration of Credit Risk

Financial
instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, investments and accounts receivable.

We maintain our cash and cash equivalents in accounts with six major financial institutions in the United States or in countries where our subsidiaries operate, in the form of demand deposits and money
market accounts. At December 31, 2005 and 2004, we had amounts on deposit with financial institutions that were in excess of the federally insured limit of $100,000. We have not experienced any losses on deposits of cash and cash
equivalents.

We believe that the concentration of credit risk in our accounts receivable is substantially mitigated by the
relatively short collection terms and the high level of credit worthiness of our customers. We record an allowance for doubtful accounts specific to the accounts receivable balances outstanding based upon the results of our evaluation of our
customers financial condition. We have not recorded an allowance for doubtful accounts for any period presented in the accompanying financial statements, since we have not realized any significant credit losses, nor do we expect any
significant credit losses relating to our customers.



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The following tables summarize sales to customers that represented 10% or more of consolidated total
revenue for the periods indicated:



|                |  |                         |   |  |                                        |   |  |                     |                                           |  |    |  
|--------------- |  | ----------------------- | - |  | -------------------------------------- | - |  | ------------------- | ----------------------------------------- |  | -- | -
|                |  | Staktek Holdings, Inc.  |   |  |                                        |  
|                |  | Year Ended December 31, |   |  | Period from Inception to Dec. 31, 2003 |   |  | Predecessor Company |                                          
|                |  | 2005                    |   |  | 2004                                   |   |  |                     | Period from Jan. 1, 2003 to Aug. 20, 2003 | 
|Samsung         |  | 32                      | % |  | 43                                     | % |  | 23                  | %                                         |  | 29 | %
|Micron          |  | 21                      | % |  | 17                                     | % |  | 24                  | %                                         |  | 29 | %
|Hewlett-Packard |  | 17                      | % |  | *                                      |   |  | *                   |                                           |  | *  |  
|Celestica       |  | *                       |   |  | *                                      |   |  | 17                  | %                                         |  | 17 | %
|SMART Modular   |  | 11                      | % |  | 12                                     | % |  | 11                  | %                                         |  | 10 | %

---

|* | Amount does not exceed 10% for the indicated period.
|- | ----------------------------------------------------

The
following table sets forth customers which receivable balances represented more than 10% of our total accounts receivable at the dates indicated:



|                |  |              |   |  |      |  
|--------------- |  | ------------ | - |  | ---- | -
|                |  | December 31, |  
|                |  | 2005         |   |  | 2004 |  
|Hewlett-Packard |  | 29           | % |  | 18   | %
|Netlist         |  | 22           | % |  | *    |  
|Micron          |  | 22           | % |  | 45   | %
|SMART Modular   |  | 15           | % |  | 23   | %

---

|* | Amount does not exceed 10% for the indicated period.
|- | ----------------------------------------------------

Foreign
Currency

Our foreign subsidiaries use the U.S. dollar as their functional currency. Gains or losses from foreign currency
transactions are included in our results of operations. For all periods presented, these foreign currency gains or losses were not material.

Revenue
Recognition

We account for our revenue under the provisions of Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition. Under the provisions of SAB 104, we recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and collectibility of the resulting receivable is reasonably
assured. Our revenue is generated primarily from manufacturing services performed for customers using our packaged memory solutions and from license fees or royalties earned pursuant to license agreements with customers.

Services Revenue

Our manufacturing services consist
of customer arrangements whereby the manufacture of our customers stacked memory units is outsourced to us. These customer arrangements can be categorized into two basic types. In the first arrangement, our customer consigns its memory
packages to us and we stack them using our proprietary solutions. In the second arrangement, our customer prequalifies vendors for memory packages and the vendor remains the primary obligor for the functionality of the memory packages. Our customer
places a purchase order with us for stacking memory packages. After we receive the purchase order from our customer, we purchase the specified memory packages and stack them using our proprietary solutions. We report revenue for memory packages
purchased and sold on a net basis in accordance with Emerging Issues Task Force Issue No. 99-19. In customer arrangements for manufacturing services (i) we are responsible for the stacking process but are not the primary obligor for the
memory packages that comprise substantially all of the functionality of the stacked unit, (ii) we do not earn profit on memory packages sold, since our customer arrangement specifies that these packages are to be sold at the same price paid by
us, (iii) we do not bear credit risk related to the memory packages, since our customer must purchase the packages at the price paid by us or the packages can



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be returned to their source, (iv) we do not have latitude in establishing the price for the memory packages, and
(v) we do not have discretion in the selection of the supplier of the memory packages, since the supplier is selected or specified by our customer. We have determined that a net basis of revenue recognition is appropriate for our customer
arrangements for manufacturing services where the customer has instructed us to purchase specified memory packages from a specified vendor for purposes of stacking and shipping to the customer.

License Revenue

In addition to our services revenue,
we also earn revenue from licensing our technology. Initial license fees are recognized when: (1) we enter into a legally binding arrangement with a customer for the license; (2) we deliver the products; (3) customer payment is deemed
fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. We may provide training and/or other assistance to our licensees under the terms of the license agreement. The amount of training or
assistance provided is limited and incidental to the licensed technology. In instances where training or other assistance is provided under the terms of a license agreement, the estimated fair value of such services is deferred until such services
are provided. The associated revenue is included in services revenue.

Currently we have license agreements with three customers that
specify that certain royalties are earned by us upon each customers shipment of products utilizing our proprietary technologies. Our customers generally report shipment information 30 days after the end of the quarter in which the activity
takes place and typically do not provide us with forward estimates or current-quarter information concerning their shipments. Because we are not able to reasonably estimate the amount of royalties earned during the period in which the licensee
actually ship products using our technologies, we do not recognize royalty revenue until the royalties are reported to us and the collection of these royalties is considered probable.

Cost of Revenue

Cost of revenue includes the cost of labor, materials and overhead
required to perform the manufacturing process. These costs are included in inventories until the product is shipped and revenue is recognized. Cost of revenue also includes the amortization of acquired technology, a customer contract and certain
patents and the amortization of deferred stock-based compensation and stock compensation expense.

Shipping and Handling Cost

We include shipping and handling costs as part of cost of revenue as incurred.

Research and Development

We expense costs for
research and development of our technologies as incurred.

Advertising Costs

We expense advertising costs as incurred. Advertising costs were not material for any periods presented.

Stock-Based Compensation

We account for our
employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations. We make disclosures regarding
employee stock-based compensation using the fair value method in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation- Transition and Disclosure- an amendment of FASB Statement No. 123. We have calculated the fair value of options granted in these periods using the Black-Scholes option-pricing model and have
determined the pro forma impact on net income (loss).

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, this option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because our
employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the Black-Scholes
model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting
period.



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The following table illustrates the pro forma effect on income (loss) available to common stockholders
and earnings (loss) per share if we and the Predecessor Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation (in thousands, except per share data):



|                                                                                                                                 |  |                         |        |   |      |   |        |                                        |  |   |                                          |   |  |   |       |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -------------------------------------- |  | - | ---------------------------------------- | - |  | - | ----- | -
|                                                                                                                                 |  | Staktek Holdings, Inc.  |        |   |      |  
|                                                                                                                                 |  | Year Ended December 31, |        |   |      |   |        | Predecessor Company                    | 
|                                                                                                                                 |  | 2005                    |        |   | 2004 |   |        | Period from Inception to Dec. 31, 2003 |  |   | Period from Jan. 1,2003 to Aug. 20, 2003 |  
|Income (loss) available to common stockholders, as reported                                                                      |  | $                       | (7,477 | ) |      | $ | 7,540  |                                        |  | $ | (6,146                                   | ) |  | $ | 9,476 |  
|                                                                                                                                 |  |                         |        |  
|Add: Stock-based compensation cost, net of related tax effects, included in the determination of net income (loss) as
reported   |  |                         | 6,180  |   |      |   | 3,947  |                                        |  |   | 5,311                                    |   |  |   | 42    |  
|                                                                                                                                 |  |                         |        |  
|Deduct: Total stock-based compensation cost, net of related tax effects, determined under fair-value based method for
all awards |  |                         | (7,112 | ) |      |   | (4,314 | )                                      |  |   | (5,349                                   | ) |  |   | (683  | )
|                                                                                                                                 |  |                         |        |   |      |   |        |                                        |  |   |                                          |   |  |   |       |  
|Pro forma income (loss) available to common stockholders                                                                         |  | $                       | (8,409 | ) |      | $ | 7,173  |                                        |  | $ | (6,184                                   | ) |  | $ | 8,835 |  
|                                                                                                                                 |  |                         |        |   |      |   |        |                                        |  |   |                                          |   |  |   |       |  
|Earnings (loss) per share:                                                                                                       |  |                         |        |   |      |   |        |                                        |  |   |                                          |   |  |   |       |  
|Basic- as reported                                                                                                               |  | $                       | (0.15  | ) |      | $ | 0.16   |                                        |  | $ | (0.17                                    | ) |  | $ | 5.16  |  
|Basic- pro forma                                                                                                                 |  | $                       | (0.17  | ) |      | $ | 0.15   |                                        |  | $ | (0.17                                    | ) |  | $ | 4.81  |  
|                                                                                                                                 |  |                         |        |  
|Diluted- as reported                                                                                                             |  | $                       | (0.15  | ) |      | $ | 0.15   |                                        |  | $ | (0.17                                    | ) |  | $ | 4.86  |  
|Diluted- pro forma                                                                                                               |  | $                       | (0.17  | ) |      | $ | 0.14   |                                        |  | $ | (0.17                                    | ) |  | $ | 4.53  |  

The fair value for these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted average assumptions:



|                        |  |                         |   |  |      |   |  |                                        |   |  |                                           |  
|----------------------- |  | ----------------------- | - |  | ---- | - |  | -------------------------------------- | - |  | ----------------------------------------- | -
|                        |  | Staktek Holdings, Inc.  |   |  |      |  
|                        |  | Year Ended December 31, |   |  |      |   |  | Predecessor Company                    |  
|                        |  | 2005                    |   |  | 2004 |   |  | Period from Inception to Dec. 31, 2003 |   |  | Period from Jan. 1, 2003 to Aug. 20, 2003 |  
|Expected life (years)   |  | 4                       |   |  | 4    |   |  | 0.5-4                                  |   |  | 5                                         |  
|Risk-free interest rate |  | 3.0                     | % |  | 3.0  | % |  | 3.0                                    | % |  | 5.0                                       | %
|Dividend yield          |  | 0.0                     | % |  | 0.0  | % |  | 0.0                                    | % |  | 0.0                                       | %
|Expected volatility     |  | 63.6                    | % |  | 66.2 | % |  | 98.0                                   | % |  | 98.0                                      | %

The estimated weighted average fair value of options granted during the years ended
December 31, 2005 and 2004, for the period from inception to December 31, 2003, and for the period from January 1, 2003 to August 20, 2003, was $1.72, $5.73, $3.57, and $15.30, respectively.

Equity instruments issued to non-employees are accounted for in accordance with SFAS 123 and Emerging Issues Task Force Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.



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Income Taxes

We account for income taxes under the provisions of SFAS 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax
assets to the amounts we expect to realize.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of vested common
shares outstanding for the period. Diluted earnings (loss) per share is computed under the treasury method giving effect to all potential dilutive common stock, including options, warrants and common stock subject to repurchase. For the year ended
December 31, 2005 and the period from inception to December 31, 2003, options and common stock subject to repurchase were not included in the computation of diluted loss per share because the effect would be antidilutive.

Recent Accounting Pronouncements

The FASB
issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (SFAS 123(R)) in December 2004. Under this standard, all forms of share-based payments to employees, including stock options,
will be treated as compensation and recognized in the income statement. Pro forma disclosure will no longer be acceptable. SFAS 123(R) became effective for us on January 1, 2006. We will continue to use the Black-Scholes option pricing model to
determine the fair value of our stock-based awards. We will utilize the modified prospective method, which requires compensation expense to be recorded upon adoption of SFAS 123(R) for new awards, modified awards and the unvested portion of
previously issued awards for which the requisite vesting has not yet occurred. Prior period restatement and cumulative adjustments are not required.

We believe the adoption of SFAS 123(R) will have a significant negative impact on our results of operations, but will not significantly impact our financial position or cash flows. We estimate the pre-tax, stock-based
compensation charge for the first quarter of 2006 related to the adoption of SFAS No. 123(R) will total approximately $1.5 million. Due to the volatility of the price of our common stock and the uncertainty of future option grants to employees,
we are unable to estimate this expense for periods subsequent to the first quarter of 2006.

3. Initial Public Offering

On February 11, 2004, we completed our initial public offering in which we sold 10 million shares of our common stock at $13.00 per share, for
an aggregate public offering price of $130.0 million. On March 5, 2004, we sold an additional 1.19 million shares in connection with the underwriters over-allotment option, for an aggregate public offering price of approximately
$15.5 million. Of the total proceeds, we applied approximately $10.2 million to underwriting discounts and commissions; $1.9 million to related costs; $78.8 million to pay in full our senior, short-term and subordinated debt (including accrued
interest and fees); and $30.6 million to redeem our outstanding preferred stock. We retained approximately $24.0 million.



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4. Investments

During 2005 and 2004, we invested in securities with original maturities greater than three months. These securities are classified as available-for-sale. The amortized cost, gross unrealized gains and
losses and fair value of these securities as of December 31, 2005 and 2004 were as follows (in thousands):



|                                    |  |                |        |                        |   |                         |  |   |                      |   |  |   |       
|----------------------------------- |  | -------------- | ------ | ---------------------- | - | ----------------------- |  | - | -------------------- | - |  | - | ------
|                                    |  | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Fair Value
|2005                                |  |                |        |                        |   |                         |  |   |                      |   |  |   |       
|Auction rate securities             |  | $              | 20,045 |                        | $ | 5                       |  | $ |                     |   |  | $ | 20,050
|Municipal bonds                     |  |                | 8,791  |                        |   |                        |  |   | (30                  | ) |  |   | 8,761 
|Other available for sale securities |  |                | 6,910  |                        |   |                        |  |   | (25                  | ) |  |   | 6,885 
|                                    |  |                |        |                        |   |                         |  |   |                      |   |  |   |       
|                                    |  | $              | 35,746 |                        | $ | 5                       |  | $ | (55                  | ) |  | $ | 35,696
|                                    |  |                |        |                        |   |                         |  |   |                      |   |  |   |       
|2004                                |  |                |        |                        |   |                         |  |   |                      |   |  |   |       
|Auction rate securities             |  | $              | 24,050 |                        | $ |                        |  | $ |                     |   |  | $ | 24,050
|Municipal bonds                     |  |                | 4,016  |                        |   |                         |  |   | (2                   | ) |  |   | 4,014 
|Other available for sale securities |  |                | 9,370  |                        |   |                         |  |   |                     |   |  |   | 9,370 
|                                    |  |                |        |                        |   |                         |  |   |                      |   |  |   |       
|                                    |  | $              | 37,436 |                        | $ |                        |  | $ | (2                   | ) |  | $ | 37,434
|                                    |  |                |        |                        |   |                         |  |   |                      |   |  |   |       

Gross unrealized losses at December 31, 2005 and 2004 were the result of fluctuations in the
current market value of these securities in the marketplace.

Maturities of investment securities classified as available-for-sale at
December 31, 2005 and 2004 by contractual maturity are shown below (in thousands). Expected maturities will vary from contractual maturities because borrowers may have the right to recall or prepay obligations with or without call or prepayment
penalties.



|                       |  |                |        |                      |   |                |  |                      |        |  |   |       
|---------------------- |  | -------------- | ------ | -------------------- | - | -------------- |  | -------------------- | ------ |  | - | ------
|                       |  | 2005           |        | 2004                
|                       |  | Amortized Cost |        | Estimated Fair Value |   | Amortized Cost |  | Estimated Fair Value
|Within 1 year          |  | $              | 14,212 |                      | $ | 14,176         |  | $                    | 4,016  |  | $ | 4,014 
|Between 1 and 5 years  |  |                | 2,224  |                      |   | 2,211          |  |                      | 4,000  |  |   | 4,000 
|Between 5 and 10 years |  |                | 2,100  |                      |   | 2,100          |  |                      | 1,250  |  |   | 1,250 
|After 10 years         |  |                | 17,210 |                      |   | 17,209         |  |                      | 28,170 |  |   | 28,170
|                       |  |                |        |                      |   |                |  |                      |        |  |   |       
|                       |  | $              | 35,746 |                      | $ | 35,696         |  | $                    | 37,436 |  | $ | 37,434
|                       |  |                |        |                      |   |                |  |                      |        |  |   |       

We sold approximately $95.1 million and $8.1 million in investment securities held as
available-for-sale in the years ended December 31, 2005 and 2004, respectively.

5. Inventories

Inventories at December 31, 2005 and 2004 consisted of the following (in thousands):



|                |  |      |     |      |   |    
|--------------- |  | ---- | --- | ---- | - | ---
|                |  | 2005 |     | 2004
|Raw Materials   |  | $    | 629 |      | $ | 712
|Work in process |  |      | 20  |      |   | 12 
|Finished goods  |  |      | 57  |      |   | 109
|                |  |      |     |      |   |    
|                |  | $    | 706 |      | $ | 833
|                |  |      |     |      |   |    



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6. Property, Plant and Equipment

Property, plant and equipment at December 31, 2005 and 2004 consisted of the following (in thousands):



|                                      |  |                          |  |      |         |   |      |   |        |  
|------------------------------------- |  | ------------------------ |  | ---- | ------- | - | ---- | - | ------ | -
|Asset Class                           |  | EstimatedLife (in years) |  | 2005 |         |   | 2004 |  
|Land                                  |  |                          |  | $    | 371     |   |      | $ | 371    |  
|Buildings                             |  | 20                       |  |      | 2,232   |   |      |   | 1,967  |  
|Software                              |  | 3                        |  |      | 933     |   |      |   | 777    |  
|Vehicles                              |  | 5                        |  |      | 76      |   |      |   | 74     |  
|Office furniture and equipment        |  | 5                        |  |      | 1,999   |   |      |   | 1,829  |  
|Lab equipment                         |  | 3                        |  |      | 12,544  |   |      |   | 9,104  |  
|Tooling and fixtures                  |  | 3                        |  |      | 1,677   |   |      |   | 918    |  
|Leasehold improvements and clean room |  | 3                        |  |      | 476     |   |      |   | 289    |  
|Assets under development              |  |                          |  |      | 9       |   |      |   | 808    |  
|                                      |  |                          |  |      |         |   |      |   |        |  
|                                      |  |                          |  |      | 20,317  |   |      |   | 16,137 |  
|Accumulated depreciation              |  |                          |  |      | (10,874 | ) |      |   | (5,975 | )
|                                      |  |                          |  |      |         |   |      |   |        |  
|Property, plant and equipment, net    |  |                          |  | $    | 9,443   |   |      | $ | 10,162 |  
|                                      |  |                          |  |      |         |   |      |   |        |  

Amortization of the assets under capital lease was included in depreciation and was approximately
$53,000, $113,000, $42,000 and $75,000 for the year ended December 31, 2005, the year ended December 31, 2004, the period from inception to December 31, 2003, and the period from January 1, 2003 to August 20, 2003,
respectively. Interest expense related to assets under capital lease was included in interest expense and was approximately $1,000, $9,000, $6,000, and $11,000 for the year ended December 31, 2005, the year ended December 31, 2004, the
period from inception to December 31, 2003 and the period from January 1, 2003 to August 20, 2003, respectively. As of December 31, 2005, we did not hold any assets under capital lease.

In October 2004, we moved several manufacturing assets to our facility in Reynosa, Mexico. Additionally, we decided to sell certain assets, which were
recorded as assets held for sale. The market value of these assets at the time we decided to sell them was approximately $59,000, which was equal to the net book value and therefore no impairment was recorded. During 2005 we sold the largest piece
of this equipment with a net book value of $56,000.

7. Other Intangible Assets

In June 2004, we acquired from DPAC Technologies Corp. (DPAC) its stacking patents and patent applications as well as certain customer
information for $0.5 million and $0.2 million, respectively, which are being amortized over 12 and 2 years, respectively.

The gross
carrying amounts and accumulated amortization of our other intangibles assets and patents at December 31, 2005 and 2004 consisted of the following (in thousands):



|                                |  |                       |        |                          |      |         |                       |  |                          |        |  |   |         |  
|------------------------------- |  | --------------------- | ------ | ------------------------ | ---- | ------- | --------------------- |  | ------------------------ | ------ |  | - | ------- | -
|                                |  | 2005                  |        |                          | 2004 |        
|                                |  | Gross Carrying Amount |        | Accumulated Amortization |      |         | Gross Carrying Amount |  | Accumulated Amortization |       
|Acquired technology and patents |  | $                     | 20,797 |                          | $    | (13,927 | )                     |  | $                        | 20,104 |  | $ | (9,092  | )
|Customer contract               |  |                       | 26,100 |                          |      | (19,452 | )                     |  |                          | 26,100 |  |   | (11,300 | )
|Other intangible assets         |  |                       | 7,598  |                          |      | (4,075  | )                     |  |                          | 7,598  |  |   | (2,963  | )
|                                |  |                       |        |                          |      |         |                       |  |                          |        |  |   |         |  
|                                |  | $                     | 54,495 |                          | $    | (37,454 | )                     |  | $                        | 53,802 |  | $ | (23,355 | )
|                                |  |                       |        |                          |      |         |                       |  |                          |        |  |   |         |  

Amortization expense for all intangibles in the year ended December 31, 2005, the year ended
December 31, 2004 and the period from inception to December 31, 2003 was $14.1 million, $17.7 million and $5.6 million, respectively. Amortization expense for all intangibles of the Predecessor Company for January 1, 2003 to
August 20, 2003 was $0.1 million.

The following table details the estimated aggregate annual amortization expense (in thousands) for
each of the five succeeding years for all of the intangibles we own that are subject to amortization:



|     |  |   |      
|---- |  | - | -----
|2006 |  | $ | 7,543
|2007 |  |   | 4,675
|2008 |  |   | 1,466
|2009 |  |   | 148  
|2010 |  |   | 54   

In addition, we have indefinite-lived intangible assets that have a net carrying value of $1.8
million.



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##### Table of Contents

8. Accrued Liabilities

Accrued liabilities at December 31, 2005 and 2004 were as follows (in thousands):



|                            |  |      |       |      |   |      
|--------------------------- |  | ---- | ----- | ---- | - | -----
|                            |  | 2005 |       | 2004
|Accrued salaries and wages  |  | $    | 454   |      | $ | 669  
|Accrued restructuring costs |  |      | 398   |      |   |     
|Accrued vacation            |  |      | 526   |      |   | 404  
|Accrued bonuses             |  |      | 798   |      |   | 526  
|Accrued property tax        |  |      | 332   |      |   | 464  
|Other accrued liabilities   |  |      | 774   |      |   | 505  
|                            |  |      |       |      |   |      
|                            |  | $    | 3,282 |      | $ | 2,568
|                            |  |      |       |      |   |      

9. Debt

On March 10, 2005, we entered into an unsecured revolving credit agreement with Guaranty Bank under which we may borrow up to $20.0 million at any given time for a one-year term. This credit agreement is
guaranteed by Staktek Group, L.P. Other than nominal closing costs associated with implementing the agreement, there are no ongoing fees associated with this credit agreement unless we borrow. The interest rate on borrowings outstanding is based on
the London interbank offered rate (LIBOR), plus between 1.25% and 1.60%, depending upon the amount of cash or liquid investments that we have on deposit with Guaranty Bank. We are required to maintain at least $5.0 million on deposit
with Guaranty Bank during the term of this credit agreement.

The credit agreement contains customary covenants that preclude us from,
among other things, making material changes to the nature and scope of our business, entering into liquidation, merger or consolidation agreements in which we would not be the surviving entity, or incurring indebtedness in excess of $10.0 million
with a third party outside the scope of this agreement.

The credit agreement contains financial covenants that must be met for periods in
which we have outstanding borrowings. These financial covenants include minimum tangible net worth of at least $70.0 million at the end of each calendar month, earnings before interest, taxes, depreciation and amortization (EBITDA) of at least $3.0
million each quarter, and a ratio of senior debt to EBITDA of no more than 2.0 times. As of December 31, 2005, we were in compliance with these covenants. As of December 31, 2005, we had not borrowed under this credit agreement, nor do we
expect we will need to make any substantial borrowings under this agreement prior to the termination of the agreement in March 2006.

10. Redeemable
Preferred Stock

At December 31, 2005 and 2004 we had 5.0 million authorized shares of $0.001 par value redeemable preferred
stock, none of which was issued or outstanding.

11. Commitments and Contingencies

At December 31, 2004, we had advance payments on assets under development of approximately $0.8 million related to the purchase of certain capital
equipment and services. At December 31, 2005 advanced payments on assets under development were immaterial.

At December 31,
2005, approximately 76% of our employees in Mexico, or approximately 56% of our total employees, were represented by a labor organization that has entered into a labor contract with us.

We have indemnification agreements with our directors and executive officers. The agreements do not set monetary limits on our indemnity obligations. We
have a director and officer insurance policy that enables us to recover a portion of any future amounts paid in respect of our indemnity obligations to our directors and officers.



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##### Table of Contents

At December 31, 2005 we had a minimum purchases contract with one of our vendors. The minimum
purchase terms stipulate the purchase of 2 million units within an 18-month period that began in October 2004. As of December 31, 2005, our estimated future purchases under this contract were 675,000 units totaling $121,500. We evaluated
our potential exposure for the anticipated shortfall of units purchased under this minimum purchase contract and recorded an accrual of $25,000.

On October 22, 2004, a class action complaint for violations of U.S. federal securities laws was filed in the U.S. District Court in New Mexico against us and two of our executive officers (the Defendants). The plaintiff
claims that the Defendants failed to disclose to the public an anticipated shortage of computer memory chips and that they knew or recklessly disregarded that the anticipated shortage would have a materially adverse impact on our revenue and
earnings. In addition, the plaintiff claims that the Defendants failed to disclose to investors that the industrys transition to a new generation of higher-capacity memory chips was causing computer makers to stockpile supplies of older memory
chips, increasing the shortage. The suit covers individuals who purchased our stock between November 26, 2003 and May 19, 2004.

In April 2005, the case was transferred to federal district court in Austin, Texas, and in June the plaintiff amended her complaint, adding our chairman of the board as a defendant. In July 2005, we filed a motion to dismiss the
amended complaint, which motion is pending.

We do not believe there is any merit to the claims asserted by the plaintiff in this complaint
and plan to vigorously defend ourselves. Due to the early stage of this lawsuit, we cannot estimate the outcome of this matter or the resulting financial impact to us, if any.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. As of December 31, 2005, we were not
involved in any other material legal proceedings.

12. Leases

We lease our Austin facility and certain production equipment under non-cancelable operating lease agreements. Total rent expense for the year ended December 31, 2005, the year ended December 31, 2004, the
period from inception to December 31, 2003 and the period from January 1, 2003 to August 20, 2003 was approximately $0.6 million, $1.1 million, $0.2 million and $1.2 million, respectively.

Future minimum payments under non-cancelable operating leases with initial terms of one year or more consist of the following at December 31, 2005
(in thousands):



|                             |  |                 |      
|---------------------------- |  | --------------- | -----
|                             |  | OperatingLeases
|2006                         |  | $               | 321  
|2007                         |  |                 | 366  
|2008                         |  |                 | 358  
|2009                         |  |                 | 362  
|2010                         |  |                 | 331  
|                             |  |                 |      
|Total minimum lease payments |  | $               | 1,738
|                             |  |                 |      

13. Related-Party Transactions

Relationship with Austin Ventures

At December 31, 2005, Austin Ventures and its affiliates
beneficially owned approximately 75% of our outstanding common stock. Set forth below is a brief description of the existing relationships and agreements between Austin Ventures and us.



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##### Table of Contents

Board of Directors

Joseph C. Aragona, a general partner of Austin Ventures, is chairman of our board of directors and serves as chairperson of our nominating and governance committee. Clark W. Jernigan, a principal of Austin Ventures,
is one of our directors and serves as chairperson of our compensation committee. Edward E. Olkkola, an operating partner of Austin Ventures, is one of our directors.

Registration Rights

Austin Ventures has registration rights with respect to the shares of our
common stock that it holds.

Repayment of Indebtedness

In February 2004, we used approximately $37.4 million of the proceeds of our initial public offering to repay all outstanding principal and accrued interest on subordinated indebtedness owed to Austin Ventures, J.
Ross Cockrell (a former director) and Mr. Jernigan, as follows (in thousands):



|                           |  |   |       
|-------------------------- |  | - | ------
|Austin Ventures VII, L.P.  |  | $ | 18,631
|Austin Ventures VIII, L.P. |  | $ | 18,743
|J. Ross Cockrell           |  | $ | 33    
|Clark W. Jernigan          |  | $ | 33    

We incurred the subordinated indebtedness in connection with the Staktek acquisition in 2003.

Redemption of Preferred Stock

In February 2004, we used approximately $30.6 million of the proceeds of our initial public offering to redeem, in accordance with its terms, an aggregate of 171.01449 shares of redeemable preferred stock held by Austin Ventures, Ross
Cockrell and Clark Jernigan, as follows (in thousands):



|                           |  |   |       
|-------------------------- |  | - | ------
|Austin Ventures VII, L.P.  |  | $ | 15,244
|Austin Ventures VIII, L.P. |  | $ | 15,336
|J. Ross Cockrell           |  | $ | 29    
|Clark W. Jernigan          |  | $ | 29    

We originally issued these shares of redeemable preferred stock in connection with the Staktek
acquisition in 2003.

Loan Guarantee

In February 2004, we used approximately $5.0 million of the proceeds of our initial public offering to repay all outstanding principal and accrued interest on short-term indebtedness owed to Comerica Bank, which was guaranteed by Austin
Ventures. We incurred the short-term indebtedness in connection with the Staktek acquisition in 2003. Austin Ventures guarantee terminated upon repayment in full of the loan.



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##### Table of Contents

14. Earnings Per Share

A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings (loss) per share follows (in thousands, except per share data):



|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|---------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ------------------------------------ | ---- | - | ------------------- | ---------------------------------------- | - | ------ | - |  | - | -----
|                                                                                         |  | Staktek Holdings, Inc.  |        |                                      |     
|                                                                                         |  | Year Ended December 31, |        | Period fromInception toDec. 31, 2003 |      |   | Predecessor Company
|                                                                                         |  | 2005                    |        |                                      | 2004 |   |                     | Period from Jan. 1,2003 to Aug. 20, 2003
|Numerator:                                                                               |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Income (loss) available to common shareholders                                           |  | $                       | (7,477 | )                                    |      | $ | 7,540               |                                          | $ | (6,146 | ) |  | $ | 9,476
|                                                                                         |  |                         |        |                                     
|Denominator:                                                                             |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Weighted average common shares outstanding                                               |  |                         | 49,674 |                                      |      |   | 50,035              |                                          |   | 37,511 |   |  |   | 1,836
|Less: Common shares subject to repurchase                                                |  |                         | 1,095  |                                      |      |   | 2,801               |                                          |   | 864    |   |  |   |     
|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Total weighted average common shares used in computing basic earnings (loss) per share   |  |                         | 48,579 |                                      |      |   | 47,234              |                                          |   | 36,647 |   |  |   | 1,836
|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Effect of dilutive securities:                                                           |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Common shares subject to repurchase                                                      |  |                         |       |                                      |      |   | 2,801               |                                          |   |       |   |  |   |     
|Stock options                                                                            |  |                         |       |                                      |      |   | 955                 |                                          |   |       |   |  |   | 113  
|Stock warrants                                                                           |  |                         |       |                                      |      |   | 6                   |                                          |   |       |   |  |   |     
|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Dilutive potential common shares                                                         |  |                         |       |                                      |      |   | 3,762               |                                          |   |       |   |  |   | 113  
|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Total weighted average common shares used in computing diluted earnings (loss) per share |  |                         | 48,579 |                                      |      |   | 50,996              |                                          |   | 36,647 |   |  |   | 1,949
|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Earnings (loss) per share:                                                               |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Basic                                                                                    |  | $                       | (0.15  | )                                    |      | $ | 0.16                |                                          | $ | (0.17  | ) |  | $ | 5.16 
|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      
|Diluted                                                                                  |  | $                       | (0.15  | )                                    |      | $ | 0.15                |                                          | $ | (0.17  | ) |  | $ | 4.86 
|                                                                                         |  |                         |        |                                      |      |   |                     |                                          |   |        |   |  |   |      

For the year ended December 31, 2005, the year ended December 31, 2004, the period from
inception to December 31, 2003, and the period from January 1, 2003 to August 20, 2003, we did not include approximately 6,168,000, 532,000, 0 and 7,000 weighted average common stock equivalents, respectively, in the diluted earnings
per share calculation because their impact would have been antidilutive.

15. Stockholders Equity

Common Stock

In August 2005, we reduced
authorized shares from 200,000,000 to 100,000,000. Of these authorized shares, 11,030,000 shares have been reserved for the issuance of stock options. Of these options 10,405,698 had been granted, of which 504,301 were forfeited during the year,
leaving 1,166,119 available for issuance. At December 31, 2004, 7,737,491 had been granted and 1,330,026 were available for issuance.

Of the 51,809,007 shares and 51,102,215 shares of common stock issued and outstanding as of December 31, 2005 and 2004, respectively, 436,786 shares and 1,854,481 shares, respectively, were unvested and subject to rights of repurchase,
at a price per share equal to the original exercise price, which repurchase rights lapse according to a time-based vesting schedule.

During 2004, our Board of Directors approved a stock repurchase program. Under this program, we could spend up to $15.0 million to purchase shares of our common stock through open market transactions or privately negotiated transactions.
During 2005 and 2004, we purchased 2,775,819 and 920,900 shares, respectively, of our stock under this program at a total cost of $10.7 million and $4.4 million, respectively. During November 2005, we completed this stock repurchase program. In
February 2006, we announced that our Board of Directors renewed our stock repurchase program. Under this program, we can spend up to $10.0 million to purchase shares of our common stock through open market transactions or privately negotiated
transactions.



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##### Table of Contents

In January 2004, our Board of Directors authorized a 2.15-for-1 forward stock split of our common stock.
All common stock and per share information has been adjusted to reflect the stock split as if this stock split had taken place at the inception of the Company.

Employee Stock Purchase Plan

During the third quarter of 2005, we adopted the Staktek Holdings, Inc. 2005 Employee
Stock Purchase Plan (ESPP), which resulted in employees purchasing 20,241 shares during the year ended December 31, 2005. As of December 31, 2005, 1.0 million shares of common stock were reserved for future issuance under this plan.

Common Stock Options

In July
2003, we adopted the 2003 Stock Option Plan (the 2003 Plan). Any incentive stock options granted to a 10% owner optionee (optionee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power) must be
granted at an exercise price of no less than 110% of the fair value on the date of grant as determined by the Board of Directors. Options generally vest over a four-year period (25% at the end of the first year from date of grant and 1/36 of
the remaining shares per month over the next 36 months) and are exercisable for a period of ten years from the date of grant.

Certain
grants are immediately exercisable and are subject to repurchase by us upon the termination of the optionees employment at the original exercise price until the shares have vested. At December 31, 2005 and 2004, 436,786 and 1,854,481
shares, respectively, issued and outstanding under the 2003 Plan were subject to repurchase by us.

We recorded $24.3 million of deferred
stock-based compensation during the period from inception through December 31, 2003 related to the issuance of stock options to purchase 7,363,741 shares of our common stock at a weighted average exercise price of $0.56 per share. Prior to our
initial public offering, our Board of Directors determined the fair value of options granted since there was no public market that could be used to establish a current value. During the registration process of our initial public offering, the fair
value of certain options was calculated using the midpoint of an anticipated price range of our stock in connection with the offering. This valuation methodology resulted in a deferred stock-based compensation charge, which is included in the
financial statements as a reduction of stockholders equity and is being amortized on a straight-line basis over the relevant vesting period of each award. We recorded amortization of deferred stock-based compensation of $7.2 million, $5.0
million and $5.4 million for the year ended December 31, 2005, the year ended December 31, 2004 and the period from inception through December 31, 2003, respectively.

On May 9, 2005, our former chief executive officers employment agreement was amended to address a change in roles and responsibilities. The
terms of the amended employment agreement provided for the immediate vesting and acceleration of his exercised, unvested shares of common stock acquired through stock options and his unexercised stock options, by 18 months, which resulted in
additional stock compensation expense of approximately $2.5 million in 2005. Effective January 1, 2006, we adopted SFAS 123(R) and his unvested stock options at that date, totaling approximately 83,000, were fair valued in accordance with the
provisions of that pronouncement.

During 2005, as a result of our restructuring, we cancelled approximately 316,000 stock options held by
16 terminated employees. Additionally, in connection with our restructuring, we repurchased approximately 164,000 shares of unvested stock from certain terminated employees at a cost of approximately $47,000 and, in accordance with their respective
employee agreements, we accelerated the vesting of approximately 283,000 stock options. Deferred stock compensation of approximately $0.8 million associated with these cancelled options and repurchased unvested stock was reversed in 2005.



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##### Table of Contents

A summary of changes in our options to purchase common stock for the period from inception to
December 31, 2005 is as follows:



|                                                 |  |                  |   |  |                         |  |                              |      
|------------------------------------------------ |  | ---------------- | - |  | ----------------------- |  | ---------------------------- | -----
|                                                 |  | Number ofOptions |   |  | Range ofExercise Prices |  | WeightedAverageExercisePrice
|Granted                                          |  | 7,363,741        |   |  | $0.01 - $8.37           |  | $                            | 0.56 
|Exercised                                        |  | (3,827,397       | ) |  | $0.01 - $1.97           |  | $                            | 0.11 
|                                                 |  |                  |   |  |                         |  |                              |      
|Options outstanding at December 31, 2003         |  | 3,536,344        |   |  | $0.01 - $8.37           |  | $                            | 1.05 
|                                                 |  |                  |  
|Granted                                          |  | 373,750          |   |  | $3.81 - $13.06          |  | $                            | 10.97
|Exercised                                        |  | (181,793         | ) |  | $0.01                   |  | $                            | 0.01 
|Forfeited or expired                             |  | (37,517          | ) |  | $1.97                   |  | $                            | 1.97 
|                                                 |  |                  |   |  |                         |  |                              |      
|Options outstanding at December 31, 2004         |  | 3,690,784        |   |  | $0.01 - $13.06          |  | $                            | 2.10 
|                                                 |  |                  |  
|Granted                                          |  | 2,668,208        |   |  | $2.72 - $5.85           |  | $                            | 3.34 
|Exercised                                        |  | (686,552         | ) |  | $0.01 - $5.01           |  | $                            | 0.33 
|Forfeited or expired                             |  | (504,301         | ) |  | $0.01 - $13.06          |  | $                            | 1.72 
|                                                 |  |                  |   |  |                         |  |                              |      
|Options outstanding at December 31, 2005         |  | 5,168,139        |   |  | $0.01 -  $13.06         |  | $                            | 3.01 
|                                                 |  |                  |   |  |                         |  |                              |      
|Options exercisable at December 31, 2005         |  | 2,011,882        |   |  |                         |  | $                            | 2.88 
|                                                 |  |                  |  
|Options available for grant at December 31, 2005 |  | 1,166,119        |   |  |                         |  |                              |      

The following table summarizes information concerning outstanding and exercisable options at
December 31, 2005:



|                         |  |                     |  |                                            |  |                                |  |                   |  |                               
|------------------------ |  | ------------------- |  | ------------------------------------------ |  | ------------------------------ |  | ----------------- |  | ------------------------------
|Options
Outstanding      |  | Options Exercisable
|Range of Exercise Prices |  | Number of Options   |  | Weighted AverageRemaining Contractual Life |  | Weighted AverageExercise Price |  | Number of Options |  | Weighted AverageExercise Price
|                         |  |                     |  | (in years)                                 |  |                                |  |                   |  |                               
|$0.01 - $2.79            |  | 3,090,581           |  | 8.38                                       |  | $        1.29                  |  | 1,390,582         |  | $    0.72                     
|$3.14 - $5.85            |  | 1,525,058           |  | 9.43                                       |  | $        3.79                  |  | 220,713           |  | $    4.06                     
|$8.37 - $13.06           |  | 552,500             |  | 8.05                                       |  | $      10.51                   |  | 400,587           |  | $    9.74                     
|                         |  |                     |  |                                            |  |                                |  |                   |  |                               
|$0.01 - $13.06           |  | 5,168,139           |  | 8.65                                       |  | $        3.01                  |  | 2,011,882         |  | $    2.88                     
|                         |  |                     |  |                                            |  |                                |  |                   |  |                               

Common Stock Warrant

In October 2003, we issued a warrant to purchase 21,500 shares of common stock to a charitable foundation at $0.67 per share. The warrant is exercisable by the warrant holder at any time prior to October 24,
2010. The fair value of the warrant was estimated using the Black-Scholes pricing model with the following assumptions: expected volatility of 98.0%; expected life of 7 years; expected dividend yield of 0.0%; and the risk-free interest rate of 3.0%.
During the period ended December 31, 2003, the warrant was recorded at its fair market value of approximately $225,000 and expensed to selling, general and administrative expenses in the consolidated statement of operations.



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16. Income Taxes

The components of the provision (benefit) for income taxes were as follows (in thousands):



|                                     |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  
|------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | -------------------------------------- |  | - | ----------------------------------------- | - |  | - | ----- | -
|                                     |  | Year Ended December 31, |        |   |      |   |        |                                        | 
|                                     |  | 2005                    |        |   | 2004 |   |        | Period from Inception to Dec. 31, 2003 |  |   | Period from Jan. 1, 2003 to Aug. 20, 2003 |  
|Current:                             |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  
|Federal                              |  | $                       | 781    |   |      | $ | 6,274  |                                        |  | $ | 1,486                                     |   |  | $ | 4,466 |  
|Foreign                              |  |                         | 2,958  |   |      |   | 5,302  |                                        |  |   | 1,064                                     |   |  |   | 2,146 |  
|State                                |  |                         | (162   | ) |      |   | 231    |                                        |  |   | 31                                        |   |  |   | 102   |  
|                                     |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  
|Total current                        |  |                         | 3,577  |   |      |   | 11,807 |                                        |  |   | 2,581                                     |   |  |   | 6,714 |  
|                                     |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  
|Deferred:                            |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  
|Federal                              |  |                         | (6,632 | ) |      |   | (6,411 | )                                      |  |   | (1,887                                    | ) |  |   | 159   |  
|Foreign                              |  |                         |       |   |      |   |       |                                        |  |   |                                          |   |  |   |      |  
|State                                |  |                         | (19    | ) |      |   | (128   | )                                      |  |   | (38                                       | ) |  |   | (12   | )
|                                     |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  
|Total deferred                       |  |                         | (6,651 | ) |      |   | (6,539 | )                                      |  |   | (1,925                                    | ) |  |   | 147   |  
|                                     |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  
|Provision (benefit) for income taxes |  |                         | (3,074 | ) |      |   | 5,268  |                                        |  |   | 656                                       |   |  |   | 6,861 |  
|                                     |  |                         |        |   |      |   |        |                                        |  |   |                                           |   |  |   |       |  

Foreign taxes include withholdings on royalties from customers located in foreign countries.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes as of December 31, 2005 and 2004 are as follows (in thousands):



|                                          |  |      |        |   |      |   |         |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                          |  | 2005 |        |   | 2004 |  
|Deferred tax assets:                      |  |      |        |   |      |   |         |  
|Current deferred tax assets               |  |      |        |   |      |   |         |  
|Accrued liabilities                       |  | $    | 254    |   |      | $ | 227     |  
|                                          |  |      |        |   |      |   |         |  
|Net current deferred tax assets           |  |      | 254    |   |      |   | 227     |  
|                                          |  |      |        |   |      |   |         |  
|Noncurrent deferred tax assets            |  |      |        |   |      |   |         |  
|Unrealized loss on securities             |  | $    | 17     |   |      | $ |        |  
|Accrued liabilities                       |  |      | 136    |   |      |   | 80      |  
|Depreciation and amortization             |  |      | 974    |   |      |   | 74      |  
|Deferred compensation                     |  |      | 1,823  |   |      |   | 967     |  
|                                          |  |      |        |   |      |   |         |  
|Net noncurrent deferred tax assets        |  |      | 2,950  |   |      |   | 1,121   |  
|                                          |  |      |        |   |      |   |         |  
|Deferred tax liabilities:                 |  |      |        |   |      |   |         |  
|Current deferred tax liabilities          |  |      |        |   |      |   |         |  
|Prepaid expenses                          |  | $    | (96    | ) |      | $ | (78     | )
|                                          |  |      |        |   |      |   |         |  
|Total current deferred tax liabilities    |  |      | (96    | ) |      |   | (78     | )
|                                          |  |      |        |   |      |   |         |  
|Noncurrent deferred tax liabilities       |  |      |        |   |      |   |         |  
|Deductible patent expense                 |  | $    | (407   | ) |      | $ | (165    | )
|Acquired intangibles                      |  |      | (5,394 | ) |      |   | (10,466 | )
|                                          |  |      |        |   |      |   |         |  
|Total noncurrent deferred tax liabilities |  |      | (5,801 | ) |      |   | (10,631 | )
|                                          |  |      |        |   |      |   |         |  
|Net current deferred tax asset            |  | $    | 158    |   |      | $ | 149     |  
|                                          |  |      |        |   |      |   |         |  
|Net noncurrent deferred tax liability     |  | $    | (2,851 | ) |      | $ | (9,510  | )
|                                          |  |      |        |   |      |   |         |  

The deferred tax assets and liabilities, acquired and assumed, at the acquisition date of the
Predecessor Company reflected managements best estimate of the tax basis of acquired assets and assumed liabilities that would ultimately be accepted by the tax authority. During 2004, we decreased goodwill by approximately $1.3 million,
primarily related to a revision of the estimate of tax benefits associated with costs incurred in the acquisition that were deductible for tax purposes and treated as part of the purchase price allocation for financial reporting purposes. During
2005, we decreased goodwill by approximately $385,000, primarily due to the tax benefits associated with tax deductible stock compensation costs associated with the Predecessor Company.



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Undistributed earnings of our foreign subsidiaries are considered to be permanently reinvested and,
accordingly, no provision for U.S. federal and/or state income taxes has been provided.

The exercise of certain of our stock options
results in compensation, which is includable in the taxable income of the exercising option holder and deductible by us for federal and state income tax purposes. This compensation results from increases in the fair market value of the our common
stock subsequent to the date of grant of the exercised stock options and, in accordance with APB No. 25, this compensation is not recognized as an expense for financial accounting purposes; however, the related tax benefits are recorded as an
increase to additional paid-in capital. During the year ended December 31, 2005, our option-related tax deductions were less than our book stock compensation, and therefore no increase to additional paid-in capital was recorded and the excess
tax asset was written off as tax expense.

Our provision for income taxes differs from the expected tax expense (benefit) amount computed
by applying the statutory federal income tax rate of 35% to income (loss) before income taxes primarily as a result of the following (in thousands):



|                                                                                  |  |                         |        |   |      |   |                                        |  |   |                                           |   |  |   |      
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | -------------------------------------- |  | - | ----------------------------------------- | - |  | - | -----
|                                                                                  |  | Staktek Holdings, Inc.  |        |   |     
|                                                                                  |  | Year Ended December 31, |        |   |      |   | Predecessor Company                   
|                                                                                  |  | 2005                    |        |   | 2004 |   | Period from Inception to Dec. 31, 2003 |  |   | Period from Jan. 1, 2003 to Aug. 20, 2003
|Computed at federal statutory rate                                                |  | $                       | (3,693 | ) |      | $ | 4,576                                  |  | $ | (1,616                                    | ) |  | $ | 5,718
|State taxes, net of federal benefit                                               |  |                         | (8     | ) |      |   | 100                                    |  |   | 12                                        |   |  |   | 133  
|Amortization of deferred stock- based compensation and stock compensation expense |  |                         | 1,399  |   |      |   | 542                                    |  |   | 1,983                                     |   |  |   |     
|Non-deductible and non-taxable items                                              |  |                         | (327   | ) |      |   | 6                                      |  |   | 258                                       |   |  |   | 992  
|Other                                                                             |  |                         | (445   | ) |      |   | 44                                     |  |   | 19                                        |   |  |   | 18   
|                                                                                  |  |                         |        |   |      |   |                                        |  |   |                                           |   |  |   |      
|Provision (benefit) for income taxes                                              |  | $                       | (3,074 | ) |      | $ | 5,268                                  |  | $ | 656                                       |   |  | $ | 6,861
|                                                                                  |  |                         |        |   |      |   |                                        |  |   |                                           |   |  |   |      

17. Employee Benefits

Full-time employees become eligible for health care benefits effective the second day of service. We offer all full-time employees partially subsidized health, dental and vision coverage. In addition, on the second
day of service all full-time employees receive at our expense life insurance, accidental death coverage, workers compensation coverage and short- and long-term disability coverage.

401(k) Plan

We have,
and the Predecessor Company had, a voluntary defined contribution retirement plan (401(k) Plan) qualifying under Section 401(k) of the Internal Revenue Code of 1986. Under the 401(k) Plan, eligible employees may defer up to 75% of
their annual compensation, subject to maximum IRS limitations. Under the provisions of the 401(k) Plan, we make, and the Predecessor Company made, contributions in amounts as determined by the Board of Directors, subject to certain limitations. Our
contributions related to the 401(k) Plan were approximately $0.5 million, $0.5 million, $0.1 million, and $0.3 million for the years ended December 31, 2005 and 2004, for the period from inception to December 31, 2003, and for the period
from January 1, 2003 to August 20, 2003, respectively.

Bonus Plan

We have, and the Predecessor Company had, a quarterly bonus plan under which eligible employees may receive a percentage of their base pay in additional
compensation. Typically, we make these payments within 40 days after the end of the quarter in which the compensation is earned. Total expense was approximately $1.9 million, $2.1 million, $1.0 million and $1.5 million for the years ended
December 31, 2005 and 2004, for the period from inception to December 31, 2003, and for the period from January 1, 2003 to August 20, 2003, respectively.



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18. Restructuring

During 2005, we recorded a restructuring charge of $1.0 million resulting from a workforce reduction of 76 employees. This restructuring was the result of the transfer of manufacturing from Austin, Texas to Reynosa,
Mexico and a realignment of our organizational structure to focus on our growth strategy. The restructuring charge was composed of costs associated with employee separations as follows (in thousands):



|                                           |  |   |       |  
|------------------------------------------ |  | - | ----- | -
|Restructuring accrual at December 31, 2004 |  | $ |      |  
|Restructuring expenses accrued             |  |   | 1,048 |  
|Payments of restructuring expenses         |  |   | (554  | )
|Reversal of excess accrual                 |  |   | (66   | )
|                                           |  |   |       |  
|Restructuring accrual at December 31, 2005 |  | $ | 428   |  
|                                           |  |   |       |  

As of December 31, 2005, approximately $30,000 of the liability was included in long-term
liabilities.

19. Geographic Information

We consider our business activities to constitute a single segment. Following is a summary of our revenues by geographic region (in thousands):



|               |  |                         |        |      |   |                                        |                     |   |                                          |  |  |   |       
|-------------- |  | ----------------------- | ------ | ---- | - | -------------------------------------- | ------------------- | - | ---------------------------------------- |  |  | - | ------
|               |  | Staktek Holdings, Inc.  |        |      |  
|               |  | Year Ended December 31, |        |      |   |                                        | Predecessor Company
|               |  | 2005                    |        | 2004 |   | Period from Inception to Dec. 31, 2003 |                     |   | Period from Jan. 1,2003 to Aug. 20, 2003
|Revenue:       |  |                         |        |      |   |                                        |                     |   |                                          |  |  |   |       
|North America: |  |                         |        |      |   |                                        |                     |   |                                          |  |  |   |       
|United States  |  | $                       | 33,307 |      | $ | 30,472                                 |                     | $ | 14,232                                   |  |  | $ | 22,353
|Canada         |  |                         | 746    |      |   | 5,143                                  |                     |   | 3,661                                    |  |  |   | 6,805 
|Europe:        |  |                         |        |      |   |                                        |                     |   |                                          |  |  |   |       
|Germany        |  |                         | 1,396  |      |   | 4,838                                  |                     |   | 2,172                                    |  |  |   | 1,500 
|Italy          |  |                         |       |      |   | 1,320                                  |                     |   | 953                                      |  |  |   | 850   
|Other          |  |                         | 37     |      |   | 345                                    |                     |   |                                         |  |  |   |      
|Asia:          |  |                         |        |      |   |                                        |                     |   |                                          |  |  |   |       
|Korea          |  |                         | 16,965 |      |   | 31,508                                 |                     |   | 6,204                                    |  |  |   | 12,625
|Japan          |  |                         | 75     |      |   |                                       |                     |   |                                         |  |  |   |      
|               |  |                         |        |      |   |                                        |                     |   |                                          |  |  |   |       
|Total          |  | $                       | 52,526 |      | $ | 73,626                                 |                     | $ | 27,222                                   |  |  | $ | 44,133
|               |  |                         |        |      |   |                                        |                     |   |                                          |  |  |   |       

At December 31, 2005 and 2004, we had physical assets consisting of cash and net property,
plant and equipment located at our manufacturing facility in Reynosa, Mexico as follows (in thousands):



|                                   |  |      |       |      |   |      
|---------------------------------- |  | ---- | ----- | ---- | - | -----
|                                   |  | 2005 |       | 2004
|Cash                               |  | $    | 69    |      | $ | 343  
|Property, plant and equipment, net |  |      | 6,025 |      |   | 4,685
|                                   |  |      |       |      |   |      
|Total                              |  | $    | 6,094 |      | $ | 5,028
|                                   |  |      |       |      |   |      

Our manufacturing operations are concentrated in a facility located in Reynosa, Mexico. As a
result of this geographic concentration, a disruption in the manufacturing process resulting from a natural disaster or other unforeseen event could have a material adverse effect on our business, financial condition or results of operations.



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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



|1. | Financial Statements: See Index to Financial Statements under Item 8.
|-- | ---------------------------------------------------------------------



|2. | Financial Statement Schedules: All schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the
consolidated financial statement or notes thereto.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. Exhibits: The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Form 10-K.

INDEX TO EXHIBITS



|               |  |                                                                                                                               |  |                           |  |             |  |         |  |             |  |               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------- |  | ------- |  | ----------- |  | --------------
|               |  |                                                                                                                               |  | Incorporated by Reference |  |            
|Exhibit Number |  | Exhibit Description                                                                                                           |  | Form                      |  | File Number |  | Exhibit |  | Filing Date |  | Filed Herewith
|3.1            |  | Amended and Restated Certificate of Incorporation                                                                             |  | 10-Q                      |  | 000-50553   |  | 3.1.1   |  | 11/7/05     |  |               
|               |  |                                                                                                                               |  |                           |  |            
|3.2            |  | Amended and Restated Bylaws                                                                                                   |  | 10-Q                      |  | 000-50553   |  | 3.2.1   |  | 11/7/05     |  |               
|               |  |                                                                                                                               |  |                           |  |            
|4.1            |  | Reference is made to Exhibits 3.1 and 3.2 for provisions defining the rights of equity holders                                |  |                           |  |             |  |         |  |             |  |               
|               |  |                                                                                                                               |  |                           |  |            
|4.2            |  | Specimen certificate for shares of common stock of Staktek Holdings, Inc.                                                     |  | S-1/A                     |  | 333-110806  |  | 4.2     |  | 1/20/04     |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.1*          |  | Staktek Holdings, Inc. 2003 Stock Option Plan, as amended to date                                                             |  | 10-Q                      |  | 000-50553   |  | 10.1    |  | 11/7/05     |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.2*          |  | Staktek Holdings 2005 Employee Stock Purchase Plan                                                                            |  | S-8                       |  | 333-125853  |  | 99      |  | 6/16/05     |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.3*          |  | Letter Agreements, dated August 19, 2003, among Staktek Holdings, Inc. and Austin Ventures, regarding management rights       |  | S-1                       |  | 333-110806  |  | 10.3    |  | 11/26/03    |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.4           |  | Amended and Restated Registration Rights Agreement, dated November 24, 2003, among Staktek Holdings, Inc. and Austin Ventures |  | S-1                       |  | 333-110806  |  | 10.5    |  | 11/26/03    |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.5**         |  | Agreement, dated July 18, 2005, among Samsung Electronics Co., Ltd and Staktek Group, L.P.                                    |  | 10-Q                      |  | 000-50553   |  | 10.2    |  | 11/7/05     |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.6           |  | Lease Agreement, dated December 1, 2003, among Staktek Group L.P. and 8900 Shoal Creek                                        |  | S-1                       |  | 333-110806  |  | 10.7    |  | 11/26/03    |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.7*          |  | Executive Employment Agreement, dated August 20, 2003, among Staktek Corporation and James W. Cady                            |  | S-1                       |  | 333-110806  |  | 10.8.1  |  | 11/26/03    |  |               
|               |  |                                                                                                                               |  |                           |  |            
|10.8*          |  | Amendment No. 1 to James W. Cadys Executive Employment Agreement, dated May 9, 2005                                          |  | 8-K                       |  | 000-50553   |  | 10.2    |  | 5/11/05     |  |               



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|               |  |                                                                                                                                  |  |                           |  |             |  |         |  |             |  |               
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------- |  | ------- |  | ----------- |  | --------------
|               |  |                                                                                                                                  |  | Incorporated by Reference |  |            
|Exhibit Number |  | Exhibit Description                                                                                                              |  | Form                      |  | File Number |  | Exhibit |  | Filing Date |  | Filed Herewith
|10.9*          |  | Executive Employment Agreement, dated August 20, 2003, among Staktek Corporation and Albert V. Saucedo                           |  | S-1                       |  | 333-110806  |  | 10.8.6  |  | 11/26/03    |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.10*         |  | Amended and Restated Executive Employment Agreement, dated October 20, 2005, among Staktek Holdings, Inc. and Wayne R. Lieberman |  | 8-K                       |  | 000-50553   |  | 10.1    |  | 10/26/05    |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.11*         |  | Amended and Restated Executive Employment Agreement, dated October 20, 2005, among Staktek Holdings, Inc. and W. Kirk Patterson  |  | 8-K                       |  | 000-50553   |  | 10.2    |  | 10/26/05    |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.12*         |  | Amended and Restated Executive Employment Agreement, dated October 20, 2005, among Staktek Holdings, Inc. and Stephanie A. Lucie |  | 8-K                       |  | 000-50553   |  | 10.3    |  | 10/26/05    |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.13*         |  | Form of Indemnification Agreement for Staktek Holdings, Inc.s directors and officers                                            |  | S-1                       |  | 333-110806  |  | 10.9    |  | 11/26/03    |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.14*         |  | Staktek Holdings, Inc. Medical Retiree Plan                                                                                      |  | 10-K                      |  | 000-50553   |  | 10.9    |  | 3/9/05      |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.15*         |  | Staktek Amended and Restated 2005 Bonus Incentive Plan                                                                           |  | 10-K                      |  | 000-50553   |  | 10.15   |  | 3/8/06      |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.16          |  | Loan Agreement, dated March 10, 2005, between Guaranty Bank and Staktek Holdings, Inc.                                           |  | 10-Q                      |  | 000-50553   |  | 10.1    |  | 5/11/05     |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.17          |  | Revolving Promissory Note in connection with the Loan Agreement dated March 10, 2005                                             |  | 10-Q                      |  | 000-50553   |  | 10.2    |  | 5/11/05     |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|10.18          |  | Guaranty Agreement, dated March 10, 2005, between Staktek Group, L.P. and Guarantee Bank                                         |  | 10-Q                      |  | 000-50553   |  | 10.3    |  | 5/11/05     |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|14.1           |  | Code of Ethics                                                                                                                   |  | 10-K                      |  | 000-50553   |  | 14.1    |  | 3/9/05      |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|21.1           |  | List of Subsidiaries                                                                                                             |  | S-1                       |  | 333-110806  |  | 21.1    |  | 11/26/03    |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|23.1           |  | Consent of Independent Registered Public Accounting Firm                                                                         |  |                           |  |             |  |         |  |             |  | X             
|               |  |                                                                                                                                  |  |                           |  |            
|24.1           |  | Power of Attorney (See signature page of this Form 10-K)                                                                         |  | 10-K                      |  | 000-50553   |  | 24.1    |  | 3/8/06      |  |               
|               |  |                                                                                                                                  |  |                           |  |            
|31.1           |  | Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 302 of the Sarbanes-Oxley Act of 2002)           |  |                           |  |             |  |         |  |             |  | X             
|               |  |                                                                                                                                  |  |                           |  |            
|31.2           |  | Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 302 of the Sarbanes-Oxley Act of 2002)           |  |                           |  |             |  |         |  |             |  | X             
|               |  |                                                                                                                                  |  |                           |  |            
|32.1           |  | Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002)           |  |                           |  |             |  |         |  |             |  | X             
|               |  |                                                                                                                                  |  |                           |  |            
|32.2           |  | Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002)           |  |                           |  |             |  |         |  |             |  | X             

---

|*  - | Constitutes management contract or compensatory arrangement
|---- | -----------------------------------------------------------

|**  - | Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this report and have been filed separately with the Securities and
Exchange Commission.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to the Companys report on Form 10-K for the year ended December 31, 2005 to be
signed on its behalf by the undersigned, thereunto duly authorized.



STAKTEK HOLDINGS, INC.By:

/s/ Wayne R. LiebermanWayne R. LiebermanPresident and Chief Executive OfficerDate: November 14, 2006By:

/s/ W. Kirk PattersonW. Kirk PattersonSenior Vice President and Chief Financial OfficerDate: November 14, 2006


Pursuant to the requirements of the Securities Act of 1934, as amended, this Amendment
No. 2 to the Companys report on Form 10-K for the year ended December 31, 2005 has been signed by the following persons in the capacities and on the dates indicated:



|                                          |  |                                                                                                |  |                  
|----------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | -----------------
|Name                                      |  | Title                                                                                          |  | Date             
|/s/ Wayne R. Lieberman Wayne R. Lieberman |  | President, Chief Executive Officer and Director
(principal executive officer)                  |  | November 14, 2006
|                                          |  |                                                                                               
|/s/ W. Kirk Patterson W. Kirk Patterson   |  | Senior Vice President and Chief Financial Officer
(principal accounting and financial officer) |  | November 14, 2006
|                                          |  |                                                                                               
|* Joseph
C. Aragona                       |  | Chairman of the Board of Directors                                                             |  | November 14, 2006
|                                          |  |                                                                                               
|* James
W. Cady                           |  | Director                                                                                       |  | November 14, 2006
|                                          |  |                                                                                               
|* Harvey
B. Cash                          |  | Director                                                                                       |  | November 14, 2006
|                                          |  |                                                                                               
|* Kevin
P. Hegarty                        |  | Director                                                                                       |  | November 14, 2006
|                                          |  |                                                                                               
|* Clark
W. Jernigan                       |  | Director                                                                                       |  | November 14, 2006
|                                          |  |                                                                                               
|* Edward
E. Olkkola                       |  | Director                                                                                       |  | November 14, 2006
|                                          |  |                                                                                               
|* A.
Travis White                         |  | Director                                                                                       |  | November 14, 2006

W. Kirk Patterson, by signing his name hereto, does hereby sign this Annual Report on Form 10-K/A on behalf of
each of the above-named directors of the Company on the date indicated below, pursuant to powers of attorney executed by each of such directors and filed with the SEC.



|     |  |                       |  |  |  |                  
|---- |  | --------------------- |  |  |  | -----------------
|*By: |  | /s/ W. Kirk Patterson |  |  |  | November 14, 2006
|     |  | W. Kirk Patterson     |  |  |  |                  
|     |  | Attorney-in-Fact      |  |  |  |                  



30