UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K



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

For the fiscal year ended December 31, 2007



| ̈ | 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





LOGO

ENTORIAN TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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

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



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

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

None.

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   ̈    NO  x

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.    YESx    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.   ̈

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



|                           |  |                      |  |                          |  |                             
|-------------------------- |  | -------------------- |  | ------------------------ |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈ |  | Non-accelerated filer   ̈ |  | Smaller reporting company  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, 2007, the end of the
registrants second fiscal quarter, was approximately $41,710,623 (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 February 29, 2008, was 46,760,825.

Documents Incorporated by Reference

Portions of the
Proxy Statement for the registrants 2008 Annual Meeting of are incorporated by reference into Part III of this Form 10-K.









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|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|         |  | PART I                                                                                                       |  |     
|Item 1.  |  | Business                                                                                                     |  | 3   
|Item 1A. |  | Risk Factors                                                                                                 |  | 10  
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 30  
|Item 2.  |  | Properties                                                                                                   |  | 30  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 30  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 31  
|         |  |                                                                                                             
|         |  | PART II                                                                                                      |  |     
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 32  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 34  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 35  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 45  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 46  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 73  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 73  
|Item 9B. |  | Other Information                                                                                            |  | 74  
|         |  |                                                                                                             
|         |  | PART III                                                                                                     |  |     
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 75  
|Item 11. |  | Executive Compensation                                                                                       |  | 75  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 75  
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 75  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 75  
|         |  |                                                                                                             
|         |  | PART IV                                                                                                      |  |     
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 76  

CAUTIONARY STATEMENT

EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS REPORT ON FORM 10-K (AS WELL AS DOCUMENTS INCORPORATED
HEREIN BY REFERENCE) MAY BE CONSIDERED FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING
STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF ENTORIAN TECHNOLOGIES INC. AND ITS MANAGEMENT, AND MAY BE EVIDENCED BY WORDS SUCH AS WE EXPECT, ANTICIPATE, TARGET,
PROJECT, BELIEVE, GOALS, ESTIMATE, POTENTIAL, PREDICT, MAY, MIGHT, COULD, INTEND, VARIATIONS OF THESE TYPES OF WORDS AND SIMILAR
EXPRESSIONS. YOU ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTIES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY THESE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED UNDER ITEM 1A OF THIS ANNUAL REPORT ON FORM 10-K AND ELSEWHERE IN THIS REPORT. ENTORIAN TECHNOLOGIES INC. DISCLAIMS ANY INTENTION OR OBLIGATION TO
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

ALL PERCENTAGE
AMOUNTS AND RATIOS WERE CALCULATED USING THE UNDERLYING DATA IN THOUSANDS.



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PART I



|ITEM 1. | BUSINESS
|------- | --------

Staktek Holdings, Inc. was originally
formed by two investment funds affiliated with Austin Ventures, L.P. in May 2003 for the purpose of acquiring Staktek Corporation (the Predecessor Company), which was incorporated in Texas in June 1990. In August 2003, we acquired by merger Staktek
Corporation, which survives as our wholly owned subsidiary. We refer to our acquisition of Staktek Corporation throughout this Annual Report on Form 10-K as the Staktek acquisition. .In February 2008, we changed our name to Entorian
Technologies Inc. In addition, the terms Entorian, we, us and our refer to Entorian Technologies Inc. and all of its subsidiaries that are consolidated in conformity with United States generally
accepted accounting principles and the Predecessor Company.

Overview

We are a provider of advanced electronic systems and sub-systems for enterprise, consumer and other
high-growth markets. Our thin, small outline package (TSOP) and ball grid array (BGA) memory stacking solutions increase operational performance by doubling, tripling or quadrupling the amount of memory in the same physical footprint as required by
standard packaging technologies. Our ArctiCore technology is a module technology using a double-sided, multi-layer flexible circuit folded around an aluminum core and is designed for
superior thermal, mechanical and electrical performance. Our other memory module technologies enable custom, as well as JEDEC-standard registered dual in-line memory module (R-DIMM), fully buffered dual in-line memory module (FB-DIMM) and small
outline dual in-line memory modules (SO-DIMMs), with the characteristics of high-density and thermal efficiencies. With an IP portfolio of more than 200 patents and patent applications pending, we offer flexibility for customers, including
outsourced manufacturing, technology licensing and custom engineering. Headquartered in Austin, Texas, we operate two ISO-certified manufacturing facilities in Irvine, California and Reynosa, Mexico. For more information, go to
http://www.entorian.com.

We currently apply our expertise in memory stacking as well as module solutions to provide intellectual property
and services that enable system original equipment manufacturer (OEM) customers to cost-effectively improve the performance and reliability of their systems. By stacking industry-standard memory, our Stakpak solutions can deliver up to four times
the memory capacity per memory module as compared to current-generation monolithic integrated circuits. Most of our memory stacking units contain stacked dynamic random access memory (DRAM) packages or NAND Flash memory (a type of nonvolatile
memory) packages. Customers generally adopt our package stacking technologies for three primary reasons: (1) to achieve higher memory densities using more generally available (and often more cost-effective) lower-density parts, (2) to
leverage DRAM component pricing and availability arbitrage often found between higher-density and lower-density parts and (3) to enable the optimum supply flexibility supporting memory ICs of various densities from various suppliers. Our
advanced module technologies deliver better capacity, reliability, electrical and thermal performance compared to conventional module technologies. In addition to memory packages, our advanced module solutions include additional active and passive
components as required by the overall solution, e.g., registers, buffers or controllers.

Our customers can license our technologies for
their in-house stacking of memory units, outsource their manufacturing needs to us, buy memory units from one of our licensees, such as Samsung Electronics Co., Ltd. (Samsung), SMART Modular Technologies, Inc. (SMART), and Toshiba Corporation
(Toshiba), or optimize their needs through a combination of these approaches.

On August 31, 2007, we acquired Southland Micro
Systems, Inc. (Southland), a provider of memory products and services to OEMs since 1987. Southlands headquarters and manufacturing facility is located in Irvine, California, with sales offices in San Jose, California and Boise,
Idaho. Through this acquisition, we expect to increase the deployment of our IP to top-tier server OEMs and data center end customers.



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Our Technologies

We design our memory solutions to be more easily accepted by system OEMs by utilizing industry-standard parts to cost-effectively provide next-generation memory capacity with better economics, form-factor
characteristics and superior thermal management design features. Although our designs are capable of supporting all major types of commercially available packaged memory, including DRAM, Flash memory and static random access memory (SRAM),
historically we have focused our development of Stakpak technologies on stacking DRAM chips in leaded TSOPs and in non-leaded BGA packages. In addition, we have focused our development of FlashStak technologies on stacking NAND Flash chips in TSOP
packages. With the acquisition of Southland, we expanded our product offerings to include custom and JEDEC-standard modules: R-DIMMs, FB-DIMMs and SO-DIMMs.

Performance Stakpak®.    Our Performance Stakpak utilizes a patented copper interconnect technology that provides a structure and an electrical and thermal path for standard-packaged DRAM chips. The Performance
Stakpak uses primarily TSOPs in two, three or four high stacked configurations. The interconnect system acts as a heat sink and heat spreader to reduce heat build-up by collecting the thermal energy and conducting it from the center of the stack to
the sides, where it can be dissipated from the package. This design allows the Performance Stakpak to achieve superior heat dissipation and lower die temperatures than an unstacked TSOP.

High Performance Stakpak®and High Performance Stakpak II®.    Our High Performance Stakpak consists of non-leaded double-data-rate (DDR) DRAM packages connected by a proprietary interconnect
system to maximize interconnection signal integrity. This design supports all JEDEC-compliant DDR2 DRAM packages. The High Performance Stakpak has the same BGA footprint as the original monolithic BGA packages, reducing the need for OEMs to redesign
circuit boards for their stacked non-leaded memory products. In addition, our High Performance Stakpak features our patented controlled impedance interconnect system to support the signal integrity needs of the high-speed DDR2 interface. The High
Performance Stakpak II is our second generation of High Performance Stakpak, which we designed to incorporate improvements in cost, manufacturability and support for a larger variety of DRAM memory devices, including devices operating at DDR2-800
speeds.

FlashStak®.    Our FlashStak technologies consist of a Flash memory stacking solution addressing the needs of high-capacity data storage devices, such as USB drives, portable MP3 players, memory cards
and Flash-based solid state drives. Similar to the DRAM Stakpak products, FlashStak enables the highest-density data storage solution using lower-density commodity Flash TSOP devices. In many cases, FlashStak may be adopted in a consumer
electronics device by simply replacing the existing Flash TSOP component with a stack of two components, thereby immediately achieving double capacity. FlashStak has the mechanical ruggedness and reliability of a single TSOP device while
achieving a low profile dimension and attractive cost structure. Since it uses standard Flash memory parts, customers enjoy the benefits of our short product lead times, as well as the flexibility to use Flash devices from multiple suppliers.
During 2006, we introduced our FlashStak X-2, which is a TSOP solution that doubles the density of a single-commodity NAND device in a single TSOP footprint for high-capacity applications in consumer electronics devices.

ArctiCore®Module
Technologies.ArctiCore modules are DIMMs targeted at servers, storage devices and laptops. We are exploring opportunities to extend the application of the ArctiCore technologies into consumer devices, medical
equipment, military equipment and mobile devices. ArctiCore utilizes a double-sided, multi-layered flexible circuit folded around a rigid aluminum core to significantly increase the area available for mounting devices. Simultaneously, ArctiCore
enhances thermal management, improves reliability and may offer a thinner overall profile compared to current standard FB-DIMMs. During 2006, we announced the availability of the first ArctiCore FB-DIMMs offering up to 8 GB capacity, as well as the
first R-DIMMs utilizing 72 standard memory components.

Custom or JEDEC-Standard Modules.With the
acquisition of Southland, we expanded our business into custom and JEDEC-standard DRAM modules: R-DIMMs, FB-DIMMs and SO-DIMMs. The combination of our



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capabilities with Southlands capabilities enables high-density, small-profile and thermally-enhanced memory modules that are not possible using
conventional designs. In addition, we apply our electrical and mechanical technologies to develop custom memory sub-system solutions according to unique customer specifications.

Our solutions provide the following benefits:

Enable Leading Memory Densities Otherwise not Commercially Achievable within an IC Package.    Our memory solutions utilize readily available, lower-cost, current-generation memory chips to provide next-generation
memory capacity. By doing so, we can produce densities higher than what is available within a chip package. In addition, we help to smooth the market transition to higher-capacity memory while production capacity for next-generation memory chips is
being developed. Once next-generation chips become readily available at lower costs, they become candidates for us to deliver even greater memory capacity to OEMs.

Improve Cost and Availability.    Our memory solutions utilize readily available, lower-cost, current-generation memory chips to provide next-generation memory capacity. Our Stakpak
technologies utilize widely available industry-standard components, enabling our memory stacks to fit on the same circuit board as monolithic packaged memory chips. Often times, stacking two lower density memory devices is more economical than using
a higher density part. We combine our use of standard products with highly automated manufacturing and testing to deliver our memory devices with high production yields.

Minimize Form Factor.    By arranging multiple TSOPs or BGAs onto a single connection on a circuit board, our technologies enable a reduction in the number of memory module sockets and,
consequently, the number of circuit boards required in a system. This approach allows OEMs to design smaller, lighter and less expensive systems.

Our Customers

Manufacturing Solutions

The vast majority of the solutions provided by us to date have been to semiconductor manufacturers, memory module manufacturers and contract manufacturers for inclusion in mid-range and high-performance servers and
storage systems products of large OEMs, such as Cisco Systems, Inc., Hewlett-Packard (HP) and IBM. We also sell our solutions directly to OEMs. We have provided our Flash solutions to semiconductor manufacturers and memory solution manufacturers for
inclusion in high-end consumer electronic devices.

We provide our stacking services indirectly to OEMs, via semiconductor, memory module
and contract manufacturers, who in turn assemble our Stakpak products onto memory modules that they deliver to the OEMs. Our major semiconductor, memory module and contract manufacturing customers include HP, Micron Technology, Inc. (Micron),
Samsung, SMART and Toshiba. Through our Southland acquisition, we provide memory modules directly to system OEMs and end customers.

For
our manufacturing services customers, we typically receive the silicon on a consignment basis and provide a quick turnaround service. Under this business model, we avoid taking price risk on the memory devices. Some of our customers place
non-binding blanket purchase orders up to three months in advance to cover shipments for the relevant period. These purchase orders serve as forecasts for pricing, administrative and general scheduling purposes and are not binding orders. In some
instances, purchase orders from customers are received no more than a day in advance or in the same shipment as the consigned DRAM chips that are supplied to us. We have no long-term purchase agreements with any of our customers.

Licensing Business

Through our flexible business
model, our customers can license our proprietary technologies. To date, we have entered into license agreements with Qimonda A.G., Samsung, SMART, Southland (which we acquired in August 2007) and Toshiba. Under these license arrangements, Samsung
and Qimonda are licensed to



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manufacture and sell memory modules containing stacked chips incorporating our leaded-package stacking technologies and intellectual property, SMART is
licensed to manufacture and sell our ArctiCore technologies as well as our Performance, High Performance Stakpak and FlashStak products, Southland Micro Systems was licensed to manufacture and sell certain of our ArctiCore technologies, and Toshiba
is licensed to manufacture and sell our NAND Flash-memory FlashStak technologies. We do not expect to receive royalties for several quarters from any new license agreements while the licensees implement our technology and set up necessary production
lines.

Custom and JEDEC-Standard Memory Subsystem Business

We work with OEMs to understand their requirements and provide them with memory solutions that they then qualify and use within their systems. These memory solutions may be custom developed for a particular
specification, or they may be JEDEC-standard module solutions leveraging our engineering, manufacturing, quality and supply-chain capabilities.

In 2007, Micron, SMART and Google, Inc. (Google) accounted for 34%, 19% and 10%, respectively, of our total revenue. We do not have long-term contracts with any of our manufacturing services customers. Sales of our memory products are made
under short-term, cancelable purchase orders that are typically received and fulfilled in the same quarter. As a result, our ability to predict future sales in any given period is limited and subject to change based on demand for a specific
OEMs systems that incorporate our memory products and an OEMs supply-chain decisions.

Our Sales and Marketing

Historically, our sales and marketing strategy has been primarily focused on targeting large OEMs, based on the assumption that ultimate control over the
selection of stacking solutions, module assembly and memory components resides with the OEMs. We have a dedicated sales and marketing staff responsible for maintaining continual dialogue and forging close relationships with leading OEMs. Sales of
stacked memory products utilizing our licensed stacking technologies also help us to increase the rate at which OEMs specify our stacked memory technologies within their systems.

OEMs value improvements in memory capacity, speed, form factor, thermal management, price and reliability. Our marketing efforts emphasize the benefits
of utilizing our memory solutions in OEMs systems and our ability to deliver our solutions through our high-yield manufacturing processes with short lead times. To maintain broad application for our memory technologies, we design our solutions
using industry-standard memory chips and footprints. This allows us to maintain a neutral position with respect to silicon providers and memory and contract manufacturers, enabling OEMs to specify the use of standardized memory chips that are
available from multiple sources in high volumes while still utilizing our technologies.

We generate new business primarily by expanding
our relationships and working closely with OEMs to design products that satisfy their systems memory needs. OEMs determine the technical specifications and control the selection of vendors and contract manufacturers or memory manufacturers
that will assemble and deliver the memory components. The typical OEM design cycle is a lengthy endeavor ranging from six months to two years, and during this process, our memory solutions are considered among other alternative solutions and undergo
arduous testing and qualification.

In addition to the OEMs, we also market and sell to the semiconductor manufacturers and memory module
manufacturers, since they are the ultimate supplier of the memory products to the OEMs, and we want them to be ready to provide memory products that incorporate our technologies when requested by the OEMs. Memory module manufacturers are also an
important channel for our technologies to smaller OEMs that we cannot reach directly in an effective manner.



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Through the acquisition of Southland, we expanded the reach of our sales channels considerably within the
United States. In addition, we have been adding sales capabilities internationally. We have third-party sales agencies in the local markets of China, Hong Kong, Japan, Korea, Sweden and Taiwan, and plan to take similar actions in other areas of the
world to aid in our regional sales efforts.

Our Growth Strategy

Our vision is to be the leading provider of electronic subsystems to markets that are fast growing, with high-margin products and are driven by large OEM
customers. We intend to build upon our leadership position by leveraging our technologies and flexible business model to continue to grow our business and expand our market opportunities, both internally and through acquisitions. The principal
elements of our growth strategy include:

Expand our Memory Business.    We believe that the strength of our
intellectual property position, our superior technologies and our focused expertise uniquely position us to benefit from both the growth in the high-capacity DRAM and Flash markets and the inclusion of stacked memory and advanced memory module
solutions within those markets. As monolithic DRAM capacity increases from 512 Mbit to one Gbit, two Gbits and beyond, we plan to apply our technologies to enable semiconductor memory manufacturers to smoothly transition from one generation to the
next and to allow OEMs to more quickly bring to market systems with enhanced performance capabilities. We intend to continually identify ways to penetrate fast-growing markets for high-capacity memory for DRAM and Flash. We also intend to develop
memory solutions that address our customers particular requirements. In addition, we plan to expand our offerings of custom as well as JEDEC-standard memory modules into new customers and applications.

Extend Technological Leadership into New Markets.    We believe that our large patent and intellectual property portfolio
position us as a leader in the development of intellectual property for memory solutions. We have introduced key innovations, such as FlashStak for consumer applications. We have also introduced key innovations unrelated to stacking DRAM, such as
our ArctiCore technologies. We intend to continue to leverage our expertise and strong intellectual property position into markets where our technologies may have a significant impact. In addition, we are exploring other product opportunities
involving memory and storage. We believe that these technologies will have applications across a broad spectrum of complementary markets for products with high processing needs and form-factor constraints. We intend to allocate increased resources
to research and development to pursue these and other market opportunities.

Leverage Strategic
Relationships.    To grow our business, we will continue to cultivate strong relationships with leading OEMs, data center customers, memory suppliers and channel partners. We intend to continue to collaborate with leading
OEMs and memory manufacturers to design more effective high-capacity memory solutions than are currently available. We intend to continue working with channel partners and third-party manufacturers to make our memory solutions widely available to
OEM customers. As we expand and diversify our solutions, we intend to establish new, complementary customer and partner relationships beyond our traditional server, networking and storage markets.

Capitalize on Our Flexible Business Model.    We believe that by offering our customers the option of licensing our
technologies, outsourcing their manufacturing requirements to us, buying from our licensees or combining these options to best satisfy their needs, we offer advantages over companies with solely a licensing or a manufacturing business model. We
intend to continue to provide high-volume manufacturing services to facilitate adoption of our technologies by our customers while aggressively pursuing new opportunities to license our technologies.

Our Suppliers

Customers that outsource
manufacturing services to us generally supply to us the memory on a consignment basis. Once we receive the memory, we assemble it in our manufacturing facility and then ship the fully assembled memory products back to them. Under this consignment
model, we are not required to carry an



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inventory of memory for these customers, reducing our inventory costs and minimizing inventory risk associated with pricing, volumes and potential
obsolescence. While we benefit from these minimized risks, if our customers are unable to obtain sufficient DRAM due to limited availability, they are unable to consign it to us for our services.

In order to manufacture our solutions, we require raw materials and components such as DRAM, NAND Flash, flex circuits, printed circuit boards, aluminum
cores, resistors, capacitors, advanced memory buffers, epoxy adhesive, solder, nitrogen, ink marking supplies and tape and reel supplies. While we generally have multiple sources of supply of these materials, we typically procure them from limited
sources to take advantage of volume pricing discounts.

We do not have extended agreements with supply-chain partners but instead they sell
to us from time to time through purchase orders.

Our Manufacturing

We believe that our ability to deliver memory stacking and module technologies in high volume and with short turnaround times distinguishes us from other
similar service providers. Our sophisticated manufacturing processes combine proprietary assembly equipment with standard, back-end automation in state-of-the-art manufacturing facilities. Since we began manufacturing our products, we have been
increasing the degree of automation, overall efficiency and production yields of our manufacturing processes.

Historically, we
manufactured all of our stacked memory products in our facility in Austin, Texas. In November 2002, we purchased a 45,000 square foot manufacturing facility in Reynosa, Mexico. We completed the transition of all of our high-volume manufacturing to
our Mexico facility during 2006. For the year ended December 31, 2007, we manufactured virtually all of our Stakpak memory products at this facility.

On August 31, 2007, pursuant to our acquisition of Southland, we added 20,000 square feet of leased manufacturing space in Irvine, California, where we manufacture memory modules.

We have a formal quality assurance organization in place with a strategic focus on applying process improvements to achieve overall factory quality
targets. We have been ISO certified to the ISO9001:2000 standard since 2001, as assessed by Bureau Veritas Quality International (N.A.) Inc. Southland is also ISO certified to the ISO9001:2000 standard.

Our Research and Development

The market for
memory is subject to rapid technological changes, product obsolescence, frequent new product introductions and enhancements, changes in end-user requirements and evolving industry standards. Our ability to continue to succeed in these markets will
significantly depend upon our ability to successfully develop, introduce and sell new and enhanced products on a timely and cost-effective basis and to respond to changing customer requirements.

We believe that to be competitive and to grow, we must increase our investment in research and development, with a continued focus both on designing
advanced technologies and improving our manufacturing processes, quality and industrial engineering and automation. Our research and development efforts are in advancing thermal, mechanical, material and electrical designs for the Stakpak
technologies, as well as for memory modules and other forms of storage sub-system products. We are also improving our manufacturing and industrial processes and engineering efforts. Through close integration of the product development and process
automation initiatives, we seek to bring together advanced product designs with process efficiencies to reduce our time to market for new technologies, reduce product cost and increase our overall production.



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Research and development expense for the years ended December 31, 2007, 2006 and 2005 was $5.7
million, $8.2 million and $5.8 million, respectively.

Our Intellectual Property

Our current business and our future success depend in large part on our ability to protect our proprietary intellectual property and technologies. We do
not consider our business materially dependent upon any one patent, although taken as a whole, our rights and the products made and sold under patents are the most significant element of our business. In addition to patents, we also rely on trade
secrets and trademark laws and contractual provisions to protect our intellectual property. We enter into confidentiality agreements with our employees, consultants, service providers, business partners and customers and have processes and controls
in place to protect and manage access to, and distribution of, our proprietary and trade secret information.

As of January 31, 2008,
we had 106 issued patents and 113 pending patent applications. The patents primarily relate to our stacking solutions and help us protect our market position. These patents expire from time to time over the next 15 years. We continue to actively
pursue filing patent applications to cover our intellectual property advancements, and we may be required to spend significant resources to monitor and protect our intellectual property rights.

Our Competition

The market to provide memory
solutions is intensely competitive. Within that market, we believe that we compete primarily with other providers of high-capacity technologies and services to OEMs and manufacturers of high-density memory chips. The primary factors upon which we
compete are product quality and reliability, manufacturing capacity, cycle times, price and prompt and effective customer service. We believe that our technologies compete favorably in each of these factors with other competitive technologies,
services and manufacturers.

We have many competitors that have developed competing technologies. For example, planar solutions allow
additional memory devices to be directly attached on the printed circuit board without the need for stacking. Most of the major OEMs and DRAM suppliers currently are using planar solutions, and we expect them to continue to utilize planar solutions
in legacy DDR and DDR-2 technologies, as well as in next-generation DDR-3 technologies with the migration to smaller footprint packages.

In addition, memory packages have been developed that place two memory chips into a single package that allows both chips to fit in the same area as a single Stakpak, reducing the need for our technology. These dual-die packages are
being offered by some semiconductor manufacturers to their OEM customers. Other competitors utilize competing technologies that stack standard chips. These traditional stacking competitors include STEC (formerly SimpleTech, Inc.), Amkor Technology,
Inc. and Tessera Technologies, Inc. We also could face competition from many new technologies, such as 3D memory cells, stacked wafers, stacked die and module innovations or module stacking. These and other new technologies could change the demand
for or performance requirements of memory products and could provide the market with cost-effective memory solutions that outperform our solutions.

Most of our customers, including HP, Micron, Samsung and SMART, also are competitors of ours, and may have the ability to manufacture competitive products at lower costs. Our current or potential competitors may also sell bundled
arrangements offering a more complete or cost-effective product despite the technical merits or advantages of our services or technologies. We also face competition from current and prospective customers that continually evaluate our capabilities
against the merits of manufacturing products internally. Competition may also arise due to the development of cooperative relationships among our current and potential competitors or third parties to increase the ability of their products to address
the needs of our prospective customers. In addition, we expect to face competition from existing competitors and new and emerging companies that may



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enter our existing or future markets with similar or alternative products, which may be less costly or provide additional features. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.

Our Regulatory Environment

We are subject to various United States and Mexican federal, state and local laws and regulations that are administered by numerous
agencies and that relate to, among other things, the protection of the environment, including those governing the discharge or disposal of pollutants and hazardous materials.

We are authorized to operate our manufacturing facility in Mexico as a Maquiladora by the Ministry of Economy of Mexico. This Maquiladora status allows
us to import items into Mexico duty free, provided that such items, after processing, are re-exported from Mexico within 18 months. Our Maquiladora status is subject to various restrictions and requirements, including compliance with the terms of
the Maquiladora authorization program; proper utilization of imported materials; hiring and training of Mexican personnel; compliance with tax, labor, exchange control and notice provisions and regulations; and compliance with local and national
constraints. Under our Maquiladora authorization program, our Reynosa, Mexico facility is not subject to any mandatory periodic audits or inspections or any periodic evaluations of our Maquiladora status. However, various Mexican government
agencies, particularly Mexicos Ministry of Economy and Mexicos Ministry of Treasury, which are primarily responsible for the oversight and regulation of Mexicos Maquiladora programs, have a statutory right to conduct inspections
and evaluations of our Reynosa, Mexico operations at their discretion to ensure our compliance with the Maquiladora authorization program.

Our
Employees

As of February 29, 2008, we had 416 full-time employees.

By region, 144 and 272 of our employees are located in the United States and in Mexico, respectively. As of February 29, 2008, 71% of our employees
in Mexico were represented by a labor organization that has entered into a labor contract with us. We are not party to any collective bargaining agreements with any of our employees in the United States. We have never had a work stoppage, and we
believe our relations with our employees are good.

Available Information

We maintain a web site at www.entorian.com, which makes available free of charge our filings with the SEC. Our Quarterly Reports on Form 10-Q,
Annual Report on Form 10-K, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are available through the Investor Relations page of our
web site as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. Our web site and the information contained therein or connected thereto are not intended to be incorporated into this Annual
Report on Form 10-K.

ITEM 1A. RISK FACTORS

Our business faces significant risks. The risk factors set forth below may not be
the only ones that we face. Additional risks that we are not aware of yet or that currently are not material may adversely affect our business operations.

We may not be able to increase our revenue and our operating results are likely to fluctuate, which may cause the trading price of our common stock to decline.

We may not be able to increase revenue or generate gross profits or net income. Our revenue and operating results are likely to fluctuate, causing our
stock price to fluctuate. If our revenue or operating results fall below the expectations of market analysts or investors, the market price of our common stock could decline substantially.



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Factors that may contribute to fluctuations in our revenue and operating results include the risk factors
discussed elsewhere in this Annual Report on Form 10-K and the following additional factors:



| |  |  | the timing and volume of orders received from our customers;
| | - |  | ------------------------------------------------------------



| |  |  | market demand for, and changes in the average sales prices of, our services and technologies;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the rate of qualification and adoption of our services and technologies including, but not limited to, the transition from DDR-1 to DDR-2 technologies, as well as
from DDR-2 to DDR-3 technologies, and from leaded to non-leaded packages;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a shortage of memory chips, which may negatively impact our ability to fulfill customer orders;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the impact of the ongoing transition from current-generation products to next-generation products, with each transition resulting in lower unit volumes of memory
products to produce the same amount of memory capacity. This is partially offset by increasing demand for memory capacity with each new generation of systems;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the increasing adoption of planar and dual-die solutions by OEMs as well as memory suppliers, instead of adopting our solutions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuating demand for, and life cycles of, the products and systems that incorporate our solutions;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | changes in OEMs memory and DIMM buying processes;
| | - |  | --------------------------------------------------



| |  |  | changes in the level of our operating expenses;
| | - |  | -----------------------------------------------



| |  |  | our ability to develop new products that are successfully qualified and utilized by customers;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | our ability to manufacture and ship products within a particular reporting period;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | deferrals or cancellations of customer orders in anticipation of the development and commercialization of new technologies or for other reasons;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to enter into new licensing arrangements, and the terms and conditions for payment to us of license fees under those arrangements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these agreements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our royalties caused by changes in demand for products incorporating semiconductors that use our licensed technology;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our services and technologies and revenue mix;
| | - |  | ---------------------------------------------------------



| |  |  | seasonal purchasing patterns for our products with lower revenue generally occurring in the first and second quarters;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of the introduction by others of competing, replacement or substitute technologies or manufacturing services;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability, or the ability of our customers, to procure or manufacture memory and other required components or fluctuations in the cost of such components;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to enforce our intellectual property rights or to defend claims that we infringe the intellectual property rights of others, and the significant costs
to us of related litigation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | new packaging types that we do not support;
| | - |  | -------------------------------------------



| |  |  | cyclical fluctuations in semiconductor markets generally; and
| | - |  | -------------------------------------------------------------



| |  |  | general economic conditions that may affect end-user demand for products that use our technologies.
| | - |  | ---------------------------------------------------------------------------------------------------



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Fluctuations in the demand for our solutions occur as the price of next-generation monolithic
memory chips declines and as OEMs respond to demand for their products, which will contribute to volatility in our revenue and operating results and may adversely impact our stock price. The rate at which OEMs adopt our memory products using a
particular generation of high-density memory chips, if they adopt our memory products at all, may affect our revenue and operating results. In the past, it has taken several quarters for new, higher-density memory chips to achieve market acceptance.
Once accepted by the market, demand for our memory products using these chips can accelerate rapidly and then level off such that rapid growth in sales of these products is not indicative of continued future growth. Likewise, demand for legacy
memory chips can quickly decline when a new, higher-density memory chip is introduced and receives market acceptance. Sales of our products and product lines toward the end of a products market life may fluctuate significantly, and the precise
timing of these fluctuations is difficult, if not impossible, to predict.

In other cases, revenue may decline as customers
anticipate making new product purchases. The need for continued significant expenditures for capital equipment purchases, research and development and ongoing customer service and support, among other factors, makes it difficult for us to reduce our
operating expenses in any particular period if our expectations for revenue for that period are not met. Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of
our future operating performance.

Because we do not have long-term agreements with our customers and generally do not have a
significant backlog of unfilled orders, our revenue and operating results in any quarter are difficult to forecast and are substantially dependent upon customer orders received and fulfilled in that quarter.

We do not have long-term purchase agreements with customers. Our customers generally place purchase orders for deliveries no more than three months in
advance and sometimes no more than a day in advance. These purchase orders generally have no cancellation or rescheduling penalty provisions. Therefore, cancellations, reductions or delays of orders from any significant customer could have a
material adverse effect on our business, financial condition and results of operations.

Our business model is one in which there typically
is not a backlog of unfilled orders. Rather, a majority of our revenue and earnings in any quarter depends upon customer orders for our products that we receive and fulfill in that quarter. Because our expense levels are based in part on our
expectations as to future revenue and to a large extent are fixed in the short term, we likely will be unable to adjust spending on a timely basis to compensate for any unexpected shortfall in revenue. Accordingly, any significant shortfall of
revenue in relation to our expectations could hurt our operating results and depress our stock price.

We depend on a limited number
of customers for a substantial portion of our revenue, and the loss of, or a significant reduction in orders from, any key customer could significantly reduce our revenue.

The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenue and adversely affect
our business. Our five largest customers accounted for 75% of our total revenue in 2007, 89% of our total revenue in 2006, and 86% of our total revenue in 2005. In particular, Micron and SMART accounted for 34%, and 19%, respectively, of our total
revenue in 2007. Most of the markets for our current services and technologies are dominated by a small number of potential customers. Therefore, our operating results in the foreseeable future will continue to depend on our ability to effect sales
to these customers, as well as the ability of these customers to sell products that incorporate memory utilizing our technologies. In the future, these customers may decide not to specify products that incorporate our technologies for use in their
systems, purchase fewer memory products than they did in the past or alter their purchasing patterns. In addition, we may be more likely to make concessions to these customers regarding potential returns, repairs, or other issues than we would make
if they were not significant customers.



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Some of our customers have sought or are seeking to design alternative solutions, either internally or
through third parties, to address their need for greater memory capacity. The success of these efforts could have an adverse effect on the prices we are able to charge our customers and the volume of units that incorporate our solutions, which would
negatively affect our revenue and operating results.

Consolidation in some of our customers industries may result in increased
customer concentration and the potential loss of customers. From time to time, the composition of our major customer base has changed from quarter to quarter as the market demand for our customers products has changed, and we expect this
variability to continue in the future. We expect that sales of our products to a limited number of customers will continue to represent a majority of our revenue in the foreseeable future. The loss of, or a significant reduction in purchases by, any
of our major customers could harm our business, financial condition and results of operations.

A natural disaster, epidemic, labor strike,
war or political unrest where our customers facilities are located could reduce our sales to such customers. For example, Samsung is based in South Korea. North Koreas decision to withdraw from the Nuclear Non-Proliferation Treaty, as
well as more recent related geopolitical developments, have created unrest. This unrest could create economic uncertainty or instability, escalate into war or otherwise adversely affect South Korea, including Samsung, which in turn, could have a
material and adverse effect on our business, financial condition and results of operations.

The price of DRAM is volatile, and
excess inventory of DRAM, other components and finished products could adversely affect our gross margin.

Given our acquisition of
Southland, we purchase more DRAM for the products we manufacture than we historically have purchased prior to this acquisition. The price of DRAM is subject to rapid fluctuation and variability. The prices of our products are adjusted
periodically based largely on the market price of DRAM. Once our prices with a customer are negotiated, we are generally unable to revise pricing with that customer until our next regularly scheduled price adjustment. Consequently, we are
exposed to the risks associated with the volatility of the price of DRAM during that period. If the market price for DRAM increases, we generally cannot pass this price increase on to our customer for products purchased under an existing
purchase order. As a result, our cost of sales could increase and our gross margin could decrease. Alternatively, if there is a decline in the price of DRAM, we will need to reduce our selling prices for subsequent purchase orders, which
may result in a decline in our expected net sales.

If we fail to protect our proprietary rights, our customers or our competitors
might gain access to our technologies, which could adversely affect our ability to sell or license our memory solutions or to compete successfully in our markets and harm our operating results.

Our solutions rely on our proprietary rights, and we believe that the strength of our intellectual property rights is, and will continue to be, critical
to the success of our business. If any of our key patents or other intellectual property rights are invalidated or deemed unenforceable, or if a court limits the scope of the claims in any of our key patents or other intellectual property rights,
the likelihood that companies will continue to purchase or license our memory solutions could be significantly reduced. If we fail to obtain patents or if the patents issued to us do not cover all of the claims we asserted in our patent
applications, others could use portions of our intellectual property without the payment of license fees and royalties.The resulting loss in revenue could significantly harm our business, financial condition and results of operations.



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We rely on a combination of license, development and nondisclosure agreements and other contractual
provisions and patent, trademark and trade secret laws, and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality agreements with our employees, consultants and third parties, and control access
to and distribution of our documentation and other proprietary information. It is possible that these efforts to protect our intellectual property rights may not:



| |  |  | prevent challenges to, or the invalidation or circumvention of, our existing patents;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | result in patents that lead to commercially viable products or provide competitive advantages for our products;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | prevent our competitors from independently developing similar products, duplicating our products or designing around the patents owned by us;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prevent third-party patents from having an adverse effect on our ability to do business;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | provide adequate protection for our intellectual property rights;
| | - |  | -----------------------------------------------------------------



| |  |  | prevent disputes with third parties regarding ownership of our intellectual property rights;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | prevent disclosure of our trade secrets and know-how to third parties or into the public domain; or
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | result in valid patents, including international patents, from any of our pending applications.
| | - |  | -----------------------------------------------------------------------------------------------

A court invalidation or limitation of our key patents could significantly harm our business, financial condition and results of operations.

Our patent portfolio contains some patents that are particularly significant to our ongoing revenue and business. If any of
these key patents is invalidated, or if a court limits the scope of the claims in any of these key patents, the likelihood that companies will take new licenses and that current licensees will continue to agree to pay under their existing licenses
could be significantly reduced. The resulting loss in license fees and royalties could significantly harm our business, financial condition and results of operations.

Our revenue may suffer if we cannot continue to license or enforce our intellectual property rights or if third parties assert that we violate
their intellectual property rights.

We rely upon patent, copyright, trademark and trade secret laws in the United States and
similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in our technology. However, any of our direct or indirect intellectual property
rights could be challenged, invalidated or circumvented. Further, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, in certain jurisdictions we may be unable to
protect our technology adequately against unauthorized third-party use, which could adversely affect our business. Third parties also may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that
the claims are without merit, the claims can be time consuming and costly to defend and divert managements attention and resources away from our business. Claims of intellectual property infringement also might require us to enter into costly
settlement or license agreements or pay costly damage awards. Some of our license agreements provide limited indemnities and we may agree to indemnify others in the future. Our indemnification obligations could result in substantial expenses. In
addition to the time and expense required for us to indemnify our licensees, a licensees development, marketing and sales of licensed semiconductors could be severely disrupted or shut down as a result of litigation, which in turn could
severely hamper our business, financial condition and results of operations. If we cannot or do not license the infringed technology at all or on reasonable terms or substitute similar technology from another source, our business could suffer.



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We are subject to risks relating to product concentration and lack of revenue diversification.

To date, we have derived nearly all of our revenue from sales or licenses of our Stakpak and memory module solutions, and we expect
these solutions to continue to account for a large portion of our total revenue in the near term. Continued market acceptance of these solutions is critical to our future success. As a result, our business, financial condition and results of
operations could be adversely affected by:



| |  |  | any decline in demand for our Stakpak or memory module solutions;
| | - |  | -----------------------------------------------------------------



| |  |  | failure of our services and technologies to achieve continued market acceptance;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the introduction of services and technologies that can serve as a substitute for, replacement of or represent an improvement over, our services and technologies
such as planar solutions for small packages or dual-die solutions that do not require stacking;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | technological innovations that we are unable to address with our services and technologies; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | any inability by us to release new products or enhanced versions of our existing services and technologies on a timely basis or the failure of our products to
achieve market acceptance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The average selling prices of our services and technologies could decrease rapidly,
which may negatively impact our revenue and gross margins.

We may experience substantial period-to-period fluctuations in our
future revenue and operating results due to a decline in the average selling prices for our services and technologies. From time to time, we reduce the average unit price of our services and technologies in anticipation of future competitive pricing
pressures, declining memory chip prices, introductions of new services and technologies by us or our memory suppliers and other factors. The high-density memory market is extremely cost sensitive due to potentially high-order volumes combined with
memory buyers expectations for aggressive price reductions over time. As a consequence, the average selling prices of monolithic memory chips historically have declined as new product generations are commercialized. We expect that these
factors will continue to create downward pressure on our average selling prices, which may, in turn, negatively impact our revenue and gross margins, particularly if we are unable to offset reductions in average selling prices by increasing our unit
volumes or reducing our manufacturing costs. To maintain our gross margins, we will need to develop and introduce new services and technologies on a timely basis and continually reduce our costs. Our failure to do so could cause our revenue and
gross margins to decline.

We are a relatively small company with limited resources compared to some of our current and potential
competitors, and we may not be able to compete effectively and maintain or increase our market share.

Some of our current and
potential competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of customers than we have. Some of these companies are better positioned to influence industry acceptance of a particular
industry standard or competing technology than we are. These companies may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products or technologies at a lower price.
They also may be able to adopt more aggressive pricing policies than we can adopt. In addition, some of our current and potential competitors have established relationships with the decision makers at our current or potential customers. These
competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products.

In addition, some of our significant customers are competitors of ours, and may have the ability to manufacture competitive products at lower costs. Our
current or potential competitors may also offer bundled arrangements offering a more complete or cost-effective product, despite the technical merits or advantages of our services or technologies. We also face competition from current and
prospective customers that continually evaluate our capabilities against the merits of manufacturing products internally. Competition may also arise due to the development of cooperative relationships among our current and potential competitors or
third parties to increase the ability of their products to address the needs of our prospective customers. In addition, we expect to face competition from existing competitors and new and emerging companies that may enter our existing or



15



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future markets with similar or alternative products, which may be less costly or provide additional features. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire significant market share.

We have many competitors who have
developed competing technologies. For example, planar solutions allow additional memory devices to be directly attached on the printed circuit board without the need for stacking. Some of the major OEMs and memory suppliers currently are using
planar solutions and we expect them to continue to utilize planar solutions in the near future in legacy DDR technologies, as well as in next-generation DDR-2 and DDR-3 technologies with the migration to smaller footprint packages.

In addition, memory packages have been developed that place multiple memory chips into a single package that allows these memory chips to fit in the same
area as a single Stakpak. Other competitors utilize competing technologies that stack standard memory chips. We also could face competition from many new technologies, such as 3D memory cells, stacked wafers, stacked die and module innovations or
module stacking. These and other new technologies could change the demand for or performance requirements of memory products, and could provide the market with cost-effective memory solutions that outperform our Stakpak solutions.

We expect our competitors to continue to improve the performance of their current products, reduce their prices and introduce new services and
technologies that may offer greater performance and improved pricing, any of which could cause a decline in revenue or loss of market acceptance of our products. In addition, our competitors may develop enhancements to, or future generations of,
competitive products that may render our services or technologies obsolete or uncompetitive. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our
business. Competition could decrease our prices, reduce our revenue, lower our gross profits or decrease our market share.

If our
services and technologies are used in defective products or include defective parts, we may be subject to product liability or other claims.

If we manufacture memory products that are defective, used in defective or malfunctioning products or contain defective components, we could be subject to product liability claims and product recalls, safety alerts or advisory notices.
While we have product liability insurance coverage, we cannot assume that it will be adequate to satisfy claims made against us in the future or that we will be able to obtain insurance in the future at satisfactory rates or in adequate amounts.
Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition, results of operations and reputation, and on our ability to attract and
retain licensees and customers.

If we acquire other businesses or technologies in the future, these acquisitions could disrupt our
business and harm our business, financial condition and results of operations.

As part of our growth and product diversification
strategy, we will evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities. For example, we
acquired, a provider of memory products and services for leading OEMs, on August 31, 2007. Acquisitions entail a number of risks that could materially and adversely affect our business and operating results, including:



| |  |  | difficulties in integrating the operations, systems, technologies or products of the acquired companies;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the risk of diverting managements time and attention from the normal daily operations of the business;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | insufficient revenue to offset increased expenses associated with acquisitions;
| | - |  | -------------------------------------------------------------------------------



| |  |  | difficulties in retaining business relationships with suppliers and customers of the acquired companies;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential loss of key employees of the acquired company; and
| | - |  | ----------------------------------------------------------------



| |  |  | the potential need to amortize intangible assets.
| | - |  | -------------------------------------------------



16



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Future acquisitions also could cause us to incur debt or contingent liabilities or cause us
to issue equity securities. These actions could negatively impact the ownership percentages of our existing stockholders, our financial condition and results of operations.

Our limited experience in acquiring other businesses, product lines and technologies may make it difficult for us to overcome problems we may
encounter in connection with any acquisitions we undertake.

We continually evaluate and explore strategic opportunities as they
arise, including business combinations, strategic relationships, capital investments and the purchase, licensing or sale of assets. Our experience in acquiring other businesses, product lines and technologies is limited. The attention of our small
management team may be diverted from our core business if we undertake future acquisitions. Future acquisitions may also require us to incur debt or issue equity securities that may result in dilution of existing stockholders. Potential future
acquisitions also involve numerous risks, including, among others:



| |  |  | problems and delays in successfully assimilating and integrating the purchased operations, personnel, technologies, products and information systems;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unanticipated costs and expenditures associated with the acquisition, including any need to infuse significant capital into the acquired operations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers, customers and strategic partners;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | risks associated with entering markets and foreign countries in which we have no or limited prior experience;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | contractual, intellectual property or employment issues;
| | - |  | --------------------------------------------------------



| |  |  | potential loss of key employees of purchased organizations; and
| | - |  | ---------------------------------------------------------------



| |  |  | potential litigation arising from the acquired companys operations before the acquisition.
| | - |  | -------------------------------------------------------------------------------------------

We may make acquisitions that are dilutive to existing shareholders, result in unanticipated accounting charges or otherwise adversely affect our
results of operations.

We intend to grow our business through business combinations or other acquisitions of businesses, products
or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. If we make any future acquisitions, we could issue stock that would
dilute our earnings and stockholders percentage ownership, reduce our cash reserves, incur substantial debt, or assume contingent liabilities.

Furthermore, acquisitions may require material infrequent charges and could result in adverse tax consequences, deferred compensation charges, substantial depreciation, in-process research and development charges, the
amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill, any of which could negatively impact our results of operations.

We expect a material portion of our future revenue to be derived from license royalties, which is inherently risky.

Because we expect a material portion of our future revenue to be derived from license royalties, our future success depends on:



| |  |  | our ability to secure broad patent coverage for our new technologies and enter into license agreements with potential licensees; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our licensees to develop and commercialize successful products that incorporate our technologies.
| | - |  | ----------------------------------------------------------------------------------------------------------------



17



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Although we have engaged in discussions with potential licensees for our Stakpak technologies, we
historically have not devoted significant resources to licensing our technologies and currently have only four license arrangements. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the
following:



| |  |  | the rate of adoption of our technologies by, and the incorporation of our technologies into products of, semiconductor manufacturers and OEMs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which large equipment vendors and materials providers develop and supply tools and materials to enable manufacturing using our technologies on a
cost-effective basis and in quantities sufficient to enable volume manufacturing;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the willingness of our licensees and others to make investments in the manufacturing process that supports our licensed technologies, and the amount and timing of
those investments;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our licensees ability to design and assemble memory modules and other system parts that utilize our technologies in components qualified for use by OEMs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any failure by our licensees to abide by compliance and quality control guidelines with respect to our proprietary rights;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | actions by our licensees that could severely harm our ability to use our proprietary rights;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | the pricing and demand for products incorporating memory modules and other system parts that utilize our licensed technologies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to structure, negotiate and enforce agreements for the determination and payment of royalties;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the cyclicality of supply and demand for products using our licensed technologies; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | competition we may face with respect to our licensees competing with our services business.
| | - |  | -------------------------------------------------------------------------------------------

It is difficult to predict when we will enter into additional license agreements, if at all. The time it takes to establish a new licensing
arrangement can be lengthy. We may also incur delays or deferrals in the execution of license agreements as we develop new technologies. The timing of our receipt of royalty payments and the timing of how we recognize license revenue under license
agreements may fluctuate and significantly impact our quarterly or annual operating results. Because we may recognize a significant portion of license fee revenue in the quarter that the license is signed, the timing of signing license agreements
may significantly impact our quarterly or annual operating results. Under our typical license agreements, we also receive ongoing royalty payments, and these may fluctuate significantly from period to period based on sales of products incorporating
our licensed technologies.

It is difficult for us to verify royalty amounts owed to us under our license agreements, and
this may cause us to lose revenue.

The standard terms of our license agreements require our licensees to document the manufacture
and sale of products that incorporate our technologies and report this data to us on a periodic basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be
expensive, time consuming and potentially detrimental to our ongoing business relationship with our licensees. As a result, to date, we have primarily relied on the accuracy of the reports themselves without independently verifying the information
in them. Our failure to audit our licensees books and records may result in us receiving less royalty revenue than we are entitled to under the terms of our license agreements.



18



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Because our licensing cycle is lengthy and costly, it is difficult to predict future revenue, which
may cause us to miss analysts estimates and may result in our stock price declining.

Pursuing and entering into new license
agreements generally requires significant marketing and sales efforts. The length of time it takes to establish a new licensing relationship can range from six to 12 months or longer. Because our licensing cycle is a lengthy process, the accurate
prediction of future revenue from new licenses is difficult.

In addition, engineering services are dependent upon the varying level of
assistance desired by licensees and, therefore, revenue from these services is also difficult to predict as it is recognized in the period in which we render service. There can be no assurance that we can accurately estimate the amount of resources
required to complete projects, or that we will have, or be able to expend, sufficient resources required to complete a project. Furthermore, there can be no assurance that the product development schedule for these projects will not be changed or
delayed. All of these factors make it difficult to predict future licensing revenue that may result in us missing analysts estimates and may cause our stock price to decline.

Our marketing and sales efforts may be unsuccessful.

We have limited sales and marketing resources. As our business evolves, we may have to employ more rigorous sales and marketing efforts, hire more sales and marketing personnel and engage in lengthy negotiations to
reach agreement with potential customers. As a result, our operating expenses may increase, and we may incur losses in periods that precede the generation of revenue. If the sales and marketing efforts of our technologies are unsuccessful, then we
may not be able to sell or license our technologies.

Our reliance on our memory manufacturer customers for the memory chips used in
products that incorporate our technologies subjects us to the risk of a shortage of these chips, adversely impacting our ability to fulfill orders from other customers, risks of natural disasters and other factors that could cause disruptions in the
supply of memory chips.

Our ability to fulfill customer orders is dependent on a sufficient supply of memory chips to which we
apply our manufacturing services. Historically, our customers have shipped on consignment their memory chips to be stacked, which we stack and then return to them. We have no memory supply contracts under which we are currently operating. In
acquiring memory chips, supply options are very limited because of the small number of memory manufacturers. Our dependence on our customers provision of memory chips to us on a just-in-time basis, rather than through guaranteed supply
contracts, subjects our business to risks associated with unforeseen disruptions in the industry availability of memory chips. In the past, there have been shortages of DRAM chips available in the market. These shortages negatively impacted our
ability to fulfill customer orders, which resulted in a decrease in shipments in these quarters. Any future shortage could result in a similar decrease in shipments, which would adversely impact our financial condition and results of operations.

In addition, natural disasters or other factors could cause delays or reductions in product shipments that could negatively affect our
revenue, financial condition and results of operations. Moreover, since the majority of memory chips are manufactured in the Pacific Rim region, we believe that the risk of exposure of memory suppliers to earthquakes, typhoons, political unrest,
terrorist activity, infectious diseases or other similar events is of particular concern. Any unexpected interruption in the manufacture of other key electronic components used in association with products that incorporate our technologies could
disrupt production of devices that use our services and technologies, thereby adversely affecting either our ability to deliver products to our customers or the customers demand for our services and technologies.



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We have an indefinite-lived intangible asset and other intangible assets that may become impaired,
which could significantly affect our results of operations in the period recognized.

In accordance with generally accepted
accounting principles, we evaluate the recoverability of our indefinite-lived intangible asset (goodwill) on an annual basis and periodically evaluate the recoverability of all of our intangible assets when indicators of
impairment exist. The following factors may result in an impairment of goodwill or other intangible assets: significant negative industry or economic trends; disruptions to our business; declines in revenue or market capitalization;
or other factors may result in an impairment of goodwill or other intangible assets. Future impairment charges could significantly affect our results of operations in the periods recognized.

If we are unable to manufacture our products efficiently or we experience credit losses or other collections issues, our business, financial
condition and results of operations could suffer.

We are continuously modifying our manufacturing processes in an effort to
maintain satisfactory manufacturing yields and product performance, lower our costs and reduce the time it takes to design products based on our technologies. In addition, new manufacturing processes are required as we ramp high-volume production of
new technologies. We face increased risks with these new processes and we incur significant start-up costs associated with implementing new manufacturing technologies, methods and processes and purchasing new equipment, which could impact our
gross margins. We expect to experience manufacturing delays and inefficiencies as we develop or refine new manufacturing technologies and methods, implement them in volume production and qualify them with customers, which could cause our operating
results to decline. As we manufacture more complex products, such as ArctiCore and future products, the risk of encountering delays or difficulties increases.

In addition, if demand for our products increases significantly, we will need to expand our operations to manufacture sufficient quantities of products without increasing our production times or our unit costs. As a
result of such expansion, we could be required to purchase new equipment, upgrade existing equipment, develop and implement new manufacturing processes and hire additional personnel. Further, new or expanded manufacturing facilities could be subject
to qualification by our customers. We cannot be certain that we will be able to add required manufacturing capacity or that we will be able to maintain control over product quality, delivery schedules, manufacturing yields and costs as we increase
our output. Any difficulties in expanding our manufacturing operations could cause product delivery delays and lost sales.

If demand for
our products decreases, we could have excess manufacturing capacity. The fixed costs associated with excess manufacturing capacity could cause our operating results to decline. If we are unable to achieve further manufacturing efficiencies and cost
reductions, particularly if we are experiencing pricing pressures in the marketplace, our financial condition and results of operations could suffer.

We have not historically recorded a bad debt allowance or established reserves for our accounts receivable because we have not had significant credit losses or other collections issues during the periods for which
financial information is presented. As a result of our acquisition of Southland in 2007, we now have an immaterial bad debt allowance. Although we do not believe that we will incur any material credit losses in the foreseeable future, if we were to
do so, our financial condition and results of operations could be harmed.



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If we are unable to develop new and enhanced solutions that achieve market acceptance in a timely
manner, our financial condition, results of operations and competitive position could be harmed.

Our future success will be based
in large part on our ability to reduce our dependence on our current Performance Stakpak solution for the majority of our revenue by increasing revenue associated with our other solutions, such as High Performance Stakpak, ArctiCore and other memory
modules, and by developing other new technologies and enhancements that can achieve market acceptance in a timely and cost-effective manner. Successful development and introduction of new technologies on a timely basis require that we:



| |  |  | identify and adjust to changing requirements of customers within the memory and semiconductor markets generally;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | identify and adapt to emerging technological trends in our target markets;
| | - |  | --------------------------------------------------------------------------



| |  |  | maintain effective marketing strategies;
| | - |  | ----------------------------------------



| |  |  | timely design and introduce cost-effective, innovative and performance-enhancing features that differentiate our services and technologies from those of our
competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | timely qualify and certify our technologies for use in our customers products; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | successfully develop our relationships with existing and potential customers, OEMs and supplier and channel partners.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

Our research and development efforts are focused primarily on furthering the technologies related to our non-leaded solutions, ArctiCore and other new
product initiatives. If the development of these technologies is delayed or abandoned, or if these new technologies fail to achieve market acceptance, our growth prospects, financial condition, results of operations and competitive position could be
adversely affected. Furthermore, if markets for these new technologies develop later than we anticipate, or do not develop at all, demand for our solutions that are currently in development would suffer, resulting in lower sales of these products
than we currently anticipate.

If we do not create and implement new designs to expand our licensable technology portfolio, our
competitive position could be harmed or our financial condition and results of operations adversely affected.

We expect in the
future to derive a significant portion of our revenue from licenses and royalties from a relatively small number of key technologies. To remain competitive, we must introduce new technologies or designs in a timely manner and the market must adopt
them. Developments in these key technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. We may not be able to develop and market new technologies in a
timely or commercially acceptable fashion. Moreover, our currently issued U.S. patents expire at various times from 2010 through 2022. We need to develop and patent successful innovations before our current patents expire.

We also may attempt to expand our licensable technology portfolio and technical expertise by acquiring technologies or developing strategic relationships
with others. These strategic relationships may include the right for us to sublicense technologies to others. However, we may not be able to acquire or obtain rights to licensable technologies in a timely manner or upon commercially reasonable
terms. Moreover, our research and development efforts, and acquisitions and strategic relationships, may be futile if we do not accurately predict the future packaging needs of the semiconductor and consumer electronics industries. Our failure to
develop or acquire new technologies could significantly harm our business, financial condition, and results of operations.



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Failure by our licensees to introduce products using our technologies, as well as our
licensees pricing policies, could limit our royalty revenue growth.

Because we expect a significant portion of our future
revenue to be derived from royalties on memory products that use our licensed technology, our future success depends upon our licensees developing and introducing commercially successful products, as well as charging competitive prices for these
products. Any of the following factors could limit our royalty revenue growth:



| |  |  | the willingness and ability of materials and equipment suppliers to produce materials and equipment that support our licensed technologies, in a quantity sufficient
to enable volume manufacturing;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our licensees to purchase such materials and equipment on a cost-effective and timely basis;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the willingness of our licensees and others to make investments in the manufacturing processes that support our licensed technologies, and the amount and timing of
those investments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our licensees ability to design and assemble packages incorporating our technologies that are acceptable to their customers; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | the willingness of our licensees to set competitive prices so that products using our intellectual properties sell in significant volume.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

Products that incorporate our technologies generally have long sales and implementation periods, and our customers
require that our technologies undergo a lengthy and expensive qualification process without any assurance of revenue.

Products that
incorporate our technologies are complex and are typically intended for use in applications that may be critical to the systems being developed by our customers. Prospective customers generally must make a significant commitment of resources to test
and evaluate our technologies and to integrate memory modules and other system parts into larger systems. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design,
testing and adoption of new, technologically complex products. This may delay the time in which we recognize revenue and result in our investing significant resources well in advance of orders for our products.

Prior to incorporating memory products utilizing our technologies, our customers require our processes and technologies to undergo an extensive
qualification process, which involves testing products utilizing our technologies, as well as rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification by a customer does not ensure any
sales to that customer. Even after successful qualification and sales to a customer of products incorporating our technologies, changes in our technologies may require a new qualification process, which may result in additional delays. After our
products are qualified, it can take an additional six months or more before the customer commences production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial resources, including design,
engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude
or delay sales of such products to the customer, which may impede our growth and cause our business to suffer.

If the supply of
materials used to manufacture our products is interrupted, or our manufacturing turnaround times are extended, our financial condition and results of operations could be adversely affected.

In order to manufacture our solutions, we require raw materials and components such as, but not limited to, DRAM, flex circuits, printed circuit boards,
aluminum cores, resistors, capacitors, advanced memory buffers, epoxy adhesive, solder, nitrogen, ink marking supplies and tape and reel supplies. We typically procure these materials from limited sources to take advantage of volume pricing
discounts. Shortages in these materials may occur from time to time, and have occurred in the past with respect to the supply of flex circuit relating to our



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ArctiCore product line. In addition to shortages, we could experience quality problems with these materials, which could result in returning them to our
suppliers. These shortages and returns could extend the turnaround times of our manufacturing services. If our supply of materials is interrupted for any reason, or our manufacturing turnaround times are extended, our financial condition and results
of operations could be adversely affected.

A significant portion of our manufacturing operations is located in Reynosa, Mexico; our
failure to continue to manage these operations, as well as issues associated with the location of this facility, could materially and adversely affect our business.

We began manufacturing operations in our Mexico facility in the first quarter of 2003, and currently manufacture virtually all of our Stakpak units in
Mexico. The relocation of our operations has placed, and any future growth of our operations may place, a significant strain on our management personnel, systems and resources. We may need to implement a variety of new and upgraded operational and
financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We also expect that we will need to continue to expand, train, manage and motivate our workforce. All of these endeavors
will require substantial management time and attention, and we anticipate that we will require additional management personnel and internal processes to manage these efforts. If we are unable to effectively manage our expanding operations, our
business could be materially and adversely affected.

In addition, this facility is exposed to certain risks as a result of its location,
including:



| |  |  | changes in international trade laws, such as the North American Free Trade Agreement, or other governmental regulations or tariffs affecting our import and export
activities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in labor laws and regulations affecting our ability to hire and retain employees;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | fluctuations of foreign currency and exchange controls;
| | - |  | -------------------------------------------------------



| |  |  | increases in Mexican tax rates;
| | - |  | -------------------------------



| |  |  | security measures at the United States-Mexico border;
| | - |  | -----------------------------------------------------



| |  |  | potential political instability and changes in the Mexican government;
| | - |  | ----------------------------------------------------------------------



| |  |  | relations between the governments of the United States and Mexico;
| | - |  | ------------------------------------------------------------------



| |  |  | potential kidnappings of employees;
| | - |  | -----------------------------------



| |  |  | natural disasters, such as flooding and other acts of nature;
| | - |  | -------------------------------------------------------------



| |  |  | strikes by our union employees;
| | - |  | -------------------------------



| |  |  | issues relating to drug-trafficking activities in Mexico; and
| | - |  | -------------------------------------------------------------



| |  |  | general economic conditions in Mexico.
| | - |  | --------------------------------------

Any of these risks could interfere with the operation of this facility or restrict or delay our ability to move components, finished products or manufacturing equipment across the United StatesMexico border and result in reduced
production, increased costs, or both. In the event that this facilitys production is reduced or we encounter disruptions or delays in moving products across the border, we could fail to ship products on schedule and could face a reduction in
future orders from dissatisfied customers. If our costs to operate this facility increase, our gross margins would decrease. Reduced shipments and margins would have an adverse effect on our business, financial condition and results of operations.



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We operate our manufacturing facility in Mexico as a Maquiladora and any loss of this status or
change in the laws affecting Maquiladoras, or disputes with the labor union in Mexico, could materially harm our business, financial condition and results of operations.

We currently manufacture virtually all of our Stakpak products at our manufacturing facility in Reynosa, Mexico. This facility is authorized to operate as
a Maquiladora by the Ministry of Economy of Mexico. Mexico has enacted this legislation to promote the use of such manufacturing operations by foreign companies, and continuation of these operations depends upon, among other factors, compliance with
applicable laws and regulations of the United States and Mexico. Maquiladora status allows us to import items into Mexico duty-free, provided that such items, after processing, are re-exported from Mexico within 18 months. Maquiladora status is
subject to various restrictions and requirements, including:



| |  |  | compliance with the terms of the Maquiladora authorization program;
| | - |  | -------------------------------------------------------------------



| |  |  | proper utilization of imported materials;
| | - |  | -----------------------------------------



| |  |  | hiring and training of Mexican personnel;
| | - |  | -----------------------------------------



| |  |  | compliance with tax, labor, exchange control and notice provisions and regulations, both in the United States and in Mexico; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | compliance with local and national constraints.
| | - |  | -----------------------------------------------

Because assembly operations in Mexico continue to be less expensive than comparable operations in the United States, in recent years many companies have established Maquiladora operations in the Reynosa area to take
advantage of lower labor costs. Increasing demand for labor, particularly skilled labor and professionals, from new and existing Maquiladora operations could in the future result in increased labor costs. The loss of our Maquiladora status, changes
in the Maquiladora program, the inability to recruit, hire and retain qualified employees, a significant increase in labor costs, unfavorable exchange rates or interruptions in the trade relations between the United States and Mexico could have a
material adverse effect on our business, financial condition and results of operation.

While we are not party to any collective bargaining
agreements with any of our employees in the United States, as of December 31, 2007, 239, or 75%, of our employees in Mexico were represented by a labor organization that has entered into a labor contract with us. As a result, our Reynosa
operations are subject to union activities, including organized strikes or other work stoppages, and cost factors arising from our negotiations of employment terms with the representatives of this union. To date, we have not experienced any
organized strikes or other work stoppages at our facility in Reynosa.

We derive a portion of our revenue from our license agreement
with Samsung. Royalties paid to us by Samsung generally have been decreasing over time and they may continue to decline as a result of Samsung not utilizing as much of our stacking technology as it utilized in the past, which could materially harm
our business, financial condition and results of operations.

We receive a portion of our license revenue from our license agreement
with Samsung. This agreement requires that Samsung pay us royalties based on the number of stacked memory products Samsung sells or bundles within its own products. Royalties paid to us by Samsung generally have been decreasing over time and they
will continue to decline as a result of Samsung not utilizing as much of our stacking technology as it has utilized in the past.

As of
December 31, 2007, the remaining residual value of the customer relationship intangible asset associated with this contract was $0.6 million. The value was initially recorded based upon the projected discounted net cash flows
attributable to this relationship. We may have to record an impairment charge for some or all of the value of this asset, depending upon the amount of royalties Samsung pays to us, since unanticipated reductions in the future cash flow from
this contract may cause an impairment. As of December 31, 2007, no impairment had been recorded.



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The consumer electronics market is a highly competitive and volatile market and if we are not
successful in this or other new markets, our business, financial condition and results of operations could be adversely affected.

One of our areas of focus is the consumer electronics market, particularly the consumer Flash market. We believe our package-stacking technologies and manufacturing processes are directly applicable to Flash memory market,
but we are a recent entrant to this market, and many of the memory suppliers and memory module makers are increasingly focusing on the consumer Flash memory market. Further, the consumer market is highly competitive and is characterized by
aggressive pricing practices, downward pressure on gross margins, frequent introduction of new products, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of
technological and product advancements by competitors, price sensitivity on the part of consumers, dynamic customer demand patterns, seasonal revenue trends and a large number of competitors. In addition, the consumer market can be much more
volatile than other segments of the memory market. To be successful, we will need to continually introduce new products and technologies, enhance existing products in order to remain competitive, and effectively stimulate customer demand for new
products and upgraded versions of our existing products. The success of new product introductions is dependent on a number of factors, including market acceptance; our ability to manage the risks associated with product transitions and production
ramp issues; the availability of products in appropriate quantities to meet anticipated demand; and the risk that new products may have quality or other defects in the early stages of introduction. The gross margins in the consumer business are also
lower than the other markets on which we are focused, which may adversely affect our financial performance and could lead to a decreased valuation of the Company. As a result, we cannot determine in advance the ultimate effect that new products will
have on our sales, licensing or results of operations, and, as a result, if we are not successful in this or other new markets, our business, financial condition and results of operations could be adversely affected.

Austin Ventures controls us, and will continue to control us, as long as it beneficially owns a majority of our common stock.

Austin Ventures beneficially owns approximately 78% of our outstanding common stock. Because Austin Ventures and its affiliates own more than 50% of
our common stock, we are considered a controlled company under NASD Marketplace Rule 4350(c)(5), and we are exempt from NASD rules that would otherwise require that our board of directors consist of a majority of independent directors.
As a controlled company, we also are exempt from NASD rules that require the compensation of officers and the nomination of company directors be determined by a committee of independent directors or a majority of independent directors.
Our board of directors currently consists of seven directors, of which three qualify as independent directors under NASD rules. As long as Austin Ventures beneficially owns a majority of our outstanding common stock, Austin Ventures will continue to
be able to elect all members of our board of directors. Purchasers of our common stock will not be able to affect the outcome of any stockholder vote until Austin Ventures beneficially owns less than a majority of our outstanding common stock. As a
result, Austin Ventures will control all matters affecting us, including:



| |  |  | the composition of our board of directors and, through it, any determination with respect to our business direction and policies, including the appointment and
removal of officers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any determinations with respect to mergers or other business combinations;
| | - |  | --------------------------------------------------------------------------



| |  |  | our acquisition or disposition of assets; and
| | - |  | ---------------------------------------------



| |  |  | our corporate finance activities.
| | - |  | ---------------------------------

In addition, to the extent that Austin Ventures continues to beneficially own a significant portion of our outstanding common stock, although less than a majority, it will continue to have a significant influence over all matters submitted
to our stockholders and to exercise significant control over our business policies and affairs. Under our certificate of incorporation, as amended, if Austin Ventures ceases to own at least 30% of our outstanding common stock, the approval of the
holders of at least two-thirds of our common stock will be required for stockholders to amend our certificate of incorporation or bylaws, to increase or decrease the



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authorized number of shares of our capital stock or to remove a director. Furthermore, concentration of voting power could have the effect of delaying,
deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. This significant concentration of share ownership may also adversely affect the trading price for our common stock
because investors may perceive disadvantages in owning stock in a company that is controlled by a small number of stockholders. Austin Ventures is not prohibited from selling a controlling interest in us to any third party, or from selling its
shares at any time, which could adversely affect our stock price.

Austin Ventures and its designees on our board of directors may
have interests that conflict with our interests.

Austin Ventures and its designees on our board of directors may have interests
that conflict with, or are different from, our own. Conflicts of interest between Austin Ventures and us may arise, and such conflicts of interest may not be resolved in a manner favorable to us, including potential competitive business activities,
corporate opportunities, indemnity arrangements, registration rights, sales or distributions by Austin Ventures of our common stock and the exercise by Austin Ventures of its ability to control our management and affairs. Our certificate of
incorporation does not contain any provisions designed to facilitate resolution of actual or potential conflicts of interest, or to ensure that potential business opportunities that may become available to both Austin Ventures and us will be
reserved for or made available to us. Pertinent provisions of law will govern any such matters if they arise. In addition, Austin Ventures and its director designees could delay or prevent an acquisition or merger even if the transaction would
benefit other stockholders.

Our operations could be disrupted by power outages, political unrest, natural disasters or other
disasters.

We operate manufacturing facilities in Irvine, California and Reynosa, Mexico. These areas are subject to
earthquakes, fires, flooding and other natural disasters. Our facility in Reynosa is also subject to an epidemic, political unrest, war, labor strikes or work stoppages. Interruptions in supply or utilities at these locations would likely
result in the disruption of our manufacturing services, cause significant delays in shipments of our products and materially and adversely affect our operating results.

In addition, our disaster recovery plans may not be adequate or effective. We do not carry earthquake insurance. Other insurance that we carry is limited in the risks covered and the amount of
coverage. Our insurance would not be adequate to cover all of our resulting costs, business interruption and lost profits if a natural disaster were to occur. A natural disaster rendering one of our manufacturing facilities totally or
partially unusable, whether or not covered by insurance, would materially and adversely affect our business and financial condition.

We intend to expand our research and development activities and other operations, and this expansion may strain our resources and increase our operating expenses.

We intend to increase our research and development activities and other operations, both in the United States and in Mexico, as we grow our business and
expand our technology offerings. We may do so through both internal growth and acquisitions. We expect that this expansion could strain our systems and operational and financial controls.

Products that incorporate our technologies must conform to industry standards in order to be widely accepted by OEMs for use in their products.

Our services and technologies are used to create products that comprise only a part of a larger system. Typically, the components
of these systems comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of systems and devices to support prevailing industry standards. Many of these companies are significantly
larger and more influential in affecting industry standards than we are. Some industry standards may not be widely adopted or implemented consistently, and



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competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry standards that we
do, or if competing standards emerge, market acceptance of our products could be adversely affected, which would harm our business.

Industry standards are continually evolving, and our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render
our products incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and to incur significant expense to implement new services and technologies to ensure compliance with
relevant standards. If our products or those of our customers are not in compliance with prevailing industry standards for a significant period of time, we may not be able to sell our services and technologies and our financial condition and results
of operations would suffer. In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be
better able to address market demand than we would and our business, financial condition and results of operations would be adversely affected.

We have been in the process of obtaining adoption of our ArctiCore technologies as a standard in the electronics industry by the JEDEC Solid State Technology Association (JEDEC). JEDEC policies and procedures require that member
companies disclose any intellectual property they own and of which they are aware that may infringe a proposed standard. Kentron Technologies, Inc. (Kentron) and Chris Karabatsos, a principal of Kentron, have stated that they believe our
ArctiCore technologies infringe on a pending patent application they have filed with the United Stated Patent and Trademark Office, which has not been publicly disclosed, but they have refused to disclose a complete copy of this patent application
to either JEDEC or to us. Their allegations cannot be evaluated without disclosure of their pending patent application. Certain members of JEDEC have expressed concern regarding these allegations, which has resulted in a delay of the
standardization of our ArctiCore technologies by JEDEC. In response to their actions, we initiated legal action against Kentron and the principal, which is more fully described in Part I, Item 3Legal Proceedings.

We may not be able to adequately address the issues raised by Kentron and its principal in a timely fashion, we may not succeed in our litigation, and we
may be required to obtain a license from Kentron, if a license is available to us on reasonable terms. In addition, there can be no assurance that we will be able to sell or license any of our ArctiCore technologies even if JEDEC standardizes some
or all of them as a standard.

We depend on a few key personnel to manage our business effectively, and if we lose the services of
any of those personnel or are unable to hire additional personnel, our business could be harmed.

We believe our future success will
depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. We believe that our future success will be dependent on retaining the services of our key personnel, developing their
successors, modifying our internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles should departures or additions to the management team occur. The loss of any of our key employees, or
the inability to attract or retain qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our services and technologies.



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We may be involved in costly legal proceedings to enforce or protect our intellectual property
rights or to defend against claims that we infringe the intellectual property rights of others.

Litigation is inherently uncertain,
and an adverse outcome could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings we initiate to protect our intellectual property rights could also result in counterclaims or countersuits against
us. Any litigation, regardless of its outcome, could be time consuming and expensive to resolve and could divert our managements time and attention. Any intellectual property litigation also could force us to take specific actions, including:



| |  |  | cease selling products that are claimed to be infringing a third partys intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | obtain licenses to make, use, sell, offer for sale or import the relevant technologies from the intellectual propertys owner, which licenses may not be
available on reasonable terms, or at all;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign those products that are claimed to be infringing a third partys intellectual property; or
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

We have found it necessary to litigate against others, including our customers, to enforce our intellectual property and contractual and commercial
rights, as well as to challenge the validity and scope of the proprietary rights of others and to defend against claims of infringement or invalidity.

We may be involved in costly legal proceedings involving our contracts, which could include our licensees, potential licenses or strategic partners.

We may become involved in a dispute relating to our contracts, which could include or be with a licensee, potential licensee or strategic partner. Any
such dispute could cause the licensee or strategic partner to cease making royalty or other payments to us and could substantially damage our relationship with the company on both business and technical levels. Any litigation stemming from such a
dispute could be very expensive. Litigation could also severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose
royalties. Any such litigation could also harm our relationships with other licensees or our ability to gain new customers, which may postpone licensing decisions pending the outcome of the litigation.

Our failure to comply with environmental laws and regulations could subject us to significant fines and liabilities, and new laws and regulations
or changes in regulatory interpretation or enforcement could make compliance more difficult and costly.

We are subject to various
and frequently changing federal, state and local, and foreign governmental laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal
of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. We could incur substantial costs, including clean-up costs, civil or criminal fines or sanctions and third-party claims for property
damage or personal injury, as a result of violations of or liabilities under environmental laws and regulations or non-compliance with the environmental permits required for our facilities. These laws, regulations and permits also could require the
installation of costly pollution control equipment or operational changes to limit pollutant emissions or decrease the likelihood of accidental releases of hazardous substances.

In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination at our
sites or the imposition of new clean-up requirements could require us to curtail our operations, restrict our future expansion, subject us to liability and cause us to incur future costs that would have a negative effect on our financial condition
and results of operations.



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Economic, political and other risks associated with international sales and operations could
adversely affect our revenue.

Since we sell our services and technologies worldwide, our business is subject to risks associated
with doing business internationally. Our revenue originating outside the United States as a percentage of our total revenue was 18% in 2007, 22% in 2006, and 37% in 2005. International turmoil, exacerbated by the war in Iraq, the escalating tensions
in North Korea and violence in the Middle East, have contributed to an uncertain political and economic climate, both in the United States and globally, which may affect our ability to generate revenue on a predictable basis. In addition, terrorist
attacks and the threat of future terrorist attacks both domestically and internationally have negatively impacted the worldwide economy. As we ship memory units both in the United States and internationally, the threat of future terrorist attacks
may adversely affect our business. These conditions make it difficult for us and for our customers to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results
of operations.

A portion of our revenue is derived from customers based in Asia. The economies of Asia have been highly volatile and
recessionary in the past, resulting in significant fluctuations in local currencies and other instabilities. Some countries in Asia have recently been affected by infectious diseases. These instabilities continue and may occur again in the future.
Our exposure to the business risks presented by the economies of Asia will increase to the extent that we continue to expand our customer base and activities in that region. An outbreak of an infectious disease could result in reduced demand for
products incorporating our technologies, extend the qualification periods for our technologies or otherwise adversely affect our business.

If industry or securities analysts do not continue to publish reports or research about our business, our stock price and trading volume could be adversely impacted.

The trading market for our common stock depends on the research and reports that industry and securities analysts publish about us and our business. We do
not have any control over these analysts. In addition, we have less analyst coverage than we had in the past. If an analyst who covers us downgrades our stock, our stock price would likely decline. If an analyst ceases coverage of our company or
fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to be adversely impacted.

Our stock price is likely to be volatile and could drop unexpectedly.

Our common stock has been publicly traded since February 2004. The market price of our common stock has been subject to significant fluctuations since the
date of our initial public offering. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies. We have limited
liquidity in terms of the number of outstanding shares of our common stock that are publicly traded, which may adversely affect the value of our stock. In addition, we have an ongoing stock repurchase program, which could further decrease our
liquidity. As a result, the market price of our common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular companys securities, securities
class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts managements attention and resources.

If Congress changes the patent laws, we could be adversely impacted.

We rely on the uniform and historically consistent application of United States patent laws and regulations. Congress is currently considering modifying
the U.S. patent laws, and the Patent and Trademark Office is considering modifying certain regulations relating to filing for patent protection. Some of these modifications may not be advantageous for us, and may make it more difficult to obtain
adequate patent protection or to enforce our patents against parties using them without a license or a payment of royalties. These changes could have a negative affect on our licensing program and, therefore, the royalties we would receive.



29



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Recently enacted and proposed changes in securities laws and regulations have increased our costs.

The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules and regulations subsequently implemented by the
SEC, have required changes to some of our corporate governance practices. The Sarbanes-Oxley Act also requires the SEC to promulgate additional new rules on a variety of subjects. In addition to final rules and rule proposals already made by the
SEC, the National Association of Securities Dealers has adopted revisions to its requirements for companies, such as us, that propose to have securities listed on the Nasdaq Stock Market. These new rules and regulations have increased our legal and
financial compliance costs, and have made some activities more difficult, time consuming and costly. These new rules and regulations have made it more difficult and more expensive for us to obtain director and officer liability insurance. These new
rules and regulations could also make it more difficult for us to attract and retain qualified members for our board of directors, particularly to serve on our audit committee, as well as qualified executive officers.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None



|ITEM 2. | PROPERTIES
|------- | ----------

Our principal executive offices are
located at 8900 Shoal Creek Boulevard, Suite 125, Austin, Texas 78757. The facility consists of approximately 46,000 square feet of office space under lease through 2010. It houses virtually all executive, administrative and research functions and
staff.

In January 2003, we commenced manufacturing operations at our new facility in Reynosa, Mexico. This facility consists of
approximately 45,000 square feet, which we own. During the year ended December 31, 2007, we manufactured virtually all of our Stakpak memory products at this facility.

On August 31, 2007, pursuant to our acquisition of Southland, we leased an additional 33,000 square feet, consisting of approximately 20,000 square
feet of manufacturing and warehouse area from two current Entorian employees (former Southland principals). We manufacture memory modules at this facility.

We continue to evaluate our future real estate needs based on the current industry environment and our business requirements. We believe that these facilities are suitable and adequate to meet our current operating
needs.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

Staktek Group, L.P. v. Kentron Technologies,
Inc. and Chris Karabatsos

On March 8, 2007, we filed an action in the U.S. District Court for the District of Massachusetts,
Boston Division, against Kentron Technologies, Inc. and Chris Karabatsos, an individual, seeking damages and injunctive relief relating to the defendants false and disparaging statements regarding Staktek and our
ArctiCore technologies that we proposed to the JEDEC Solid State Technology Association for possible adoption as a standard. In particular, we have alleged that the defendants actions constituted unfair
competition under the Lanham Act, intentional interference with prospective business relations, defamation, business disparagement and have caused actionable injury to our business reputation. On July 11, 2007, the defendants filed their
answer and a counterclaim, in which they made claims of unfair methods of competition and unfair, deceptive acts by Staktek, in violation of the laws of the Commonwealth of Massachusetts. On July 12, 2007, the defendants filed a motion to
dismiss our Lanham Act claims, and we also filed a motion to dismiss their counterclaims. The judge denied these motions. We also filed a motion to compel discovery, which the judge granted on October 24, 2007. We are in the
discovery phase of this litigation and expect a trial date in early 2009. While we intend to vigorously prosecute these claims, as well as vigorously defend against the defendants counterclaim, there can be no guarantee that we will
ultimately prevail or that the court will award the remedies we are seeking.



30



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As of December 31, 2007, we were not involved in any other material legal proceedings.

From time to time, we may be subject to legal proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we
operate, and non-contractual customer claims or requested concessions we may agree to in the interest of maintaining business relationships.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

None.



31



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

Market Information

Our common stock has been
quoted on the NASDAQ National Market since February 6, 2004 under the symbol ENTN. As of March 3, 2008, there were 85 holders of record of our common stock.

The following tables sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ National Market.



|                           |  |      |      |     |   |     
|-------------------------- |  | ---- | ---- | --- | - | ----
|                           |  | High |      | Low
|2006:                      |  |      |      |     |   |     
|Quarter Ended March 31     |  | $    | 7.80 |     | $ | 5.40
|Quarter Ended June 30      |  | $    | 6.85 |     | $ | 4.72
|Quarter Ended September 30 |  | $    | 6.58 |     | $ | 4.58
|Quarter Ended December 31  |  | $    | 6.19 |     | $ | 5.10
|2007:                      |  |      |      |     |   |     
|Quarter Ended March 31     |  | $    | 5.49 |     | $ | 3.21
|Quarter Ended June 30      |  | $    | 4.15 |     | $ | 2.50
|Quarter Ended September 30 |  | $    | 4.10 |     | $ | 2.70
|Quarter Ended December 31  |  | $    | 3.70 |     | $ | 1.75

Dividends

We have not declared or paid cash dividends on our common stock. We expect to retain all available funds and any future earnings for use in the operation and development of our business.

At December 31, 2007 and 2006 we had 5.0 million authorized shares of $0.001 par value redeemable preferred stock, none of which was issued or
outstanding.



32



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Equity Compensation Plan Information

We currently maintain two equity compensation plans: the 2003 Stock Option Plan, providing for the issuance of common stock to our employees, directors
and consultants and the 2006 Equity-Based Compensation Plan, providing for the issuance of restricted stock, restricted stock units, stock appreciation rights, bonus stock and other types of equity to our employees, directors and consultants. The
following table provides information about the Companys common stock that may be issued upon the exercise of options under the Companys 2003 Stock Option Plan, upon the issuance of restricted stock units pursuant to the 2006 Equity-Based
Compensation Plan, and the shares of stock issued pursuant to the 2005 Employee Stock Purchase Plan, which we terminated in 2007, in each case as of December 31, 2007.



|                                                           |  |                                                                                          |  |                                                                             |      |                                                                                                                                     |        
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                           |  | A                                                                                        |  | B                                                                           |      | C                                                                                                                                  
|Plan category                                              |  | Number of securities tobe issued upon exerciseof outstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights(1) |      | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn A)
|Equity compensation plans approved by security holders     |  | 5,839,255                                                                                |  | $                                                                           | 3.31 |                                                                                                                                     | 729,111
|Equity compensation plans not approved by security holders |  |                                                                                         |  |                                                                             | N/A  |                                                                                                                                     | N/A    
|Total                                                      |  | 5,839,255                                                                                |  | $                                                                           | 3.31 |                                                                                                                                     | 729,111



|(1) | Excludes RSUs.
|--- | --------------

Issuer Purchases of Equity Securities

The following table provides information with respect to our purchases of our common stock during the quarter ended
December 31, 2007:



|         |  |                                  |  |                              |      |                                                                            |         |                                                                                              |           |            
|-------- |  | -------------------------------- |  | ---------------------------- | ---- | -------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------- | --------- | -----------
|Period   |  | TotalNumberof SharesPurchased(1) |  | AveragePricePaid perShare(2) |      | Total Numberof SharesPurchased asPart of PubliclyAnnouncedPlans orPrograms |         | Maximum ApproximateDollar Value of Sharesthat May Yet BePurchased under thePlans or
Programs
|October  |  | 115,593                          |  | $                            | 3.49 |                                                                            | 115,593 |                                                                                              | Approx. $ | 7.4 million
|November |  | 41,037                           |  | $                            | 2.81 |                                                                            | 41,037  |                                                                                              | Approx. $ | 7.3 million
|December |  | 117,824                          |  | $                            | 2.03 |                                                                            | 117,824 |                                                                                              | Approx. $ | 7.0 million
|         |  |                                  |  |                              |      |                                                                            |         |                                                                                              |           |            
|Total    |  | 274,454                          |  | $                            | 2.76 |                                                                            | 274,454 |                                                                                              |           |            
|         |  |                                  |  |                              |      |                                                                            |         |                                                                                              |           |            



|(1) | On February 2, 2006, our Board of Directors renewed our stock repurchase program for up to $10.0 million to purchase shares of our common stock. On November 14, 2006, our
Board of Directors authorized an additional $10.0 million to purchase shares of our common stock.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Excludes commissions paid.
|--- | --------------------------



33



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The selected financial
data should be read in connection with Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes appearing in Item 8 of this
Annual Report on Form 10-K. The consolidated statement of operations for the years ended December 31, 2005, 2006, and 2007 and the consolidated balance sheet data as of December 31, 2006 and December 31, 2007 are derived from our
audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations for the year ended December 31, 2004, the period from January 1, 2003 to August 20, 2003 and
the period from inception to December 31, 2003, and the consolidated balance sheet data as of December 31, 2003, December 31, 2004, and December 31, 2005 are derived from our audited consolidated financial statements that
are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in any future period.



|                                                       |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------------------ | - | ---------------------------------------------------------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | - |  |  |  | - | ------
|                                                       |  | Entorian Technologies Inc. |         |   |                                      |   | Predecessor CompanyPeriod fromJan. 1, 2003
toAug. 20, 2003
|                                                       |  | Year EndedDecember 31,     |         |   | Period fromInception toDec. 31, 2003 |   |                                                            |      | 
|(in thousands, except per sharedata)                   |  | 2007                       |         |   | 2006                                 |   |                                                            | 2005 |  |   | 2004    |   |  |      |        
|Consolidated Statement of Operations:                  |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Total revenue                                          |  | $                          | 40,870  |   |                                      | $ | 55,556                                                     |      |  | $ | 52,526  |   |  | $    | 73,626  |   |  | $ | 27,222  |   |  |  |  | $ | 44,133
|Gross profit                                           |  | $                          | 7,543   |   |                                      | $ | 20,686                                                     |      |  | $ | 11,771  |   |  | $    | 31,136  |   |  | $ | 10,940  |   |  |  |  | $ | 24,300
|Income (loss) from operations                          |  | $                          | (43,056 | ) |                                      | $ | (3,565                                                     | )    |  | $ | (12,277 | ) |  | $    | 13,911  |   |  | $ | (1,255  | ) |  |  |  | $ | 16,257
|Net income (loss)                                      |  | $                          | (39,987 | ) |                                      | $ | (454                                                       | )    |  | $ | (7,477  | ) |  | $    | 7,806   |   |  | $ | (5,274  | ) |  |  |  | $ | 9,476 
|Preferred stock dividends                              |  |                            |        |   |                                      |   |                                                           |      |  |   |        |   |  |      | (266    | ) |  |   | (872    | ) |  |  |  |   |      
|                                                       |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Income (loss) available to common stockholders         |  | $                          | (39,987 | ) |                                      | $ | (454                                                       | )    |  | $ | (7,477  | ) |  | $    | 7,540   |   |  | $ | (6,146  | ) |  |  |  | $ | 9,476 
|                                                       |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Earnings (loss) per share:                             |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Basic                                                  |  | $                          | (0.85   | ) |                                      | $ | (0.01                                                      | )    |  | $ | (0.15   | ) |  | $    | 0.16    |   |  | $ | (0.17   | ) |  |  |  | $ | 5.16  
|                                                       |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Diluted                                                |  | $                          | (0.85   | ) |                                      | $ | (0.01                                                      | )    |  | $ | (0.15   | ) |  | $    | 0.15    |   |  | $ | (0.17   | ) |  |  |  | $ | 4.86  
|                                                       |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Shares used in computing earnings (loss) per share:    |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Basic                                                  |  |                            | 47,156  |   |                                      |   | 48,080                                                     |      |  |   | 48,579  |   |  |      | 47,234  |   |  |   | 36,647  |   |  |  |  |   | 1,836 
|Diluted                                                |  |                            | 47,156  |   |                                      |   | 48,080                                                     |      |  |   | 48,579  |   |  |      | 50,996  |   |  |   | 36,647  |   |  |  |  |   | 1,949 
|                                                       |  |                            |        
|                                                       |  | Entorian Technologies Inc. |         |   |                                      |   |                                                           
|                                                       |  | As of December 31,         |         |   |                                      |   |                                                           
|(in thousands)                                         |  | 2007                       |         |   | 2006                                 |   |                                                            | 2005 |  |   | 2004    |   |  | 2003 |         |   |  |   |        
|Consolidated Balance Sheet Data:                       |  |                            |         |   |                                      |   |                                                            |      |  |   |         |   |  |      |         |   |  |   |         |   |  |  |  |   |       
|Cash and cash equivalents                              |  | $                          | 34,013  |   |                                      | $ | 40,797                                                     |      |  | $ | 38,011  |   |  | $    | 39,984  |   |  | $ | 31,165  |   |  |  |  |   |       
|Working capital                                        |  | $                          | 66,335  |   |                                      | $ | 84,530                                                     |      |  | $ | 79,515  |   |  | $    | 82,011  |   |  | $ | 25,404  |   |  |  |  |   |       
|Total assets                                           |  | $                          | 99,413  |   |                                      | $ | 135,191                                                    |      |  | $ | 138,349 |   |  | $    | 155,471 |   |  | $ | 137,542 |   |  |  |  |   |       
|Capitalized lease obligations, less current maturities |  | $                          | 54      |   |                                      | $ | 75                                                         |      |  | $ |        |   |  | $    |        |   |  | $ | 51      |   |  |  |  |   |       
|Long-term debt, less current portion                   |  | $                          |        |   |                                      | $ |                                                           |      |  | $ |        |   |  | $    |        |   |  | $ | 65,125  |   |  |  |  |   |       
|Redeemable preferred stock                             |  | $                          |        |   |                                      | $ |                                                           |      |  | $ |        |   |  | $    |        |   |  | $ | 30,372  |   |  |  |  |   |       
|Total stockholders equity                             |  | $                          | 91,269  |   |                                      | $ | 130,028                                                    |      |  | $ | 131,284 |   |  | $    | 141,807 |   |  | $ | 315     |   |  |  |  |   |       



34



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Cautionary Statement

The following discussion should be read along with the audited consolidated
condensed financial statements and notes included in Item 8 of this Annual Report on Form 10-K. This Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future
events and our future results are based on current expectations, estimates, forecasts and projections, and the beliefs and assumptions of our management including, without limitation, our expectations regarding the following: the sales of our
products to a limited number of customers and with a limited number of key technologies; deriving a material portion of our future revenue from license royalties; the lack of significant credit losses from our customers; manufacturing delays as we
develop or refine new manufacturing technologies and methods; our belief that our current assets, including cash, cash equivalents and investments, and expected cash flows from operating activities, will be sufficient to fund our operations; our
anticipated additions to property, plant and equipment and any share repurchases under our stock repurchase program for at least the next 12 months; our belief that our package-stacking technologies and manufacturing processes are directly
applicable to the Flash memory market; our belief that our facilities are suitable and adequate to meet our current operating needs; our belief that a ten percent change in interest rates will not have a significant impact on our interest income;
our belief that our strong patent portfolio and intellectual property position will allow us to continue to expand our business; our belief that the strength of our intellectual property rights is, and will continue to be, critical to the success of
our business and will allow us to compete favorably against our competition; our intent to vigorously protect our intellectual property; our intent to grow our business through business combinations or other acquisitions; our intent to expand our
research and development activities; our belief that our future success will depend upon our ability to attract and retain personnel; our belief regarding increasing our investment in research and development; our expectation regarding increasing
the opportunity to deploy our IP to top-tier server OEMs and data center end customers through our Southland acquisition; and our intent to exploit our intellectual properties and capability to establish market leadership in new technologies; our
intent to devote additional personnel and other resources to research and development in future periods to address market opportunities for advanced technologies. Words such as we expect, anticipate, target,
project, believe, goals, estimate, potential, predict, may, might, could, intend, variations of these types of words and similar
expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore,
actual results may differ materially and adversely from those expressed in any forward-looking statements.

Overview

We are a provider of advanced electronic systems and sub-systems for enterprise, consumer and other high-growth markets. As of December 31,
2007, our patent portfolio consisted of more than 200 patents and patent applications pending. We believe that our strong patent portfolio and intellectual property position will allow us to continue to expand our business as demand for high-density
memory increases and to capitalize on emerging market opportunities. We intend to exploit our intellectual property and capabilities to establish market leadership in new technologies.

On August 31, 2007, we acquired Southland, a provider of memory products and services to OEMs since 1987. Southlands headquarters and
manufacturing facility is located in Irvine, California, with sales offices in San Jose, California and Boise, Idaho. Through this acquisition, we expect to increase the opportunity to deploy IP to top-tier server OEMs and data center end
customers.



35



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Results of Operations

The following table presents our results of operations for the periods indicated expressed as a percentage of total revenue:



|                                                       |  |                         |    |  |       |    |  |       |   
|------------------------------------------------------ |  | ----------------------- | -- |  | ----- | -- |  | ----- | --
|                                                       |  | Year Ended December 31, |   
|                                                       |  | 2007                    |    |  | 2006  |    |  | 2005  |   
|Revenue:                                               |  |                         |    |  |       |    |  |       |   
|Product                                                |  | 84.4                    | %  |  | 77.6  | %  |  | 64.0  | % 
|License                                                |  | 15.6                    |    |  | 22.4  |    |  | 36.0  |   
|                                                       |  |                         |    |  |       |    |  |       |   
|Total revenue                                          |  | 100.0                   |    |  | 100.0 |    |  | 100.0 |   
|Cost of revenue:                                       |  |                         |    |  |       |    |  |       |   
|Product                                                |  | 69.1                    |    |  | 50.9  |    |  | 53.0  |   
|Amortization and impairment of acquisition intangibles |  | 12.4                    |    |  | 11.9  |    |  | 24.6  |   
|                                                       |  |                         |    |  |       |    |  |       |   
|Total cost of revenue                                  |  | 81.5                    |    |  | 62.8  |    |  | 77.6  |   
|                                                       |  |                         |    |  |       |    |  |       |   
|Gross profit                                           |  | 18.5                    |    |  | 37.2  |    |  | 22.4  |   
|Operating expenses:                                    |  |                         |    |  |       |    |  |       |   
|Selling, general and administrative                    |  | 39.1                    |    |  | 26.6  |    |  | 31.1  |   
|Research and development                               |  | 13.8                    |    |  | 14.8  |    |  | 10.9  |   
|Restructuring                                          |  | 0.8                     |    |  | 0.7   |    |  | 1.9   |   
|Goodwill impairment                                    |  | 68.3                    |    |  |      |    |  |      |   
|Amortization of acquisition intangibles                |  | 1.8                     |    |  | 1.5   |    |  | 1.9   |   
|                                                       |  |                         |    |  |       |    |  |       |   
|Total operating expenses                               |  | 123.8                   |    |  | 43.6  |    |  | 45.8  |   
|                                                       |  |                         |    |  |       |    |  |       |   
|Loss from operations                                   |  | (105.3                  | )  |  | (6.4  | )  |  | (23.4 | ) 
|Other income, net                                      |  | 7.5                     |    |  | 5.4   |    |  | 3.3   |   
|                                                       |  |                         |    |  |       |    |  |       |   
|Loss before income taxes                               |  | (97.8                   | )  |  | (1.0  | )  |  | (20.1 | ) 
|Provision (benefit) for income taxes                   |  | 0.0                     |    |  | (0.2  | )  |  | (5.9  | ) 
|                                                       |  |                         |    |  |       |    |  |       |   
|Net loss                                               |  | (97.8                   | )% |  | (0.8  | )% |  | (14.2 | )%
|                                                       |  |                         |    |  |       |    |  |       |   

Total Revenue

Total revenue for the year ended December 31, 2007 was $40.9 million, compared to revenue of $55.6 million and $52.5 million for the years ended December 31, 2006 and 2005, respectively. Product revenue in
2007 was $34.5 million, compared to $43.1 million and $33.6 million for 2006 and 2005, respectively. License revenue in 2007 was $6.4 million, compared to $12.5 million and $18.9 million for 2006 and 2005, respectively.

Our decrease in product revenue during 2007, compared to 2006, was primarily due to a decrease in both leaded-package and BGA stacks. This decline
was driven by the continuing shift from DDR-1 to DDR-2 technologies. DDR-2 devices are enclosed in BGA packages and the demand for stacks of this technology has not grown to offset the decline in leaded packages. The demand for BGA stacks
has been hindered by the availability of other competitive solutions, including dual-die and planar technologies. In addition, the price differential between 512 Mbit devices and 1 Gbit devices declined during 2007, temporarily reducing a key
value proposition associated with stacking the 512 Mbit packages. These declines have been partially offset by an increase in Flash-based stacks and by $6.7 million in revenue from our Southland acquisition for the last four months of 2007.

License revenue decreased $6.1 million during 2007, compared with 2006, which was mainly the result of decreased royalties from Samsung.
The Samsung license is for our leaded-package technologies, which are being replaced over time by BGA technologies.



36



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Product revenue increased during 2006, compared to 2005, primarily due to an increase in demand for our
High Performance Stakpak. Revenue increased as the demand for this package type increased in the server market.

License revenue decreased
$6.4 million during 2006, compared with 2005, due primarily to decreased royalty revenue from Samsung.

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



|                                                                      |  |                         |   |  |      |   |  |      |  
|--------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                      |  | Year Ended December 31, |  
|                                                                      |  | 2007                    |   |  | 2006 |   |  | 2005 |  
|Micron                                                                |  | 34                      | % |  | 18   | % |  | 21   | %
|SMART                                                                 |  | 19                      | % |  | 13   | % |  | 11   | %
|Google                                                                |  | 10                      | % |  | *    |   |  | *    |  
|Samsung                                                               |  | *                       |   |  | 20   | % |  | 32   | %
|HP                                                                    |  | *                       |   |  | 20   | % |  | 17   | %
|Netlist                                                               |  | *                       |   |  | 18   | % |  | *    |  
|*       Amount does not equal or exceed 10% for the indicated period. |  |                         |   |  |      |   |  |      |  

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



|        |  |              |   |  |      |  
|------- |  | ------------ | - |  | ---- | -
|        |  | December 31, |  
|        |  | 2007         |   |  | 2006 |  
|Google  |  | 30           | % |  | *    |  
|SMART   |  | 18           | % |  | 18   | %
|Micron  |  | 16           | % |  | 36   | %
|HP      |  | *            |   |  | 23   | %
|Netlist |  | *            |   |  | 11   | %



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

Gross Profit

Gross profit for the year ended December 31, 2007 was $7.5 million, or 18.5% of total revenue. This amount represents a
decrease of $13.2 million, compared to gross profit of $20.7 million, or 37.2% of total revenue, for the year ended December 31, 2006. The reduction in our gross profit as a percentage of total revenue during 2007, compared to 2006, was
primarily due to lower gross margin on our product business resulting from fixed costs being spread over fewer units. Additionally, license revenue, for which there was no corresponding impact on our cost of revenue, declined by $6.1 million. The
acquisition of Southland further contributed to the decline in gross margin as a percentage of total revenue due to higher material costs associated with the sale of memory modules relative to memory stacking.

Gross profit for the year ended December 31, 2006 was $20.7 million, or 37.2% of total revenue. This amount represents an increase of $8.9 million,
compared to gross profit of $11.8 million, or 22.4% of total revenue, for the year ended December 31, 2005. The increase in our gross profit for 2006 was primarily the result of a $6.3 million net decrease in the amortization of acquisition
intangibles and the stock-based compensation expense allocated to cost of revenue. Gross profit as a percentage of total revenue was reduced by 13.0 percentage points during 2006 due to the amortization of acquisition intangibles and stock-based
compensation expense allocated to cost of revenue, compared with a 25.7 percentage point impact of these items in overall gross profit during 2005. Additionally, while license revenue, for which there was not any corresponding impact



37



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on our cost of revenue, declined by $6.4 million, product revenue increased by $9.5 million while the costs associated with product revenue increased by $0.5
million. The combination of these factors resulted in a $2.6 million increase in gross profit.

Selling, General and Administrative Expenses

Selling, general and administrative expense for the year ended December 31, 2007 was $16.0 million, or 39.1% of total revenue. This
amount reflected an increase of $1.2 million, or 8.1%, compared to selling, general and administrative expense of $14.8 million, or 26.6% of total revenue, for the year ended December 31, 2006. For the years ended December 31, 2007 and
2006, selling, general and administrative expense included stock-based compensation expense of $4.7 million and $4.6 million, respectively. The increase in selling, general and administrative expense during 2007, relative to 2006, was primarily due
to increased personnel-related costs in connection with our acquisition of Southland.

Selling, general and administrative expense for the
year ended December 31, 2006 was $14.8 million, or 26.6% of total revenue. This amount reflected a decrease of $1.5 million, or 9.2%, compared to selling, general and administrative expense of $16.3 million, or 31.1% of total revenue, for the
year ended December 31, 2005. For the year ended December 31, 2006 and 2005, selling, general and administrative expense included stock-based compensation expense of $4.6 million and $6.2 million, respectively. The reduction in selling,
general and administrative expense during 2006 relative to 2005 was primarily due to a decrease in stock-based compensation expense of $1.6 million and a reduction in directors and officers insurance costs of $0.7 million, partially
offset by an increase in personnel costs of $0.9 million.

Research and Development

Research and development expense for the year ended December 31, 2007 was $5.7 million, or 13.8% of total revenue, which reflected a decrease of $2.5
million, or 30.5%, compared with research and development expense of $8.2 million, or 14.8% of total revenue for the year ended December 31, 2006. For the years ended December 31, 2007 and 2006, research and development expense included
stock-based compensation expense of approximately $0.8 million and $1.0 million, respectively. The decrease in research and development expense during 2007, compared to 2006, mainly resulted from reductions in personnel-related costs. We intend to
devote additional personnel and other resources to research and development in future periods to address market opportunities for advanced technologies.

Research and development expense for the year ended December 31, 2006 was $8.2 million, or 14.8% of total revenue, which reflected an increase of $2.4 million, or 41.4%, compared with research and development
expense of $5.8 million, or 10.9% of total revenue for the year ended December 31, 2005. For the years ended December 31, 2006 and 2005, research and development expense included stock-based compensation expense of approximately $1.0
million and $0.4 million, respectively. The increase in costs for the year resulted from expenditures associated with the development of our non-leaded technologies, ArctiCore as well as other new product initiatives, and recording stock-based
compensation of $1.0 million.

Restructuring Expense

During the year ended December 31, 2007, we recorded restructuring expense of $0.3 million as a result of changing our long-term focus.

During the year ended December 31, 2006, we recorded $0.4 million as a result of the continuing transfer of manufacturing from Austin, Texas to
Reynosa, Mexico and a realignment of our organizational structure.

Goodwill Impairment

Based on our annual assessment on October 1, 2007, we determined that no impairment of goodwill existed. The decline in our market capitalization
during the fourth quarter of 2007 was an indicator of potential goodwill impairment, and because of this decline we undertook an assessment on December 31, 2007 to determine the fair value



38



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of our business associated with the goodwill. As a result of that review, we have recorded a non-cash charge of $27.9 million for the write-down of the
goodwill related to our stacking business that Austin Ventures acquired in August 2003. The impairment charge reflects the changing business prospects for our stacking business, declining utilization of our processes by licensees and declining
demand for our products.

Critical estimates made in determining the fair value of our stacking business included expected future cash
flows from licensing agreements and product sales, customer turnover and future overhead expenses. Managements best estimates of fair value are based upon assumptions we believed to be reasonable, but which are inherently uncertain and
unpredictable.

Amortization and Impairment of Acquisition Intangibles

During the year ended December 31, 2007, we amortized $5.8 million of intangible assets resulting from the Staktek and Southland acquisitions, with
$5.1 million allocated to cost of revenue and $0.7 million to operating expenses. In 2008, we expect to incur amortization expense of $2.7 million, with $1.8 million allocated to cost of revenue and $0.9 million to operating expenses.

As of March 31, 2007, as a result of our customers increased use of competitive technologies and the associated uncertainty around our future
revenue, we tested our trademark intangible asset for impairment. As a result of our review, we recorded an impairment charge of approximately $0.7 million, which is included in Amortization and impairment of acquisition intangibles in cost of
revenue. As of March 31, 2007, we also determined that the trademark intangible asset had an estimated remaining useful life of four years. During the second quarter of 2007, we began amortizing the remaining balance of $1.1 million over its
estimated useful life in proportion to the estimated contribution to discounted cash flows during the four-year period.

During the year
ended December 31, 2006, we amortized $7.4 million of intangible assets resulting from the Staktek acquisition during the third quarter of 2003, with $6.6 million allocated to cost of revenue and $0.8 million to operating expenses. During the
year ended December 31, 2005, we amortized $14.0 million of intangible assets resulting from that acquisition, with $13.0 million allocated to cost of revenue and $1.0 million to operating expenses.

The acquisition intangibles were originally valued using various discounted cash flow methodologies. As a result, each year the total annual amortization
expense of these intangibles is scheduled to decline.

Interest and Other Income (Expense)

Interest and other income, net, for the years ended December 31, 2007 and 2006, was $3.1 million and $3.0 million, respectively. The increase in
interest and other income, net was mainly due to the cash received during 2007 as a result of recycling scrapped material.

Interest and
other income, net, for the year ended December 31, 2006, was $3.0 million, as compared to interest and other income, net of $1.7 million for the year ended December 31, 2005. The increase in interest and other income, net, for 2006 versus
2005 was mainly due to an improved rate of return on investments.

Benefit for Income Taxes

We recorded an income tax benefit of $10,000 and $0.1 million in the years ended December 31, 2007 and 2006, respectively. For the years ended
December 31, 2007 and 2006, our effective tax rate was 0.0% and 22.3%, respectively. Management has determined that it is not more likely than not that we will realize the benefit of our net deferred tax asset. As a result, we recorded a
valuation allowance in 2007 of approximately $5.1 million against our net deferred tax assets.



39



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We recorded an income tax benefit of $0.1 million and $3.1 million in the years ended December 31,
2006 and 2005, respectively. For the years ended December 31, 2006 and 2005, our effective tax rate was 22.3% and 29.1%, respectively.

During 2007, the effective tax rate differed from the federal statutory rate of 35% due primarily to recording the impairment of goodwill and the $5.1 million valuation allowance. During 2006 and 2005, the effective tax rate differed from
the federal statutory rate of 35%, due primarily to the impact of certain stock-based compensation expenses that were not tax deductible, in addition to other permanent items, including tax-exempt interest income.

Quarterly Results of Operations

The following table
presents unaudited results of operations for each of the quarters in the years ended December 31, 2007 and 2006. You should read the following table in connection with the consolidated financial statements and related notes contained in
Item 8 in this Annual Report on Form 10-K. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. This table includes all adjustments, consisting of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.



|                                                    |  |                    |         |   |              |   |        |              |  |   |              |   |  |              |        |   |              |   |              |   |              |   |        |  |   |        |  |   |        |  
|--------------------------------------------------- |  | ------------------ | ------- | - | ------------ | - | ------ | ------------ |  | - | ------------ | - |  | ------------ | ------ | - | ------------ | - | ------------ | - | ------------ | - | ------ |  | - | ------ |  | - | ------ | -
|                                                    |  | Three Months Ended |        
|(in thousands, except per sharedata)                |  | Dec. 31,2007       |         |   | Sep. 30,2007 |   |        | Jun. 30,2007 |  |   | Mar. 31,2007 |   |  | Dec. 31,2006 |        |   | Sep. 30,2006 |   | Jun. 30,2006 |   | Mar. 31,2006 |  
|Revenue:                                            |  |                    |         |   |              |   |        |              |  |   |              |   |  |              |        |   |              |   |              |   |              |   |        |  |   |        |  |   |        |  
|Product                                             |  | $                  | 11,088  |   |              | $ | 8,756  |              |  | $ | 7,464        |   |  | $            | 7,182  |   |              | $ | 11,087       |   |              | $ | 11,271 |  | $ | 11,094 |  | $ | 9,632  |  
|License                                             |  |                    | 1,923   |   |              |   | 2,185  |              |  |   | 775          |   |  |              | 1,496  |   |              |   | 2,869        |   |              |   | 3,430  |  |   | 3,325  |  |   | 2,848  |  
|                                                    |  |                    |         |   |              |   |        |              |  |   |              |   |  |              |        |   |              |   |              |   |              |   |        |  |   |        |  |   |        |  
|Total revenue                                       |  | $                  | 13,011  |   |              | $ | 10,941 |              |  | $ | 8,239        |   |  | $            | 8,678  |   |              | $ | 13,956       |   |              | $ | 14,701 |  | $ | 14,419 |  | $ | 12,480 |  
|Gross profit                                        |  | $                  | 1,706   |   |              | $ | 3,299  |              |  | $ | 1,407        |   |  | $            | 1,130  |   |              | $ | 4,531        |   |              | $ | 6,117  |  | $ | 5,718  |  | $ | 4,320  |  
|Net income (loss)                                   |  | $                  | (31,686 | ) |              | $ | (1,257 | )            |  | $ | (4,108       | ) |  | $            | (2,936 | ) |              | $ | (796         | ) |              | $ | 600    |  | $ | 592    |  | $ | (850   | )
|Earnings (loss) per share:                          |  |                    |         |   |              |   |        |              |  |   |              |   |  |              |        |   |              |   |              |   |              |   |        |  |   |        |  |   |        |  
|Basic                                               |  | $                  | (0.68   | ) |              | $ | (0.03  | )            |  | $ | (0.09        | ) |  | $            | (0.06  | ) |              | $ | (0.02        | ) |              | $ | 0.01   |  | $ | 0.01   |  | $ | (0.02  | )
|Diluted                                             |  | $                  | (0.68   | ) |              | $ | (0.03  | )            |  | $ | (0.09        | ) |  | $            | (0.06  | ) |              | $ | (0.02        | ) |              | $ | 0.01   |  | $ | 0.01   |  | $ | (0.02  | )
|Shares used in computing earnings (loss) per share: |  |                    |         |   |              |   |        |              |  |   |              |   |  |              |        |   |              |   |              |   |              |   |        |  |   |        |  |   |        |  
|Basic                                               |  |                    | 46,810  |   |              |   | 46,997 |              |  |   | 47,380       |   |  |              | 47,377 |   |              |   | 47,780       |   |              |   | 48,187 |  |   | 48,303 |  |   | 48,053 |  
|Diluted                                             |  |                    | 46,810  |   |              |   | 46,997 |              |  |   | 47,380       |   |  |              | 47,377 |   |              |   | 47,780       |   |              |   | 49,682 |  |   | 49,894 |  |   | 48,053 |  

The following table presents our historical results for the periods indicated as a percentage of
total revenue:



|                  |  |                    |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   
|----------------- |  | ------------------ | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | - |  | ------------ | - |  | ------------ | --
|                  |  | Three Months Ended |   
|                  |  | Dec. 31,2007       |    |  | Sep. 30,2007 |    |  | Jun. 30,2007 |    |  | Mar. 31,2007 |    |  | Dec. 31,2006 |    |  | Sep. 30,2006 |   |  | Jun. 30,2006 |   |  | Mar. 31,2006 |   
|Revenue:          |  |                    |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   
|Product           |  | 85.2               | %  |  | 80.0         | %  |  | 90.6         | %  |  | 82.8         | %  |  | 79.4         | %  |  | 76.7         | % |  | 76.9         | % |  | 77.2         | % 
|License           |  | 14.8               | %  |  | 20.0         | %  |  | 9.4          | %  |  | 17.2         | %  |  | 20.6         | %  |  | 23.3         | % |  | 23.1         | % |  | 22.8         | % 
|                  |  |                    |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   
|Total revenue     |  | 100.0              | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | % |  | 100.0        | % |  | 100.0        | % 
|Gross profit      |  | 13.1               | %  |  | 30.2         | %  |  | 17.1         | %  |  | 13.0         | %  |  | 32.5         | %  |  | 41.6         | % |  | 39.7         | % |  | 34.6         | % 
|Net income (loss) |  | (243.5             | )% |  | (11.5        | )% |  | (49.9        | )% |  | (33.8        | )% |  | (5.7         | )% |  | 4.1          | % |  | 4.1          | % |  | (6.8         | )%



40



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Liquidity and Capital Resources

Our contractual obligations at December 31, 2007 for the next five years are summarized as follows (in thousands):



|                 |  |       |       |                 |   |          |  |          |       |                  |   |    |  |   |  
|---------------- |  | ----- | ----- | --------------- | - | -------- |  | -------- | ----- | ---------------- | - | -- |  | - | -
|                 |  | Total |       | Less Than1 Year |   | 1-3Years |  | 3-5Years |       | More Than5 Years
|Operating leases |  | $     | 2,531 |                 | $ | 874      |  | $        | 1,651 |                  | $ | 6  |  | $ | 
|Capital leases   |  |       | 139   |                 |   | 44       |  |          | 88    |                  |   | 7  |  |   | 
|                 |  |       |       |                 |   |          |  |          |       |                  |   |    |  |   |  
|Total            |  | $     | 2,670 |                 | $ | 918      |  | $        | 1,739 |                  | $ | 13 |  | $ | 
|                 |  |       |       |                 |   |          |  |          |       |                  |   |    |  |   |  

Operating lease obligations above included rent commitments at December 31, 2007 for our
corporate office and research and production facility located in Austin, Texas. In addition, on September 1, 2007, we entered into a lease agreement with an entity owned by two current Entorian employees (former Southland principals) to lease
our Irvine facility for a term of three years. The capital lease commitment at December 31, 2007 was for office equipment.

We believe
that our cash and cash equivalents and future cash flows from operations will be sufficient to fund these obligations.

As of
December 31, 2007, we had no material future sales commitments to any of our customers.

As of December 31, 2007, we had working
capital of $66.3 million, including $61.9 million of cash, cash equivalents and investments, compared to working capital of $84.5 million, including $79.7 million of cash, cash equivalents and investments as of December 31, 2006. The decline in
our working capital was primarily due to $20.9 million of cash used in the Southland acquisition, net of cash acquired.

As of
December 31, 2006, we had working capital of $84.5 million, including $79.7 million of cash, cash equivalents and investments, compared to working capital of $79.5 million, including $73.7 million of cash, cash equivalents and investments as of
December 31, 2005.

Net cash provided by operating activities was $8.9 million for the year ended December 31, 2007, and resulted
primarily from our net loss adjusted by non-cash expenses including the goodwill impairment of $27.9 million and the change in accounts receivable and inventories. Net cash provided by operating activities was $14.7 million for the year ended
December 31, 2006, and resulted primarily from net loss adjusted by non-cash expenses and the change in income taxes receivable/payable partially offset by the change in inventories. Net cash provided by operating activities during 2005 was
$12.0 million and resulted primarily from net income adjusted by non-cash expenses, partially offset by the change in deferred income taxes and income taxes receivable. The net impact of the 2007 Southland acquisition is accounted for under
investing activities. See Note 3, Southland Acquisition, of the Notes to the Consolidated Financial Statements included elsewhere in this report for a detail of the balances acquired.

Net cash used in investing activities was $11.0 million for the year ended December 31, 2007, compared to $5.0 million for 2006. Investing
activities during 2007 consisted primarily of the purchase of investment securities of $37.9 million and the acquisition of Southland, net of cash acquired of $20.9 million, partially offset by sales of investment securities of $48.7 million. Net
cash used in investing activities was $5.0 million for the year ended December 31, 2006, compared to $3.5 million for 2005. Investing activities during 2006 consisted primarily of the purchase of investment securities of $42.0 million and
additions to property, plant and equipment of $1.5 million, partially offset by sales of investment securities of $38.7 million. Investing activities during 2005 consisted primarily of the purchase of investment securities of $93.5 million and
additions to property, plant and equipment of $4.4 million, partially offset by sales of investment securities of $95.1 million.



41



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Net cash used in financing activities during the year ended December 31, 2007 was $4.6 million,
primarily due to the purchase of our common stock as part of our stock repurchase program for $4.9 million. Net cash used in financing activities during the year ended December 31, 2006 was $6.9 million, primarily due to the purchase of our
common stock as part of our stock repurchase program for $8.1 million, partially offset by the proceeds of $0.9 million received from the issuance of our common stock under our employee stock plans. Net cash used in financing activities during the
year ended December 31, 2005 was $10.4 million, primarily due to the purchase of our common stock as part of our stock repurchase program for $10.7 million.

On July 25, 2007, we amended our unsecured revolving credit agreement with Guaranty Bank (the Lender), under which we may borrow up to $20 million at any given time through June 23, 2008 (the Credit
Agreement). The Credit Agreement is guaranteed by Entorian Technologies 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% or the commercial-based rate minus between 0.50% and 1.00%, depending upon the amount of cash or liquid investments that we have on
deposit with the Lender.

We are required to maintain at least $5 million on deposit with the Lender during the term of the Credit
Agreement. As of December 31, 2007, we had on deposit this required amount and had not borrowed under this agreement. The Credit Agreement contains customary covenants that preclude us, among other things, from 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, acquiring another company or entity for which we would pay more than $30 million, or incurring
indebtedness in excess of $10 million with a third party outside the scope of the Credit Agreement. The Credit Agreement contains financial covenants requiring that our tangible net worth must be at least $70 million and our unencumbered
liquid assets must be at least $50 million. We must certify our compliance with these covenants while any advances remain outstanding under this agreement.

We believe that our current assets, including cash and cash equivalents, investments and expected cash flow from operations, will be sufficient to fund our operations, our anticipated additions to property, plant and
equipment and any share repurchases under our stock repurchase program for at least the next 12 months. However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to acquire other
businesses, products or technologies. We could raise these funds by borrowing money or selling more stock to the public or to selected investors. In addition, while we may not need additional funds, we may elect to sell additional equity securities
or obtain credit facilities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing more equity or convertible debt securities, the
ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Critical Accounting Estimates

Our accounting
policies are more fully described in Note 2 of the Notes to the Consolidated Financial Statements. As disclosed in Note 2, the preparation of financial statements in conformity with United States generally accepted accounting principles requires
that management make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses
our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require managements most difficult, subjective and complex judgments.

Revenue Recognition and Presentation.    We engage in transactions where we sell consigned inventory to third
parties and where we provide licensees with inventory. We evaluate these transactions and determine if the costs and revenue should be presented on a gross or net basis. In making this determination, we primarily consider the following:
(1) we are not adding value to the inventory through our manufacturing processes, (2) we



42



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do not take risk of ownership of the inventory and (3) our net revenue from the transaction is predefined. In situations where these conditions are
met, we net the expense of the inventory against the revenue from the transaction.

We recognize initial license fees 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
reasonably assured. 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 these services are provided. The associated revenue is included in product revenue. In instances where we
provide training or other assistance that is considered inconsequential to the license agreement, the estimated fair value of the services is recognized in connection with the initial license fee and is included in license revenue.

Royalty revenue from our license agreements is recognized in the quarter in which our licensees report royalties to us. Certain licensees 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 these licensees 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 reasonably assured.

Impairment of Assets.    We evaluate the recoverability of losses on long-lived assets, such as property and equipment and intangible assets, when events or changes in
circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than the carrying value of these assets, and accordingly, all or a portion of this carrying value may not be recoverable. Impairment losses are
then measured by comparing the fair value of the assets to the carrying amounts. Determining the appropriate fair value model and calculating the fair value of intangible assets require the input of highly subjective assumptions, including the
expected future cash flows from, and the expected life of, the intangible asset, as well as the appropriate discount rate. The assumptions used in calculating the fair value of intangible assets represent managements best estimates, but these
estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, we could reach a different conclusion regarding whether an intangible asset is impaired and, if so,
the amount of the impairment loss.

As of December 31, 2007, goodwill is our only intangible asset that is not amortized. We evaluate
goodwill annually for impairment as of October 1 and periodically when indicators of impairment exist. The goodwill impairment test requires judgment regarding the determination of fair value of the reporting unit, which we determined to be our
company as a whole, and the determination of fair value of our assets and liabilities. We periodically assess our goodwill for indications of impairment on a reporting unit level. A reporting unit is defined as a component of an entity for which the
operating results are regularly reviewed by management and discrete financial information is available.

Based on our annual assessment on
October 1, 2007, we determined that no impairment of goodwill existed. The decline in our market capitalization during the fourth quarter of 2007 was an indicator of potential goodwill impairment, and because of this decline we undertook a
review to determine the fair value of our business associated with the goodwill. As a result of that review, we have recorded a non-cash charge of $27.9 million for the write-down of the goodwill related to our stacking business that Austin Ventures
acquired in August 2003.

Inventory and Inventory Reserves.We
value our inventory at a standard cost and review our inventory for quantities in excess of production requirements and for obsolescence. We maintain a reserve for excess, slow moving, and obsolete inventory as well as for inventory with a carrying
value in excess of its market value. A review of inventory on hand is made quarterly and a provision for excess, slow moving, and obsolete inventory is recorded, if necessary. The review is based on several factors including a current assessment of
future product demand, historical experience, and market conditions. If actual conditions are less favorable than those that we projected, additional inventory reserves may be required.



43



---

Income Taxes.We determine deferred tax assets
and liabilities 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. Inherent in the
measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized.
Our effective tax rate considers our judgment of expected tax liabilities in the various taxing jurisdictions, within which we are subject to tax as well as the realizability of deferred tax assets. The recorded amounts of income tax are subject to
adjustment upon audit, changes in interpretation and changes in judgment utilized in determining estimates.

Stock-Based
Compensation.    Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment
(SFAS 123(R)) using the modified prospective transition method and, therefore, we did not restate prior periods results. Under this method, we recognize compensation expense for all share-based payments granted after January 1, 2006,
as well as those granted prior to but not yet vested as of January 1, 2006, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate on
a straight-line basis over the requisite service period of the award and only recognize compensation cost for those shares expected to vest. Prior to SFAS 123(R) adoption, we accounted for share-based payments under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25).

Determining the appropriate fair value model and
calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value
of share-based payment awards represent managements best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially
different from our estimate, the stock-based compensation expense could be significantly different from the amount we have recorded in the current period.

Southland Earn-Out Consideration.    As part of the purchase of Southland, we offered compensation of up to $7 million to the Sellers if certain financial goals are achieved
over the two years subsequent to closing the acquisition. We must estimate, on a quarterly basis, if these goals will be met, but final determination of achieving the goals will only be known on the first and second anniversary dates of the
effective date. As a result, from quarter to quarter, changes in our estimates could result in reversing or recognizing significant amounts of compensation expense. In addition, the Sellers may elect to receive payment in either cash or stock. We
must, based on our current stock price compared to the Earn-Out exercise price, predict which form of payment the Sellers will elect to receive. If our stock price is not an accurate indicator of the Sellers eventual election, our total
liabilities could be misstated.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS 157). This standard defines fair
value, establishes a framework for measuring fair value in United States generally accepted accounting principles and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,
which delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not expect the adoption of SFAS 157 to have a material impact on our financial position and results of operations.



44



---

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). This standard allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value. The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, SFAS 159 specifies
that unrealized gains and losses for that instrument shall be reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 159
to have a material impact on our financial position and results of operations.

In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), "Business Combinations", (SFAS 141R). This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting
SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date.

Subsequent Events

Effective February 27, 2008, the Company changed its name from Staktek Holdings, Inc. to Entorian Technologies Inc. In connection with the
change in corporate name, effective February 28, 2008, the ticker symbol for the Companys common stock changed to ENTN.

The change in the Companys name to Entorian Technologies Inc. was effected by means of a merger pursuant to Section 253 of the Delaware General Corporation Law, of a wholly owned subsidiary of the Company (formed solely for the
purpose of implementing the name change) with and into the Company, with the Company continuing as the surviving company. In connection with the merger, Article I of the Companys Amended and Restated Certificate of Incorporation was
amended at the effective time of the merger to reflect the new corporate name, and the Companys By-Laws were amended to replace all references to Staktek Holdings, Inc. with Entorian Technologies Inc.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Foreign Currency Exchange Risk.    Most of our transactions are denominated in U.S. dollars. The functional currency of our subsidiaries in Mexico is the U.S. dollar. As a result, we have very little exposure to
currency exchange risks and foreign exchange losses have been minimal to date. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or
speculative purposes. In the future, if we believe that our currency exposure has increased, we may consider entering into hedging transactions to help mitigate that risk.

Interest Rate Risk.    The primary objective of our investment activities is to preserve principal while maximizing the
related income without significantly increasing risk. Even so, some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to
fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt
securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates will have a significant impact on our interest income. As of
December 31, 2007, all of our cash was held in deposit or money market accounts, or invested in investment grade securities. At December 31, 2007, 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.



45



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

Set
forth below are our audited consolidated financial statements for the years ended December 31, 2007, 2006 and 2005.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | 47  
|Consolidated Balance Sheets                             |  | 48  
|Consolidated Statements of Operations                   |  | 49  
|Consolidated Statements of Stockholders Equity         |  | 50  
|Consolidated Statements of Cash Flows                   |  | 52  
|Notes to Consolidated Financial Statements              |  | 53  



46



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Entorian Technologies
Inc.

We have audited the accompanying consolidated balance sheets of Entorian Technologies Inc., formerly Staktek Holdings, Inc., (the
Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years ended December 31, 2007. 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 Entorian Technologies Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three
years ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 16 to the
financial statements, in 2006, the Company changed its method of accounting for stock-based compensation.

/s/
Ernst & Young LLP

Austin, Texas

March 13, 2008



47



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ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                        |  | December 31,2007 |         |   | December 31,2006 |  
|ASSETS                                                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                         |  |                  |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                               |  | $                | 34,013  |   |                  | $ | 40,797  |  
|Investments                                                                                                                                                                             |  |                  | 27,912  |   |                  |   | 38,874  |  
|Accounts receivable                                                                                                                                                                     |  |                  | 5,681   |   |                  |   | 5,479   |  
|Inventories                                                                                                                                                                             |  |                  | 2,921   |   |                  |   | 2,355   |  
|Prepaid expenses                                                                                                                                                                        |  |                  | 633     |   |                  |   | 638     |  
|Income tax recoverable                                                                                                                                                                  |  |                  | 1,969   |   |                  |   |        |  
|Deferred tax asset                                                                                                                                                                      |  |                  | 143     |   |                  |   | 341     |  
|Other current assets                                                                                                                                                                    |  |                  | 916     |   |                  |   | 878     |  
|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                    |  |                  | 74,188  |   |                  |   | 89,362  |  
|Property, plant and equipment, net                                                                                                                                                      |  |                  | 9,212   |   |                  |   | 6,766   |  
|Deferred tax assets                                                                                                                                                                     |  |                  |        |   |                  |   | 932     |  
|Goodwill                                                                                                                                                                                |  |                  | 4,953   |   |                  |   | 28,081  |  
|Other intangible assets, net                                                                                                                                                            |  |                  | 10,826  |   |                  |   | 9,903   |  
|Other assets                                                                                                                                                                            |  |                  | 234     |   |                  |   | 147     |  
|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  
|Total assets                                                                                                                                                                            |  | $                | 99,413  |   |                  | $ | 135,191 |  
|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                    |  |                  |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                    |  |                  |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                        |  | $                | 3,348   |   |                  | $ | 1,228   |  
|Accrued compensation                                                                                                                                                                    |  |                  | 1,428   |   |                  |   | 2,159   |  
|Accrued liabilities                                                                                                                                                                     |  |                  | 3,056   |   |                  |   | 1,083   |  
|Income taxes payable                                                                                                                                                                    |  |                  |        |   |                  |   | 343     |  
|Current maturities of capitalized lease obligations                                                                                                                                     |  |                  | 21      |   |                  |   | 19      |  
|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                               |  |                  | 7,853   |   |                  |   | 4,832   |  
|Capitalized lease obligations, less current maturities                                                                                                                                  |  |                  | 54      |   |                  |   | 75      |  
|Other accrued liabilities                                                                                                                                                               |  |                  | 199     |   |                  |   | 256     |  
|Deferred tax liabilities                                                                                                                                                                |  |                  | 38      |   |                  |   |        |  
|Redeemable preferred stock; $0.001 par value; 5,000,000 shares authorized                                                                                                               |  |                  |        |   |                  |   |        |  
|Stockholders equity:                                                                                                                                                                   |  |                  |         |   |                  |   |         |  
|Common stock; $0.001 par value; 100,000,000 shares authorized at December 31, 2007 and 2006; 52,876,038 shares and 52,513,671 shares
issued at December 31, 2007 and 2006, respectively |  |                  | 52      |   |                  |   | 52      |  
|Additional paid-in capital                                                                                                                                                              |  |                  | 163,298 |   |                  |   | 157,193 |  
|Treasury stock, at cost; 6,172,650 shares and 4,819,703 shares at December 31, 2007 and 2006, respectively                                                                              |  |                  | (25,601 | ) |                  |   | (20,676 | )
|Accumulated other comprehensive income (loss)                                                                                                                                           |  |                  | 44      |   |                  |   | (4      | )
|Accumulated deficit                                                                                                                                                                     |  |                  | (46,524 | ) |                  |   | (6,537  | )
|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                              |  |                  | 91,269  |   |                  |   | 130,028 |  
|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                              |  | $                | 99,413  |   |                  | $ | 135,191 |  
|                                                                                                                                                                                        |  |                  |         |   |                  |   |         |  

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



48



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ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                       |  | Year Ended December 31, |        
|                                                       |  | 2007                    |         |   | 2006 |   |        | 2005 | 
|Revenue:                                               |  |                         |         |   |      |   |        |      |  |   |         |  
|Product                                                |  | $                       | 34,490  |   |      | $ | 43,084 |      |  | $ | 33,641  |  
|License                                                |  |                         | 6,380   |   |      |   | 12,472 |      |  |   | 18,885  |  
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Total revenue                                          |  |                         | 40,870  |   |      |   | 55,556 |      |  |   | 52,526  |  
|Cost of revenue:                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Product (1)                                            |  |                         | 28,250  |   |      |   | 28,247 |      |  |   | 27,817  |  
|Amortization and impairment of acquisition intangibles |  |                         | 5,077   |   |      |   | 6,623  |      |  |   | 12,938  |  
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Total cost of revenue                                  |  |                         | 33,327  |   |      |   | 34,870 |      |  |   | 40,755  |  
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Gross profit                                           |  |                         | 7,543   |   |      |   | 20,686 |      |  |   | 11,771  |  
|Operating expenses:                                    |  |                         |         |   |      |   |        |      |  |   |         |  
|Selling, general and administrative (1)                |  |                         | 15,980  |   |      |   | 14,805 |      |  |   | 16,302  |  
|Research and development (1)                           |  |                         | 5,654   |   |      |   | 8,238  |      |  |   | 5,751   |  
|Restructuring                                          |  |                         | 332     |   |      |   | 391    |      |  |   | 982     |  
|Goodwill impairment                                    |  |                         | 27,903  |   |      |   |       |      |  |   |        |  
|Amortization of acquisition intangibles                |  |                         | 730     |   |      |   | 817    |      |  |   | 1,013   |  
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Total operating expenses                               |  |                         | 50,599  |   |      |   | 24,251 |      |  |   | 24,048  |  
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Loss from operations                                   |  |                         | (43,056 | ) |      |   | (3,565 | )    |  |   | (12,277 | )
|Other income (expense):                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Interest income                                        |  |                         | 3,051   |   |      |   | 3,077  |      |  |   | 1,816   |  
|Interest expense                                       |  |                         | (17     | ) |      |   | (19    | )    |  |   | (7      | )
|Other, net                                             |  |                         | 25      |   |      |   | (77    | )    |  |   | (83     | )
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Total other income, net                                |  |                         | 3,059   |   |      |   | 2,981  |      |  |   | 1,726   |  
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Loss before income taxes                               |  |                         | (39,997 | ) |      |   | (584   | )    |  |   | (10,551 | )
|Benefit for income taxes                               |  |                         | (10     | ) |      |   | (130   | )    |  |   | (3,074  | )
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Net loss                                               |  | $                       | (39,987 | ) |      | $ | (454   | )    |  | $ | (7,477  | )
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Loss per share:                                        |  |                         |         |   |      |   |        |      |  |   |         |  
|Basic                                                  |  | $                       | (0.85   | ) |      | $ | (0.01  | )    |  | $ | (0.15   | )
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Diluted                                                |  | $                       | (0.85   | ) |      | $ | (0.01  | )    |  | $ | (0.15   | )
|                                                       |  |                         |         |   |      |   |        |      |  |   |         |  
|Shares used in computing loss per share:               |  |                         |         |   |      |   |        |      |  |   |         |  
|Basic                                                  |  |                         | 47,156  |   |      |   | 48,080 |      |  |   | 48,579  |  
|Diluted                                                |  |                         | 47,156  |   |      |   | 48,080 |      |  |   | 48,579  |  
|(1)    Includes stock-based compensation as follows:   |  |                         |         |   |      |   |        |      |  |   |         |  
|Cost of revenue                                        |  | $                       | 426     |   |      | $ | 595    |      |  | $ | 543     |  
|Selling, general and administrative expense            |  | $                       | 4,732   |   |      | $ | 4,599  |      |  | $ | 6,231   |  
|Research and development expense                       |  | $                       | 790     |   |      | $ | 1,022  |      |  | $ | 407     |  

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



49



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ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share amounts)



|                                                            |  |              |  |                          |    |  |               |         |   |                                 |   |         |                                            |  |   |                           |   |  |                          |     |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------- |  | ------------ |  | ------------------------ | -- |  | ------------- | ------- | - | ------------------------------- | - | ------- | ------------------------------------------ |  | - | ------------------------- | - |  | ------------------------ | --- | - |  | - | ------ | - |  | - | ------- | -
|                                                            |  |              |  | AdditionalPaid-InCapital |    |  | TreasuryStock |         |   | DeferredStock-BasedCompensation |   |         | AccumulatedOtherComprehensiveIncome (Loss) |  |   | RetainedEarnings(Deficit) |   |  | TotalStockholdersEquity |    
|                                                            |  | Common Stock |  |                          |    |  |               |        
|                                                            |  | Shares       |  | Amount                   |    |  |               |         |   |                                
|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 |  
|ESPP purchases                                              |  | 35,970       |  |                          |   |  |               | 171     |   |                                 |   |        |                                            |  |   |                          |   |  |                          |    |   |  |   |       |   |  |   | 171     |  
|Share repurchases                                           |  |             |  |                          |   |  |               |        |   |                                 |   | (8,104  | )                                          |  |   |                          |   |  |                          |    |   |  |   |       |   |  |   | (8,104  | )
|Exercise of stock options                                   |  | 668,694      |  |                          | 1  |  |               | 773     |   |                                 |   |        |                                            |  |   |                          |   |  |                          |    |   |  |   |       |   |  |   | 774     |  
|Vesting of previously exercised unvested stock options      |  |             |  |                          |   |  |               | 17      |   |                                 |   |        |                                            |  |   |                          |   |  |                          |    |   |  |   |       |   |  |   | 17      |  
|Stock-based compensation                                    |  |             |  |                          |   |  |               | 6,216   |   |                                 |   |        |                                            |  |   |                          |   |  |                          |    |   |  |   |       |   |  |   | 6,216   |  
|Reclassification resulting from the adoption of SFAS 123(R) |  |             |  |                          |   |  |               | (6,332  | ) |                                 |   |        |                                            |  |   | 6,332                     |   |  |                          |    |   |  |   |       |   |  |   |        |  
|Tax benefit from disqualifying disposition, net             |  |             |  |                          |   |  |               | 96      |   |                                 |   |        |                                            |  |   |                          |   |  |                          |    |   |  |   |       |   |  |   | 96      |  
|Net loss                                                    |  |             |  |                          |   |  |               |        |   |                                 |   |        |                                            |  |   |                          |   |  |                          |    |   |  |   | (454   | ) |  |   | (454    | )
|Unrealized gain on investment securities, net of tax        |  |             |  |                          |   |  |               |        |   |                                 |   |        |                                            |  |   |                          |   |  |                          | 28  |   |  |   |       |   |  |   | 28      |  
|                                                            |  |              |  |                          |    |  |               |         |   |                                 |   |         |                                            |  |   |                           |   |  |                          |     |   |  |   |        |   |  |   |         |  
|Total comprehensive loss                                    |  |             |  |                          |   |  |               |        |   |                                 |   |        |                                            |  |   |                          |   |  |                          |    |   |  |   |       |   |  |   | (426    | )
|                                                            |  |              |  |                          |    |  |               |         |   |                                 |   |         |                                            |  |   |                           |   |  |                          |     |   |  |   |        |   |  |   |         |  
|Balances at December 31, 2006                               |  | 52,513,671   |  | $                        | 52 |  | $             | 157,193 |   |                                 | $ | (20,676 | )                                          |  | $ |                          |   |  | $                        | (4  | ) |  | $ | (6,537 | ) |  | $ | 130,028 |  
|                                                            |  |              |  |                          |    |  |               |         |   |                                 |   |         |                                            |  |   |                           |   |  |                          |     |   |  |   |        |   |  |   |         |  

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



50



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ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (CONTINUED)

(in
thousands, except share amounts)



|                                                       |  |              |  |                          |    |  |               |         |   |                                            |   |         |                           |  |   |                          |   |  |   |         |   |  |   |         |  
|------------------------------------------------------ |  | ------------ |  | ------------------------ | -- |  | ------------- | ------- | - | ------------------------------------------ | - | ------- | ------------------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------- | -
|                                                       |  | Common Stock |  | AdditionalPaid-InCapital |    |  | TreasuryStock |         |   | AccumulatedOtherComprehensiveIncome (Loss) |   |         | RetainedEarnings(Deficit) |  |   | TotalStockholdersEquity |  
|                                                       |  | Shares       |  | Amount                   |    |  |               |         |  
|Balances at December 31, 2006                          |  | 52,513,671   |  | $                        | 52 |  | $             | 157,193 |   |                                            | $ | (20,676 | )                         |  | $ | (4                       | ) |  | $ | (6,537  | ) |  | $ | 130,028 |  
|ESPP purchases                                         |  | 12,420       |  |                          |   |  |               | 34      |   |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   | 34      |  
|Share repurchases                                      |  |             |  |                          |   |  |               |        |   |                                            |   | (4,925  | )                         |  |   |                         |   |  |   |        |   |  |   | (4,925  | )
|Exercise of stock options                              |  | 245,967      |  |                          |   |  |               | 187     |   |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   | 187     |  
|Vesting of previously exercised unvested stock options |  |             |  |                          |   |  |               | 12      |   |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   | 12      |  
|Stock-based compensation                               |  |             |  |                          |   |  |               | 5,948   |   |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   | 5,948   |  
|Tax benefit from disqualifying disposition, net        |  |             |  |                          |   |  |               | 95      |   |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   | 95      |  
|Restricted stock units issued                          |  | 103,980      |  |                          |   |  |               |        |   |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   |        |  
|Restricted stock unit tax impact                       |  |             |  |                          |   |  |               | (171    | ) |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   | (171    | )
|Net loss                                               |  |             |  |                          |   |  |               |        |   |                                            |   |        |                           |  |   |                         |   |  |   | (39,987 | ) |  |   | (39,987 | )
|Unrealized gain on investment securities, net of tax   |  |             |  |                          |   |  |               |        |   |                                            |   |        |                           |  |   | 48                       |   |  |   |        |   |  |   | 48      |  
|                                                       |  |              |  |                          |    |  |               |         |   |                                            |   |         |                           |  |   |                          |   |  |   |         |   |  |   |         |  
|Total comprehensive loss                               |  |             |  |                          |   |  |               |        |   |                                            |   |        |                           |  |   |                         |   |  |   |        |   |  |   | (39,939 | )
|                                                       |  |              |  |                          |    |  |               |         |   |                                            |   |         |                           |  |   |                          |   |  |   |         |   |  |   |         |  
|Balances at December 31, 2007                          |  | 52,876,038   |  | $                        | 52 |  | $             | 163,298 |   |                                            | $ | (25,601 | )                         |  | $ | 44                       |   |  | $ | (46,524 | ) |  | $ | 91,269  |  
|                                                       |  |              |  |                          |    |  |               |         |   |                                            |   |         |                           |  |   |                          |   |  |   |         |   |  |   |         |  

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



51



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ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                |  | Year Ended December 31, |        
|                                                                                |  | 2007                    |         |   | 2006 |   |         | 2005 | 
|Cash flows from operating activities:                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                        |  | $                       | (39,987 | ) |      | $ | (454    | )    |  | $ | (7,477  | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation, amortization and impairment of intangibles                        |  |                         | 37,089  |   |      |   | 11,726  |      |  |   | 19,226  |  
|Stock-based compensation expense                                                |  |                         | 5,948   |   |      |   | 6,216   |      |  |   | 7,181   |  
|Excess tax benefit related to the exercise of employee stock options            |  |                         | (95     | ) |      |   | (315    | )    |  |   |        |  
|Other non-cash charges                                                          |  |                         | 492     |   |      |   | 81      |      |  |   | 111     |  
|Deferred income taxes                                                           |  |                         | 1,169   |   |      |   | (4,200  | )    |  |   | (6,651  | )
|Changes in operating assets and liabilities, net of acquisition:                |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                             |  |                         | 4,205   |   |      |   | (417    | )    |  |   | (569    | )
|Inventories                                                                     |  |                         | 1,613   |   |      |   | (1,649  | )    |  |   | 127     |  
|Other current assets                                                            |  |                         | 81      |   |      |   | 179     |      |  |   | (60     | )
|Income tax receivable/payable                                                   |  |                         | (2,039  | ) |      |   | 2,969   |      |  |   | (221    | )
|Accounts payable                                                                |  |                         | (261    | ) |      |   | 825     |      |  |   | (311    | )
|Accrued liabilities                                                             |  |                         | 661     |   |      |   | (12     | )    |  |   | 944     |  
|Deferred revenue                                                                |  |                         | 7       |   |      |   | (283    | )    |  |   | (346    | )
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                       |  |                         | 8,883   |   |      |   | 14,666  |      |  |   | 11,954  |  
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Purchases of investments                                                        |  |                         | (37,868 | ) |      |   | (41,957 | )    |  |   | (93,482 | )
|Sales and maturities of investments                                             |  |                         | 48,745  |   |      |   | 38,716  |      |  |   | 95,062  |  
|Additions to property, plant and equipment                                      |  |                         | (725    | ) |      |   | (1,468  | )    |  |   | (4,446  | )
|Proceeds from sale of equipment                                                 |  |                         | 103     |   |      |   | 226     |      |  |   | 55      |  
|Acquisition of Southland Micro Systems, Inc., net of cash acquired              |  |                         | (20,874 | ) |      |   |        |      |  |   |        |  
|Patent application costs                                                        |  |                         | (420    | ) |      |   | (537    | )    |  |   | (693    | )
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                           |  |                         | (11,039 | ) |      |   | (5,020  | )    |  |   | (3,504  | )
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Net proceeds from the issuance of common stock                                  |  |                         | 221     |   |      |   | 943     |      |  |   | 345     |  
|Excess tax benefit related to the exercise of employee stock options            |  |                         | 95      |   |      |   | 315     |      |  |   |        |  
|Share repurchases                                                               |  |                         | (4,925  | ) |      |   | (8,104  | )    |  |   | (10,668 | )
|Repurchase of exercised unvested shares                                         |  |                         |        |   |      |   |        |      |  |   | (47     | )
|Payments on capitalized lease obligations                                       |  |                         | (19     | ) |      |   | (14     | )    |  |   | (53     | )
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                           |  |                         | (4,628  | ) |      |   | (6,860  | )    |  |   | (10,423 | )
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                            |  |                         | (6,784  | ) |      |   | 2,786   |      |  |   | (1,973  | )
|Cash and cash equivalents at beginning of period                                |  |                         | 40,797  |   |      |   | 38,011  |      |  |   | 39,984  |  
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of period                                      |  | $                       | 34,013  |   |      | $ | 40,797  |      |  | $ | 38,011  |  
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flows information:                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash paid during the period for interest                                        |  | $                       | 10      |   |      | $ | 12      |      |  | $ | 1       |  
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash paid during the period for income taxes, net of refunds                    |  | $                       | 797     |   |      | $ | 1,099   |      |  | $ | 3,798   |  
|                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Noncash operating and investing activities:                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Changes in goodwill                                                             |  | $                       | (28,081 | ) |      | $ |        |      |  | $ | 385     |  
|Fixed assets acquired under capital lease                                       |  | $                       |        |   |      | $ | 108     |      |  | $ |        |  

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



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ENTORIAN TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Staktek Holdings, Inc.
(we, us and our) was originally formed by two investment funds affiliated with Austin Ventures L.P. in May 2003 for the purpose of acquiring Staktek Corporation, which was incorporated in Texas in June 1990. As a
result of this merger, Staktek Corporation became our wholly owned subsidiary.

We are a provider of intellectual property, products
and services for next-generation mechanical and electrical packaging technologies for high-speed, high-capacity systems. With an IP portfolio of more than 200 patents and patent applications pending, we offer outsourced manufacturing,
technology licensing and custom engineering.

On August 31, 2007, we acquired Southland, a provider of memory products and services to
OEMs since 1987. Southlands headquarters and manufacturing facility is located in Irvine, California, with sales offices in San Jose, California and Boise, Idaho. Through this acquisition, we expect to increase the opportunity to
deploy our IP to top-tier server OEMs and data center end customers.

Effective February 27, 2008, the Company changed its name from
Staktek Holdings, Inc. to Entorian Technologies Inc.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles. Our consolidated financial statements include the accounts of Entorian Technologies Inc. and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles 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 2005 consolidated financial statements to conform to the current year presentation. The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107), which
states that companies should present the expense related to share-based payment arrangements in the same line or lines as cash compensation paid to the same employees. Accordingly, we have reclassified share-based payments previously recorded as
amortization of deferred stock-based compensation and stock compensation expense to the appropriate functional categories. The reclassifications had no impact on our financial position or results of operations.

Cash and Cash Equivalents

We consider all
highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. We classify variable rate demand note securities with hard put features, where the issuer holds the obligation, as cash equivalents. At
December 31, 2007 and 2006, our cash equivalents included funds in demand deposit accounts, money market accounts, municipal bonds, variable rate demand notes and commercial paper.



53



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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, where the broker holds the obligation, 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. Interest, 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.

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 either a
first-in, first-out (FIFO) method or a moving average unit cost method, depending on the inventories location.

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 Staktek and Southland acquisitions. We have a two reporting units at an enterprise level and allocate goodwill to these reporting units for goodwill impairment testing.

We assess whether goodwill and indefinite-lived intangible assets (trademark) are impaired on an annual basis. Upon determining the existence of goodwill
and/or trademark impairment, we measure that impairment based on the amount by which the book value of goodwill and/or trademark 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. See Note 7 for a discussion of the impairment charge we took on our trademark during the first quarter of 2007.

Based on our annual assessment on October 1, 2007, we determined that no impairment of goodwill existed. The decline in our market
capitalization during the fourth quarter of 2007 was an indicator of potential goodwill impairment, and because of this decline we undertook an assessment on December 31, 2007 to determine the fair value of our business associated with the
goodwill. As a result of that review, we have recorded a non-cash charge of $27.9 million for the write-down of the goodwill related to our stacking business that Austin Ventures acquired in August 2003.

Critical estimates made in determining the fair value of our stacking business included expected future cash flows from licensing agreements and product
sales, customer turnover and future overhead expenses. Managements best estimates of fair value are based upon assumptions we believed to be reasonable, but which are inherently uncertain and unpredictable.



54



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Intangible Assets

Amounts allocated to acquired technology, a customer contract, customer relationships, tradename and, effective April 1, 2007, our trademark are being amortized over the respective assets estimated useful
lives of four to ten 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 being amortized over their estimated useful lives of three to four years using the straight-line method. Amortization of acquired technology, trademark, tradename and a customer contract is included in Amortization and
impairment 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 beginning when the patent is issued. Amortization expense related to our patents is included in product cost of revenue or research and development expense. 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 have invested $10.3 million in auction-rate securities that are rated Aaa and AAA, the majority of which are guaranteed by the federal government under the Federal Family Education Loans Program. However, as
recently reported in the financial press, the current disruptions in the credit markets have adversely affected the auction market for these types of securities, and they are currently illiquid. We cannot predict how long they will remain illiquid
and whether we will be able to liquidate them prior to their maturities at prices approximating their face amounts. The final maturity dates of the auction rate securities that the Company owns is between 2029 and 2041. The current market for the
auction rate securities held by the Company is uncertain, and we will continue to monitor and evaluate the market for these securities to determine if impairment of the carrying value of the securities has occurred due to the loss of liquidity or
for other reasons. If the credit ratings of the security issuers deteriorate or if normal market conditions do not return in the near future, we may be required to reduce the value of these securities. We cannot predict how long these securities
will remain illiquid. As a result, at least in the near term, we may or may not be able to liquidate some or all of our auction rate securities prior to their maturities at prices approximating their face amounts.



55



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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, 2007 and 2006, 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.

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



|        |  |                         |   |  |      |   |  |      |  
|------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|        |  | Year Ended December 31, |  
|        |  | 2007                    |   |  | 2006 |   |  | 2005 |  
|Micron  |  | 34                      | % |  | 18   | % |  | 21   | %
|SMART   |  | 19                      | % |  | 13   | % |  | 11   | %
|Google  |  | 10                      | % |  | *    |   |  | *    |  
|Samsung |  | *                       |   |  | 20   | % |  | 32   | %
|HP      |  | *                       |   |  | 20   | % |  | 17   | %
|Netlist |  | *                       |   |  | 18   | % |  | *    |  



|* | Amount does not equal or 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, |  
|        |  | 2007         |   |  | 2006 |  
|Google  |  | 30           | % |  | *    |  
|SMART   |  | 18           | % |  | 18   | %
|Micron  |  | 16           | % |  | 36   | %
|HP      |  | *            |   |  | 23   | %
|Netlist |  | *            |   |  | 11   | %



|* | 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, sale of memory modules assembled by us, and from license fees or royalties earned pursuant to license agreements with customers.



56



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Product Revenue

Our manufacturing products consist of various customer arrangements, including outsourcing the manufacture of our customers stacked memory units to us, outsourcing the assembly of memory modules to us using
customer supplied components, and the resale of memory modules consigned to us. Additionally, we assemble memory modules from purchased components for resale to distributors and end users.

We report revenue in accordance with Emerging Issues Task Force Issue No. 99-19. In customer arrangements for manufacturing services, we have
determined that a net basis of revenue recognition is appropriate where the customer has instructed us to purchase specified memory packages from a specified vendor for purposes of stacking or assembling and shipping to the customer, or where the
customer has supplied us with components. Additionally, in situations where we resell memory modules sold to us and the supplier determines the final sales price or grants favorable rights of return or credit terms to us, we report the revenue on a
net basis.

License Revenue

In
addition to our product revenue, we also earn revenue from licensing our technologies. 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. To date, the training or assistance we have provided has been limited and incidental to the licensed technologies. 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 these services are provided. The associated revenue is included in product revenue. In instances where we provide training or other assistance that is considered inconsequential to the license agreement, the
estimated fair value of the services is recognized in connection with the initial license fee and is included in license revenue.

Currently we have license agreements with four customers that specify that certain royalties are earned by us upon each customers shipment of products utilizing our proprietary technologies. Certain customers report shipment
information 20 to 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 these licensees 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, certain patents and, effective April 1, 2007, our trademark as well as stock-based 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.



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Stock-Based Compensation

We account for our employee stock-based compensation using the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method and, therefore, we have not restated prior
periods results. Under this method, we recognize compensation expense for all share-based payments granted after January 1, 2006, as well as those granted prior to but not yet vested as of January 1, 2006, in accordance with SFAS
123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award and only recognize compensation
cost for those shares expected to vest. In addition, under SFAS 123(R), tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) are presented as financing cash flows in the consolidated statement of cash
flows. Prior to SFAS 123(R) adoption, we accounted for share-based payments under APB 25.

Determining the appropriate fair value
model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the
fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our
stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is
materially different from our estimate, the stock-based compensation expense could be significantly different from the amount we have recorded in the current period.

Equity instruments issued to non-employees are accounted for in accordance with FASB Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (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.

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.

Loss Per Share

Basic loss per share is
computed by dividing net loss by the weighted-average number of vested common shares outstanding for the period. Diluted 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 years ended December 31, 2007, 2006 and 2005, 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

In September 2006, the FASB issued SFAS 157. This standard defines fair value, establishes a framework for measuring fair value in United States generally accepted accounting principles and expands disclosures
about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, which delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).We do not expect the adoption of SFAS 157 to have
a material impact on our financial position and results of operations.



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In February 2007, the FASB issued SFAS 159. This standard allows entities to voluntarily choose
to measure certain financial assets and liabilities at fair value. The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is
elected for an instrument, SFAS 159 specifies that unrealized gains and losses for that instrument shall be reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15,
2007. We do not expect the adoption of SFAS 159 to have a material impact on our financial position and results of operations.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, (SFAS 141R). This standard establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date.

3. Southland Acquisition

On August 31, 2007, we acquired all of the outstanding ownership
interests in Southland, a provider of memory products and services to OEMs pursuant to an Agreement and Plan of Merger by and among us, Southland, Shula Merger Sub, Inc., a wholly owned subsidiary of Entorian, the stockholders of Southland
(Sellers), and John R. Meehan, as the stockholder representative, dated August 21, 2007 (the Merger Agreement). Through this acquisition, we expect to increase the deployment of our intellectual property to top-tier server OEMs and data
center end customers. These factors contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, we recorded goodwill.The total purchase price has been allocated to the assets acquired
based on their respective fair values at the acquisition date. Goodwill, which will be deductible for income tax purposes, is assigned at the reporting unit level. The purchase price was allocated to identifiable assets and liabilities based on
managements estimate and an independent valuation. The purchase price we paid for all outstanding shares at the effective time of the merger was $15.8 million in cash. We also retired approximately $6.0 million of Southlands
indebtedness.

We deposited $5.0 million of the purchase price into an escrow account as security for working capital adjustments and
indemnification obligations of the Sellers under the Merger Agreement. On November 28, 2007, we finalized the working capital adjustment, and $2.0 million was released from the escrow account, of which approximately $1.4 million was distributed
to the Sellers and $0.6 million was returned to us. On August 31, 2008, up to another $1 million will be released to the Sellers from the escrow fund, less any amounts for unresolved and settled claims. Any remaining amount in the escrow fund,
less any amounts for unresolved and settled claims, will be released on August 31, 2009.

In addition, we entered into a restriction
agreement with a key Southland employee and former stockholder who held shares of restricted stock of Southland. We paid him the merger consideration for the vested Southland stock he owned, but we are holding the merger consideration for his
unvested shares of restricted stock. We are releasing the merger consideration to him in accordance with his original vesting schedule for the restricted stock. As of the acquisition date, the vested portion of his merger payments, or
approximately $0.4 million, was recorded as part of the purchase price, and the unvested portion of approximately $1.0 million, which is contingent on future employment, is being recorded as compensation expense as it is earned.

In addition to the purchase price, we agreed to pay an additional $7.0 million to Southlands stockholders, based on the achievement of certain
financial growth goals during the period from September 1, 2007 through August 31, 2009. This payment is contingent upon the Sellers continued employment. The Earn-Out is payable in two installments and each installment can be paid
in any combination of cash or shares of our common stock. At each quarter end, we will project the financial performance of the Southland subsidiary, determine the



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projected level of the target achievement for the respective Earn-Out period, and will record compensation expense based on the projected level of
achievement. If the stock price at closing on the last day of the quarter is greater than the Earn-Out exercise price, we will assume the Sellers will elect to receive the consideration in stock. At December 31, 2007, we determined the target
achievement to be probable and that the election to receive the Earn-Out in cash will be made. As a result, we recorded approximately $1.2 million in accrued liabilities and compensation expense during the year ended December 31, 2007.

As part of the acquisition, certain Southland employees were granted employment inducement stock options to purchase a total of 500,000
shares of our common stock pursuant to Nasdaq Marketplace Rule 4350(i)(1)(A)(iv). All of these options have an exercise price equal to the closing sales price per share of Entorian common stock on August 31, 2007, will vest over a four-year
period and have associated compensation expense recorded in accordance with SFAS 123(R).

The following table summarizes the estimated fair
value of the assets acquired and liabilities assumed at August 31, 2007. The allocation of the purchase price was subject to change due to a working capital adjustment of $0.6 million. The purchase price allocation is based upon
managements best estimates of the relative fair values of the identifiable assets acquired and liabilities assumed. The purchase price was allocated based on the estimated fair value of net assets acquired as follows (in thousands):



|                              |  |        |        |   |                       |    
|----------------------------- |  | ------ | ------ | - | --------------------- | ---
|                              |  | Amount |        |   | Useful Life(in years)
|Accounts receivable, net      |  | $      | 4,408  |   |                       |    
|Inventory                     |  |        | 2,179  |   |                       |    
|Property, plant and equipment |  |        | 5,300  |   |                       | 3-7
|Other assets                  |  |        | 353    |   |                       |    
|Goodwill                      |  |        | 4,953  |   |                       |    
|Customer relationships        |  |        | 4,655  |   |                       | 10 
|Trade name                    |  |        | 1,806  |   |                       | 10 
|Noncompete                    |  |        | 207    |   |                       | 3  
|Current liabilities           |  |        | (2,739 | ) |                       |    
|                              |  |        |        |   |                       |    
|Total purchase price          |  | $      | 21,122 |   |                       |    
|                              |  |        |        |   |                       |    

We recorded Southlands results of operations with ours subsequent to the acquisition date,
which was August 31, 2007.

Pro Forma Results

The following unaudited pro forma information presents the combined results of operations of Entorian and Southland for the years ended December 31, 2007 and 2006 as if the merger had been consummated at the
beginning of the respective years. The information is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that actually would have occurred if the merger had been consummated at the
beginning of the respective years, nor is it necessarily indicative of future operating results.

The following table sets forth the
required pro forma information (in thousands, except per share amounts):



|                             |  |                         |         |   |      |   |        |  
|---------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | -
|                             |  | Year ended December 31, |        
|                             |  | 2007                    |         |   | 2006 |  
|Net sales                    |  | $                       | 58,381  |   |      | $ | 79,586 |  
|Net loss                     |  | $                       | (41,731 | ) |      | $ | (2,074 | )
|Net loss per share - basic   |  | $                       | (0.88   | ) |      | $ | (0.04  | )
|Net loss per share - diluted |  | $                       | (0.88   | ) |      | $ | (0.04  | )



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4. Investments

During 2007 and 2006, we invested in securities with original maturities greater than three months. These securities are classified as available-for-sale. The amortized cost, net unrealized gains and
losses and fair value of these securities as of December 31, 2007 and 2006 were as follows (in thousands):



|                                    |  |               |        |                    |   |                     |  |   |                     |   |  |   |       
|----------------------------------- |  | ------------- | ------ | ------------------ | - | ------------------- |  | - | ------------------- | - |  | - | ------
|                                    |  | AmortizedCost |        | NetUnrealizedGains |   | NetUnrealizedLosses |  |   | EstimatedFair Value
|2007                                |  |               |        |                    |   |                     |  |   |                     |   |  |   |       
|Auction rate securities             |  | $             | 10,300 |                    | $ |                    |  | $ |                    |   |  | $ | 10,300
|Municipal bonds                     |  |               | 15,568 |                    |   | 43                  |  |   |                    |   |  |   | 15,611
|Other available for sale securities |  |               | 2,000  |                    |   | 1                   |  |   |                    |   |  |   | 2,001 
|                                    |  |               |        |                    |   |                     |  |   |                     |   |  |   |       
|                                    |  | $             | 27,868 |                    | $ | 44                  |  | $ |                    |   |  | $ | 27,912
|                                    |  |               |        |                    |   |                     |  |   |                     |   |  |   |       
|2006                                |  |               |        |                    |   |                     |  |   |                     |   |  |   |       
|Auction rate securities             |  | $             | 15,775 |                    | $ |                    |  | $ |                    |   |  | $ | 15,775
|Municipal bonds                     |  |               | 12,006 |                    |   |                    |  |   | (3                  | ) |  |   | 12,003
|Other available for sale securities |  |               | 11,099 |                    |   |                    |  |   | (3                  | ) |  |   | 11,096
|                                    |  |               |        |                    |   |                     |  |   |                     |   |  |   |       
|                                    |  | $             | 38,880 |                    | $ |                    |  | $ | (6                  | ) |  | $ | 38,874
|                                    |  |               |        |                    |   |                     |  |   |                     |   |  |   |       

Net unrealized gains and losses at December 31, 2007 and 2006 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, 2007 and 2006 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.



|                       |  |               |        |                     |   |               |  |                     |        |  |   |       
|---------------------- |  | ------------- | ------ | ------------------- | - | ------------- |  | ------------------- | ------ |  | - | ------
|                       |  | 2007          |        | 2006               
|                       |  | AmortizedCost |        | EstimatedFair Value |   | AmortizedCost |  | EstimatedFair Value
|Within 1 year          |  | $             | 7,071  |                     | $ | 7,082         |  | $                   | 8,893  |  | $ | 8,887 
|Between 1 and 5 years  |  |               | 6,516  |                     |   | 6,539         |  |                     | 7,112  |  |   | 7,112 
|Between 5 and 10 years |  |               | 1,001  |                     |   | 1,003         |  |                     |       |  |   |      
|After 10 years         |  |               | 13,280 |                     |   | 13,288        |  |                     | 22,875 |  |   | 22,875
|                       |  |               |        |                     |   |               |  |                     |        |  |   |       
|                       |  | $             | 27,868 |                     | $ | 27,912        |  | $                   | 38,880 |  | $ | 38,874
|                       |  |               |        |                     |   |               |  |                     |        |  |   |       

We sold approximately $48.7 million and $38.7 million in investment securities held as
available-for-sale in the years ended December 31, 2007 and 2006, respectively.

5. Inventories

Inventories at December 31, 2007 and 2006 consisted of the following (in thousands):



|                |  |      |       |      |   |      
|--------------- |  | ---- | ----- | ---- | - | -----
|                |  | 2007 |       | 2006
|Raw materials   |  | $    | 2,565 |      | $ | 2,206
|Work in process |  |      | 15    |      |   | 42   
|Finished goods  |  |      | 341   |      |   | 107  
|                |  |      |       |      |   |      
|                |  | $    | 2,921 |      | $ | 2,355
|                |  |      |       |      |   |      

At December 31, 2007 and 2006, our reserve for slow-moving and obsolete inventory was
approximately $0.8 million and $13,000, respectively.



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6. Property, Plant and Equipment

Property, plant and equipment at December 31, 2007 and 2006 consisted of the following (in thousands):



|                                   |  |                         |  |      |         |   |      |   |         |  
|---------------------------------- |  | ----------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Asset Class                        |  | EstimatedLife(in years) |  | 2007 |         |   | 2006 |  
|Land                               |  |                         |  | $    | 371     |   |      | $ | 371     |  
|Buildings                          |  | 20                      |  |      | 2,311   |   |      |   | 2,283   |  
|Software                           |  | 3                       |  |      | 1,098   |   |      |   | 949     |  
|Vehicles                           |  | 5                       |  |      | 51      |   |      |   | 50      |  
|Office furniture and equipment     |  | 5                       |  |      | 2,411   |   |      |   | 2,314   |  
|Lab equipment                      |  | 3-5                     |  |      | 16,809  |   |      |   | 12,864  |  
|Tooling and fixtures               |  | 3-7                     |  |      | 2,171   |   |      |   | 2,013   |  
|Leasehold improvements             |  | 3                       |  |      | 985     |   |      |   | 491     |  
|Assets under development           |  |                         |  |      |        |   |      |   | 108     |  
|                                   |  |                         |  |      |         |   |      |   |         |  
|                                   |  |                         |  |      | 26,207  |   |      |   | 21,443  |  
|Accumulated depreciation           |  |                         |  |      | (16,995 | ) |      |   | (14,677 | )
|                                   |  |                         |  |      |         |   |      |   |         |  
|Property, plant and equipment, net |  |                         |  | $    | 9,212   |   |      | $ | 6,766   |  
|                                   |  |                         |  |      |         |   |      |   |         |  

Amortization of the assets under capital lease was included in depreciation and was approximately
$22,000, $18,000 and $53,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Interest expense related to assets under capital lease was included in interest expense and was approximately $10,000, $10,000 and $1,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.

During 2005, we sold a piece of equipment previously recorded as assets
held for sale with a net book value of $56,000. During 2006, we sold a piece of lab equipment for a gain of $0.2 million to SMART under our manufacturing agreement with SMART. During 2007, we sold certain equipment with a net book value of $36,000,
for a gain of $62,000. Increases in asset balances are primarily due to our Southland acquisition discussed in Note 3.

7. Other Intangible Assets

As of March 31, 2007, as a result of our customers increased use of competitive technologies and the associated uncertainty
around our future revenue, we tested our trademark intangible asset for impairment. We calculated fair value using a form of discounted cash flow analysis known as the relief from royalty approach, which is based on an analysis of
economic benefit provided to the owner of the trademark. As a result of our review, during the three months ended March 31, 2007, we recorded an impairment charge of approximately $0.7 million, which is included in Amortization and impairment
of acquisition intangibles in cost of revenue.

In addition, as of March 31, 2007, we determined that the trademark intangible asset
has an estimated remaining useful life of four years. During the three months ended June 30, 2007, we began to amortize the remaining balance of $1.1 million over its estimated useful life in proportion to the estimated contribution to
discounted cash flows during the four-year period. The resulting amortization expense in 2007 was $0.3 million and was included in Amortization and impairment of acquisition intangibles in cost of revenue.

In connection with our Southland acquisition during the third quarter of 2007, we acquired intangible assets consisting of customer relationships, trade
name and a noncompete agreement for $4.7 million, $1.8 million and $0.2 million, respectively.



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The gross carrying amounts and accumulated amortization of our other intangible assets and patents at
December 31, 2007 and 2006 consisted of the following (in thousands):



|                                |  |                      |        |                         |      |         |                      |  |                         |        |  |   |         |  
|------------------------------- |  | -------------------- | ------ | ----------------------- | ---- | ------- | -------------------- |  | ----------------------- | ------ |  | - | ------- | -
|                                |  | 2007                 |        |                         | 2006 |        
|                                |  | Gross CarryingAmount |        | AccumulatedAmortization |      |         | Gross CarryingAmount |  | AccumulatedAmortization |       
|Acquired technology and patents |  | $                    | 21,337 |                         | $    | (18,735 | )                    |  | $                       | 21,207 |  | $ | (16,881 | )
|Customer contract               |  |                      | 26,100 |                         |      | (25,461 | )                    |  |                         | 26,100 |  |   | (23,180 | )
|Trademark and trade name        |  |                      | 2,922  |                         |      | (326    | )                    |  |                         | 1,800  |  |   |        |  
|Other intangible assets         |  |                      | 10,660 |                         |      | (5,671  | )                    |  |                         | 5,798  |  |   | (4,941  | )
|                                |  |                      |        |                         |      |         |                      |  |                         |        |  |   |         |  
|                                |  | $                    | 61,019 |                         | $    | (50,193 | )                    |  | $                       | 54,905 |  | $ | (45,002 | )
|                                |  |                      |        |                         |      |         |                      |  |                         |        |  |   |         |  

Amortization expense for all intangibles in the years ended December 31, 2007, 2006 and 2005
was $5.8 million, $7.4 million and $14.0 million, respectively. During 2007, we also recorded a charge of $0.3 million in connection with abandoning certain patent applications.

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:



|     |  |   |      
|---- |  | - | -----
|2008 |  | $ | 2,662
|2009 |  | $ | 1,216
|2010 |  | $ | 1,156
|2011 |  | $ | 925  
|2012 |  | $ | 842  

8. Accrued Liabilities

Accrued compensation at December 31, 2007 and 2006 were as follows (in thousands):



|                                          |  |      |       |      |   |      
|----------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                          |  | 2007 |       | 2006
|Accrued salaries and wages                |  | $    | 306   |      | $ | 354  
|Accrued vacation                          |  |      | 835   |      |   | 575  
|Accrued bonuses                           |  |      | 287   |      |   | 744  
|Accrued severance and restructuring costs |  |      |      |      |   | 486  
|                                          |  |      |       |      |   |      
|                                          |  | $    | 1,428 |      | $ | 2,159
|                                          |  |      |       |      |   |      

Accrued liabilities at December 31, 2007 and 2006 were as follows (in thousands):



|                                            |  |      |       |      |   |      
|------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                            |  | 2007 |       | 2006
|Accrued payroll taxes and indirect benefits |  | $    | 160   |      | $ | 248  
|Accrued property tax                        |  |      | 183   |      |   | 235  
|Accrued earn-out provision                  |  |      | 1,977 |      |   |     
|Other accrued liabilities                   |  |      | 736   |      |   | 600  
|                                            |  |      |       |      |   |      
|                                            |  | $    | 3,056 |      | $ | 1,083
|                                            |  |      |       |      |   |      

See Note 3 for additional discussion regarding the earn-out provision.



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9. Debt

On July 25, 2007, we amended our unsecured revolving credit agreement with Guaranty Bank (the Lender), under which we may borrow up to $20 million at any given time through June 23, 2008 (the Credit Agreement). The Credit
Agreement is guaranteed by Entorian Technologies 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% or the commercial-based rate minus between 0.50% and 1.00%, depending upon the amount of cash or liquid investments that we have on deposit with the
Lender.

We are required to maintain at least $5 million on deposit with the Lender during the term of the Credit Agreement. As
of December 31, 2007, we had on deposit this required amount and had not borrowed under this agreement. The Credit Agreement contains customary covenants that preclude us, among other things, from 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, acquiring another company or entity for which we would pay more than $30 million, or incurring indebtedness in excess of
$10 million with a third party outside the scope of the Credit Agreement. The Credit Agreement contains financial covenants requiring that our tangible net worth must be at least $70 million and our unencumbered liquid assets must be at
least $50 million. We must certify our compliance with these covenants while any advances remain outstanding under this agreement.

10. Redeemable
Preferred Stock

At December 31, 2007 and 2006, 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, 2006, we had advance payments on assets under development of approximately $0.1 million related to the purchase of certain capital
equipment and services.

At December 31, 2007, approximately 75% of our employees in Mexico, or approximately 51% 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.

Staktek Group, L.P. v. Kentron Technologies, Inc. and Chris Karabatsos

On March 8, 2007, we filed an action in the U.S. District Court for the District of Massachusetts, Boston Division, against Kentron Technologies,
Inc. and Chris Karabatsos, an individual, seeking damages and injunctive relief relating to the defendants false and disparaging statements regarding Staktek and our ArctiCore technologies that we proposed to the JEDEC
Solid State Technology Association for possible adoption as a standard. In particular, we have alleged that the defendants actions constituted unfair competition under the Lanham Act, intentional interference with
prospective business relations, defamation, business disparagement and have caused actionable injury to our business reputation. On July 11, 2007, the defendants filed their answer and a counterclaim, in which they made claims of unfair
methods of competition and unfair, deceptive acts by Staktek, in violation of the laws of the Commonwealth of Massachusetts. On July 12, 2007, the defendants filed a motion to dismiss our Lanham Act claims, and we also filed a motion
to dismiss their counterclaims. The judge denied these motions. We also filed a motion to compel discovery, which the judge granted on October 24, 2007. We are in the discovery phase of this litigation and expect a trial date in
early 2009. While we intend to vigorously prosecute these claims, as well as vigorously defend against the defendants counterclaim, there can be no guarantee that we will ultimately prevail or that the court will award the
remedies we are seeking.



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As of December 31, 2007, we were not involved in any other material legal proceedings.

From time to time, we may be subject to legal proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we
operate, and non-contractual customer claims or requested concessions we may agree to in the interest of maintaining business relationships.

12. Leases

In connection with the Southland acquisition, on September 1, 2007, we entered into a lease agreement with an entity owned by two
current Entorian employees (former Southland principals) to lease our Irvine facility for a term of three years. We incurred approximately $0.2 million in total operating expense related to this lease during 2007. During 2007 and 2006, we
leased our Austin facility under a non-cancelable operating lease agreement. During 2005, we leased our Austin facility and certain production and office equipment under non-cancelable operating lease agreements. Total operating lease expense for
the years ended December 31, 2007, 2006 and 2005 was approximately $0.6 million, $0.4 million, and $0.6 million, respectively. Additionally, we have office equipment under a capital lease at December 31, 2007 and 2006.

Future minimum payments under capital leases and non-cancelable operating leases with initial terms of one year or more consist of the following at
December 31, 2007 (in thousands):



|                                            |  |               |     |   |                 |   |      
|------------------------------------------- |  | ------------- | --- | - | --------------- | - | -----
|                                            |  | CapitalLeases |     |   | OperatingLeases
|2008                                        |  | $             | 44  |   |                 | $ | 874  
|2009                                        |  |               | 44  |   |                 |   | 926  
|2010                                        |  |               | 44  |   |                 |   | 725  
|2011                                        |  |               | 7   |   |                 |   | 6    
|2012                                        |  |               |    |   |                 |   |     
|                                            |  |               |     |   |                 |   |      
|Total minimum lease payments                |  |               | 139 |   |                 | $ | 2,531
|                                            |  |               |     |   |                 |   |      
|Amount representing interest                |  |               | (64 | ) |                 |   |      
|                                            |  |               |     |   |                 |   |      
|Present value of net minimum lease payments |  |               | 75  |   |                 |   |      
|Less current maturities                     |  |               | (21 | ) |                 |   |      
|                                            |  |               |     |   |                 |   |      
|                                            |  | $             | 54  |   |                 |   |      
|                                            |  |               |     |   |                 |   |      

13. Related-Party Transactions

Revenue

During 2007, we sold product to Southland. On August 31, 2007, we acquired
all of the outstanding ownership interests of this entity and as a result, recorded related-party product revenue of approximately $0.6 million for the period prior to the acquisition.

Lease Agreement

In connection with the acquisition, on September 1, 2007, we entered
into a lease agreement with an entity owned by two current Entorian employees (former Southland principals) to lease our Irvine facility for a term of three years. We incurred approximately $0.2 million in total operating expense related to
this lease during 2007.

Relationship with Austin Ventures

At December 31, 2007, Austin Ventures and its affiliates beneficially owned approximately 78% of our outstanding common stock. Set forth below is a brief description of the existing relationships and agreements
between Austin Ventures and us.



65



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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. Joseph A. Marengi, a venture 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.

14. Loss Per Share

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



|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                              |  | Year Ended December 31, |        
|                                                                              |  | 2007                    |         |   | 2006 |   |        | 2005 | 
|Numerator:                                                                    |  |                         |         |   |      |   |        |      |  |   |        |  
|Net loss                                                                      |  | $                       | (39,987 | ) |      | $ | (454   | )    |  | $ | (7,477 | )
|Denominator:                                                                  |  |                         |         |   |      |   |        |      |  |   |        |  
|Weighted average common shares outstanding                                    |  |                         | 47,199  |   |      |   | 48,345 |      |  |   | 49,674 |  
|Less: Weighted common shares subject to repurchase                            |  |                         | 43      |   |      |   | 265    |      |  |   | 1,095  |  
|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Total weighted average common shares used in computing basic loss per share   |  |                         | 47,156  |   |      |   | 48,080 |      |  |   | 48,579 |  
|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Effect of dilutive securities:                                                |  |                         |         |   |      |   |        |      |  |   |        |  
|Common shares subject to repurchase                                           |  |                         |        |   |      |   |       |      |  |   |       |  
|Stock options                                                                 |  |                         |        |   |      |   |       |      |  |   |       |  
|Stock warrants                                                                |  |                         |        |   |      |   |       |      |  |   |       |  
|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Dilutive potential common shares                                              |  |                         |        |   |      |   |       |      |  |   |       |  
|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Total weighted average common shares used in computing diluted loss per share |  |                         | 47,156  |   |      |   | 48,080 |      |  |   | 48,579 |  
|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Loss per share:                                                               |  |                         |         |   |      |   |        |      |  |   |        |  
|Basic                                                                         |  | $                       | (0.85   | ) |      | $ | (0.01  | )    |  | $ | (0.15  | )
|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Diluted                                                                       |  | $                       | (0.85   | ) |      | $ | (0.01  | )    |  | $ | (0.15  | )
|                                                                              |  |                         |         |   |      |   |        |      |  |   |        |  

15. Stockholders Equity

Common Stock

In August 2005, we reduced authorized shares of common stock from 200,000,000 to
100,000,000. Of these authorized shares, 11,530,000 shares have been reserved for the issuance of stock options. Of these options, 12,341,878 had been granted, of which 1,398,215 were forfeited, leaving 586,337 available for issuance at
December 31, 2007. At December 31, 2006, 10,874,448 had been granted and 977,035 were available for issuance.

Of 52,513,671
shares of common stock issued as of December 31, 2006, 104,884 shares 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. Of the 52,876,038 shares of common stock issued as of December 31, 2007, no shares were unvested and subject to rights of repurchase.



66



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In February 2006, we announced that our Board of Directors renewed our stock repurchase program. Under
this renewed program, we can spend up to $10.0 million to purchase shares of our common stock through open market transactions or privately negotiated transactions. In November 2006, our Board of Directors authorized an additional $10.0 million to
purchase our common stock. During 2005, 2006 and 2007, we purchased 2,775,819 shares, 1,406,683 shares and 1,352,947 shares of our stock under this program at a total cost of $10.6 million, $8.1 million and $4.9 million, respectively.

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.

16. Stock-Based Compensation

In July 2003, we
adopted the 2003 Stock Option Plan, which currently has 11,530,000 authorized shares. Options generally vest over a four-year period and are exercisable for a period of ten years from the date of grant.

In December 2004, the FASB issued SFAS 123(R). Under this standard, all forms of share-based payments to employees, including stock options, are
treated as compensation and recognized in the income statement. Pro forma disclosure is no longer acceptable. In addition, under SFAS 123(R), tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) are
presented as financing cash flows in the consolidated condensed statement of cash flows. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) and continued to use the Black-Scholes method of valuation for
share-based compensation. Under the fair value recognition provisions of SFAS 123(R), we adopted the modified prospective transition method, and therefore, recognize compensation expense for all share-based payments granted after January 1,
2006, as well as those granted prior to but not yet vested as of January 1, 2006. Prior period restatement and cumulative adjustments were not required.

Prior to adopting SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of option grants as operating cash flows in the consolidated statements of cash flows. SFAS 123(R) requires
the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized to be classified as financing cash flows. As a result, $95,000 and $0.3 million of excess tax benefits for 2007 and 2006, respectively,
have been classified as financing cash flows.

Information with respect to stock option activity for the year ended December 31, 2007
was as follows:



|                                         |  |                     |   |  |                               |      |                                                    |      |                                       |   |      
|---------------------------------------- |  | ------------------- | - |  | ----------------------------- | ---- | -------------------------------------------------- | ---- | ------------------------------------- | - | -----
|                                         |  | Outstanding Options
|                                         |  | Number ofOptions    |   |  | WeightedAverageExercise Price |      | WeightedAverageRemainingContractual Life(in years) |      | AggregateIntrinsicValue (inthousands)
|Outstanding at December 31, 2006         |  | 4,688,529           |   |  | $                             | 3.56 |                                                    |      |                                       |   |      
|Granted                                  |  | 1,467,430           |   |  | $                             | 2.86 |                                                    |      |                                       |   |      
|Exercised                                |  | (245,967            | ) |  | $                             | 0.76 |                                                    |      |                                       |   |      
|Cancelled or forfeited                   |  | (576,732            | ) |  | $                             | 5.27 |                                                    |      |                                       |   |      
|                                         |  |                     |   |  |                               |      |                                                    |      |                                       |   |      
|Outstanding at December 31, 2007         |  | 5,333,260           |   |  | $                             | 3.31 |                                                    | 7.60 |                                       | $ | 1,498
|                                         |  |                     |   |  |                               |      |                                                    |      |                                       |   |      
|Options exercisable at December 31, 2007 |  | 3,005,805           |   |  | $                             | 3.33 |                                                    | 6.68 |                                       | $ | 1,499



67



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As of December 31, 2007, there was approximately $4.2 million of unrecognized compensation cost
related to outstanding stock options. For the years ended December 31, 2007 and 2006, the total intrinsic value of exercised stock options was $0.7 million and $3.3 million, respectively.

For grants issued during the 12 months ended December 31, 2007 and 2006, the weighted average assumptions used in determining fair value under the
Black-Scholes model are outlined in the following table:



|                         |  |                         |  |              
|------------------------ |  | ----------------------- |  | -------------
|                         |  | Year Ended December 31,
|                         |  | 2007                    |  | 2006         
|Expected volatility      |  | 59.0%  61.6%           |  | 59.0%  62.0%
|Dividend yield           |  | 0.0%                    |  | 0.0%         
|Expected term (in years) |  | 7.0                     |  | 7.0  10.0   
|Risk-free interest rate  |  | 3.0%  5.0%             |  | 4.5%  5.2%  

The computation of expected volatility is based on historical volatility of our common stock. The
expected term of options issued to employees is estimated based on the average of the vesting period and contractual term of the option. The expected term of options issued to non-employees is based on the contractual term of the option. The
risk-free rate is based on U.S. Treasury yields for securities in effect at the time of grant, with terms approximating the expected term until exercise of the option. The weighted-average fair value of stock options granted during the years ended
December 31, 2007 and 2006 was $1.83 and $3.98, respectively. During the years ended December 31, 2007 and 2006, we recorded share-based compensation expense for options of approximately $5.0 million and $5.8 million, respectively.

Prior to the adoption of SFAS 123(R), we applied the intrinsic-value-based method of accounting prescribed by APB 25, and related
interpretations to account for our stock options granted to employees. Under this method, we recorded compensation cost only if the market price of the underlying common stock on the grant date exceeded the exercise price. SFAS 123 established
accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by SFAS 123, we elected to continue to apply the intrinsic-value-based method of accounting described
above, and adopted only the disclosure requirements of SFAS 123.

The following table illustrates the previously disclosed pro forma effect
on net loss and loss per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation (in thousands, except per share data):



|                                                                                                                                 |  |                             |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | -
|                                                                                                                                 |  | Year EndedDecember 31, 2005 |       
|Net loss, as reported                                                                                                            |  | $                           | (7,477 | )
|Add: Stock-based compensation cost, net of related tax effects, included in the determination of net loss, as reported           |  |                             | 6,180  |  
|Deduct: Total stock-based compensation cost, net of related tax effects, determined under fair-value based method for all
awards |  |                             | (7,112 | )
|                                                                                                                                 |  |                             |        |  
|Pro forma net loss                                                                                                               |  | $                           | (8,409 | )
|                                                                                                                                 |  |                             |        |  
|Loss per share:                                                                                                                  |  |                             |        |  
|Basicas reported                                                                                                                |  | $                           | (0.15  | )
|                                                                                                                                 |  |                             |        |  
|Basicpro forma                                                                                                                  |  | $                           | (0.17  | )
|                                                                                                                                 |  |                             |        |  
|Dilutedas reported                                                                                                              |  | $                           | (0.15  | )
|                                                                                                                                 |  |                             |        |  
|Dilutedpro forma                                                                                                                |  | $                           | (0.17  | )
|                                                                                                                                 |  |                             |        |  



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Employee Stock Purchase Plan

During the third quarter of 2005, we adopted the Staktek Holdings, Inc. 2005 Employee Stock Purchase Plan (ESPP), pursuant to which eligible employees could contribute a portion of their base compensation to purchase
shares of our common stock at a price equal to 85% of the fair market value on the date of exercise. In accordance with SFAS 123(R), we recognized expense based on the 15% discount at purchase. For the years ended December 31, 2007 and 2006,
ESPP compensation expense was approximately $6,000 and $30,000, respectively. Effective April 1, 2007, we terminated the ESPP. On May 16, 2007, we deregistered the authorized but unpurchased shares with the SEC.

Restricted Stock Units

During the second quarter of
2006, we adopted our Equity-Based Compensation Plan, which provides for granting restricted stock awards, stock appreciation rights, restricted stock units (RSUs), bonus stock and dividend equivalents to eligible employees. As of December 31,
2007, we had 800,000 authorized shares under this plan. RSUs generally vest over a four-year period.

Information with respect to RSU
activity for the year ended December 31, 2007 was as follows:



|                                 |  |                |   |  |                                       |     
|-------------------------------- |  | -------------- | - |  | ------------------------------------- | ----
|                                 |  | Number of RSUs |   |  | Weighted Average GrantDate Fair Value
|Outstanding at December 31, 2006 |  | 361,463        |   |  | $                                     | 6.73
|Granted                          |  | 399,734        |   |  | $                                     | 4.97
|Vested                           |  | (151,231       | ) |  | $                                     | 6.73
|Forfeited                        |  | (103,971       | ) |  | $                                     | 5.72
|                                 |  |                |   |  |                                       |     
|Outstanding at December 31, 2007 |  | 505,995        |   |  | $                                     | 5.55
|                                 |  |                |   |  |                                       |     

Share-based compensation related to RSUs is recorded based on our stock price as of the grant
date. For the years ended December 31, 2007 and 2006, RSU compensation expense was $0.9 million and $0.4 million, respectively. As of December 31, 2007, there was approximately $2.2 million of unrecognized compensation cost related to
outstanding RSUs, which we expect to recognize over a weighted average period of 2.8 years.

17. Income Taxes

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



|                         |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                         |  | Year Ended December 31, |       
|                         |  | 2007                    |        |   | 2006 |   |        | 2005 | 
|Current:                 |  |                         |        |   |      |   |        |      |  |   |        |  
|Federal .      |  | $                       | (1,767 | ) |      | $ | 2,077  |      |  | $ | 781    |  
|Foreign .      |  |                         | 595    |   |      |   | 1,991  |      |  |   | 2,958  |  
|State .       |  |                         | (5     | ) |      |   | 6      |      |  |   | (162   | )
|                         |  |                         |        |   |      |   |        |      |  |   |        |  
|Total current            |  |                         | (1,177 | ) |      |   | 4,074  |      |  |   | 3,577  |  
|                         |  |                         |        |   |      |   |        |      |  |   |        |  
|Deferred:                |  |                         |        |   |      |   |        |      |  |   |        |  
|Federal .      |  |                         | 1,157  |   |      |   | (4,081 | )    |  |   | (6,632 | )
|Foreign .      |  |                         | 7      |   |      |   | (112   | )    |  |   |       |  
|State .       |  |                         | 3      |   |      |   | (11    | )    |  |   | (19    | )
|                         |  |                         |        |   |      |   |        |      |  |   |        |  
|Total deferred .  |  |                         | 1,167  |   |      |   | (4,204 | )    |  |   | (6,651 | )
|                         |  |                         |        |   |      |   |        |      |  |   |        |  
|Benefit for income taxes |  | $                       | (10    | ) |      | $ | (130   | )    |  | $ | (3,074 | )
|                         |  |                         |        |   |      |   |        |      |  |   |        |  

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



69



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As of December 31, 2007, we had federal research and development credit carryforward of
approximately $76,000, which will begin to expire in 2027 if not utilized. 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, 2007 and 2006 were as follows (in thousands):



|                                              |  |      |        |   |      |   |        |  
|--------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                              |  | 2007 |        |   | 2006 |  
|Deferred tax assets:                          |  |      |        |   |      |   |        |  
|Current deferred tax assets                   |  |      |        |   |      |   |        |  
|Unrealized loss on securities                 |  | $    |       |   |      | $ | 2      |  
|Accrued liabilities                           |  |      | 701    |   |      |   | 448    |  
|                                              |  |      |        |   |      |   |        |  
|Gross current deferred tax assets             |  |      | 701    |   |      |   | 450    |  
|Valuation allowance                           |  |      | (471   | ) |      |   |       |  
|                                              |  |      |        |   |      |   |        |  
|Net current deferred tax assets               |  | $    | 230    |   |      | $ | 450    |  
|                                              |  |      |        |   |      |   |        |  
|Noncurrent deferred tax assets                |  |      |        |   |      |   |        |  
|Credit carryovers                             |  | $    | 76     |   |      | $ |       |  
|Accrued liabilities                           |  |      | 149    |   |      |   | 142    |  
|Depreciation and amortization                 |  |      | 1,411  |   |      |   | 1,227  |  
|Deferred compensation                         |  |      | 4,342  |   |      |   | 2,897  |  
|                                              |  |      |        |   |      |   |        |  
|Gross noncurrent deferred tax assets          |  |      | 5,978  |   |      |   | 4,266  |  
|Valuation allowance                           |  |      | (4,588 | ) |      |   |       |  
|                                              |  |      |        |   |      |   |        |  
|Net noncurrent deferred tax assets            |  | $    | 1,390  |   |      | $ | 4,249  |  
|                                              |  |      |        |   |      |   |        |  
|Deferred tax liabilities:                     |  |      |        |   |      |   |        |  
|Current deferred tax liabilities              |  |      |        |   |      |   |        |  
|Prepaid expenses                              |  | $    | (87    | ) |      | $ | (109   | )
|                                              |  |      |        |   |      |   |        |  
|Total current deferred tax liabilities        |  | $    | (87    | ) |      | $ | (109   | )
|                                              |  |      |        |   |      |   |        |  
|Noncurrent deferred tax liabilities           |  |      |        |   |      |   |        |  
|Deductible patent expense                     |  | $    | (597   | ) |      | $ | (551   | )
|Acquired intangibles                          |  |      | (831   | ) |      |   | (2,783 | )
|                                              |  |      |        |   |      |   |        |  
|Total noncurrent deferred tax liabilities     |  | $    | (1,428 | ) |      | $ | (3,334 | )
|                                              |  |      |        |   |      |   |        |  
|Net current deferred tax asset                |  | $    | 143    |   |      | $ | 341    |  
|                                              |  |      |        |   |      |   |        |  
|Net noncurrent deferred tax asset (liability) |  | $    | (38    | ) |      | $ | 932    |  
|                                              |  |      |        |   |      |   |        |  

During 2007, we established a $5.1 million valuation allowance, which was equal to the net
domestic deferred tax assets due to uncertainties regarding the realization of these deferred tax assets.

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 our common stock subsequent to the date of grant of the exercised stock options. Any option-related excess tax benefits are recorded as an increase to additional paid-in capital, while
option-related tax deficiencies are recorded as a decrease to additional paid-in capital to the extent of our additional paid-in capital option pool, and the remainder, if any, is taken to the income tax provision. During the years ended
December 31, 2007 and 2006, our option-related excess tax deductions resulted in an increase to additional paid-in capital of approximately $0.1 million and $0.3 million, respectively, while option-related tax deficiencies resulted in a
decrease to additional paid-in capital of approximately $0 and $0.2 million, respectively.



70



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



|                                     |  |                         |         |   |      |   |      |      |  |   |        |  
|------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                     |  | Year Ended December 31, |        
|                                     |  | 2007                    |         |   | 2006 |   |      | 2005 | 
|Computed at federal statutory rate   |  | $                       | (13,999 | ) |      | $ | (204 | )    |  | $ | (3,693 | )
|Goodwill impairment                  |  |                         | 9,766   |   |      |   |     |      |  |   |       |  
|Deferred assets not benefited        |  |                         | 5,060   |   |      |   |     |      |  |   |       |  
|Stock-based compensation expense     |  |                         | 431     |   |      |   | 387  |      |  |   | 1,399  |  
|Research and development credit      |  |                         | (809    | ) |      |   |     |      |  |   |       |  
|Non-deductible and non-taxable items |  |                         | (474    | ) |      |   | (395 | )    |  |   | (327   | )
|State taxes, net of federal benefit  |  |                         | (11     | ) |      |   | 1    |      |  |   | (8     | )
|Other                                |  |                         | 26      |   |      |   | 81   |      |  |   | (445   | )
|                                     |  |                         |         |   |      |   |      |      |  |   |        |  
|Benefit for income taxes             |  | $                       | (10     | ) |      | $ | (130 | )    |  | $ | (3,074 | )
|                                     |  |                         |         |   |      |   |      |      |  |   |        |  

We file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The tax years 2003 through 2007 remain open to examination by all the major
taxing jurisdictions to which we are subject, though we are not currently under examination by any major taxing jurisdiction.

We adopted
the provision of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, we recognized no changes in the liability for unrecognized tax benefits
and no adjustments to the January 1, 2007 balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



|                                                             |  |   |      |  
|------------------------------------------------------------ |  | - | ---- | -
|Balance at January 1, 2007                                   |  | $ | 179  |  
|Additions based on tax positions related to the current year |  |   |     |  
|Additions for tax positions of prior years                   |  |   |     |  
|Reductions for tax positions of prior years                  |  |   | (179 | )
|Settlements                                                  |  |   |     |  
|                                                             |  |   |      |  
|Balance at December 31, 2007                                 |  | $ |     |  
|                                                             |  |   |      |  

In the event we have unrecognized tax benefits, we will recognize the related accrued interest and
penalties as income tax expense.

18. Employee Benefits

We offer all full-time employees subsidized health, dental and vision coverage. In addition, 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 maintain the Staktek Group L.P. Employees 401(k) Profit Sharing Plan and Trust (the Staktek Plan), which is a voluntary defined contribution
retirement plan qualifying under Section 401(k) of the Internal Revenue Code of 1986. Under the Staktek Plan, eligible employees may defer up to 75% of their annual compensation, subject to maximum IRS limitations. Under the provisions of the
Staktek Plan, we make contributions in amounts as determined by the Board of Directors, subject to certain limitations. Our contributions related to the Staktek Plan were approximately $0.4 million, $0.5 million and $0.5 million for the years
ended December 31, 2007, 2006 and 2005, respectively.



71



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We also maintain the Southland 401(k) Employees Savings Plan, which we acquired with the Southland
acquisition (the Southland Plan). Under the provisions of the Southland Plan, we made a contribution for 2007 in the amount of $22,000. We are planning to merge the Southland Plan into our Entorian Plan effective March 3, 2008.

Bonus Plan

We
have a quarterly bonus plan under which eligible employees may receive a percentage of their base pay in additional compensation. Typically, we have made these payments within 40 days after the end of the quarter in which the compensation is earned.
Total expense was approximately $0, $2.3 million and $1.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Discretionary Payment

For the third and fourth quarters of 2007, the Board of Directors authorized discretionary
bonus payments to eligible employees. Total expense recorded in 2007 for these payments was approximately $0.8 million. For the fourth quarter of 2006, the Board of Directors authorized a discretionary bonus payment to eligible employees. Total
expense recorded in 2006 for this discretionary payment was approximately $0.8 million.

19. Restructuring

During 2005, we recorded a restructuring charge totaling $1.0 million resulting from workforce reductions of 76 employees. In April 2006, we recorded an
additional restructuring charge of approximately $0.4 million for separation costs for a workforce reduction of 29 employees. Both restructurings were 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.

In the third quarter of 2007, we recorded a restructuring
charge of $0.4 million as a result of changing our long-term focus. The following table details the changes in the restructuring accrual (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   |  
|Restructuring expenses accrued             |  |   | 391   |  
|Payments of restructuring expenses         |  |   | (789  | )
|                                           |  |   |       |  
|Restructuring accrual at December 31, 2006 |  |   | 30    |  
|Restructuring expenses accrued             |  |   | 356   |  
|Payments of restructuring expenses         |  |   | (386  | )
|                                           |  |   |       |  
|Restructuring accrual at December 31, 2007 |  | $ |      |  
|                                           |  |   |       |  



72



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20. Geographic Information

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



|                   |  |                         |        |      |   |        |  |   |       
|------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                   |  | Year Ended December 31,
|                   |  | 2007                    |        | 2006 |   | 2005  
|Revenue:           |  |                         |        |      |   |        |  |   |       
|North America:     |  |                         |        |      |   |        |  |   |       
|United States      |  | $                       | 33,368 |      | $ | 43,133 |  | $ | 33,307
|Canada             |  |                         | 198    |      |   |       |  |   | 746   
|Central America:   |  |                         |        |      |   |        |  |   |       
|Dominican Republic |  |                         | 2,313  |      |   |       |  |   |      
|Europe:            |  |                         |        |      |   |        |  |   |       
|Germany            |  |                         | 143    |      |   | 592    |  |   | 1,396 
|Other              |  |                         | 20     |      |   | 1      |  |   | 37    
|Asia:              |  |                         |        |      |   |        |  |   |       
|Korea              |  |                         | 2,891  |      |   | 11,221 |  |   | 16,965
|Japan              |  |                         | 1,092  |      |   | 609    |  |   | 75    
|Malaysia           |  |                         | 409    |      |   |       |  |   |      
|Thailand           |  |                         | 305    |      |   |       |  |   |      
|China              |  |                         | 131    |      |   |       |  |   |      
|                   |  |                         |        |      |   |        |  |   |       
|Total              |  | $                       | 40,870 |      | $ | 55,556 |  | $ | 52,526
|                   |  |                         |        |      |   |        |  |   |       

At December 31, 2007 and 2006, 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):



|                                   |  |      |       |      |   |      
|---------------------------------- |  | ---- | ----- | ---- | - | -----
|                                   |  | 2007 |       | 2006
|Cash                               |  | $    | 129   |      | $ | 581  
|Property, plant and equipment, net |  |      | 3,019 |      |   | 4,643
|                                   |  |      |       |      |   |      
|Total                              |  | $    | 3,148 |      | $ | 5,224
|                                   |  |      |       |      |   |      

Our foreign 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.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

The SEC defines the term
disclosure controls and procedures to mean a companys controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Our chief executive officer and chief financial officer have concluded, based upon the evaluation of the effectiveness of
our disclosure controls and procedures by our management as of the end of the period covered by this annual report based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and excluding



73



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the controls performed at our Southland subsidiary, that our disclosure controls and procedures were effective for this purpose. This assessment
excludes the controls performed at our Southland subsidiary because we acquired it in the second half of 2007. Southlands total assets and total revenue represent 24% of our total assets and 16% of our total revenue, respectively, as of
December 31, 2007. While we are addressing Southlands controls and procedures, we are permitted to exclude an acquisition for our assessment of internal controls over financial reporting if, among other circumstances and factors,
there is not adequate time between the closing date of the acquisition and the assessment date to assess its internal controls.

It should
be noted that in designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met due to numerous factors, ranging from errors to conscious
acts of an individual, or individuals acting together. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because
of inherent limitations in a cost-effective control system, misstatements due to error and/or fraud may occur and not be detected.

Changes in Internal
Controls Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the
quarter ended December 31, 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.



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PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ---------------------------------------------------------

The information set forth in the Proxy Statement to be delivered to stockholders in connection with our Annual Meeting of Stockholders to be held on April 17, 2008 (the Proxy Statement) under the headings Board Structure
and Compensation, Proposal: Election of Directors, Executive Officers, and Section 16(a) Beneficial Ownership Reporting Compliance is incorporated herein by reference. In addition, the Company has adopted a
Code of Conduct that applies to our directors and employees. This Code of Conduct can be found under the Investor Relations section on our web site and is included as Exhibit 14.1 to this Form 10-K.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information set forth
in the Proxy Statement under the headings Board Structure and CompensationDirector Compensation Arrangements and Executive Compensation and Other Information is incorporated herein by reference.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information set forth in the Proxy Statement under the heading Security Ownership of Certain Beneficial Owners and Management is
incorporated herein by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

The information set forth in the Proxy Statement under the heading Certain Relationships and Related Transactions is incorporated herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The
information set forth in the Proxy Statement under the heading Independent Registered Public Accounting Firm is incorporated herein by reference.



75



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



|(a) | Financial Statement Schedules
|--- | -----------------------------



|1. | Financial Statements: See Index to Consolidated 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.
|-- | -------------------------------------------------------------------------------------------------------------------------------------



|(b) | Exhibits
|--- | --------

INDEX TO EXHIBITS



|              |  |                                                                                                                                                          |  |                           |  |             |  |         |  |            |  |              
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------- |  | ------- |  | ---------- |  | -------------
|              |  |                                                                                                                                                          |  | Incorporated by Reference |  |            
|ExhibitNumber |  | Exhibit Description                                                                                                                                      |  | Form                      |  | File Number |  | Exhibit |  | FilingDate |  | FiledHerewith
|              |  |                                                                                                                                                          |  |                           |  |            
|2.1           |  | Agreement and Plan of Merger, dated as of August 21, 2007, among Staktek Holdings, Inc., Southland Micro Systems, Inc. and certain other parties thereto |  | 8-K                       |  | 000-50553   |  | 2.1     |  | 9/5/07     |  |              
|              |  |                                                                                                                                                          |  |                           |  |            
|2.2           |  | Escrow Agreement, dated as of August 31, 2007, among Staktek Holdings, Inc., Wells Fargo Bank, N.A., and John R. Meehan                                  |  | 8-K                       |  | 000-50553   |  | 2.2     |  | 9/5/07     |  |              
|              |  |                                                                                                                                                          |  |                           |  |            
|3.1           |  | Amended and Restated Certificate of Incorporation                                                                                                        |  | 10-Q                      |  | 000-50553   |  | 3.1.1   |  | 11/7/05    |  |              
|              |  |                                                                                                                                                          |  |                           |  |            
|3.1.1         |  | Certificate of Ownership and Merger                                                                                                                      |  | 8-K                       |  | 000-50553   |  | 3.1     |  | 2/27/08    |  |              
|              |  |                                                                                                                                                          |  |                           |  |            
|3.2           |  | Amended and Restated Bylaws                                                                                                                              |  |                           |  |             |  |         |  |            |  |              
|              |  |                                                                                                                                                          |  |                           |  |            
|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*         |  | Entorian Technologies Inc. 2003 Stock Option Plan, as amended to date                                                                                    |  | 14C                       |  | 000-50553   |  |         |  | 2/26/08    |  |              
|              |  |                                                                                                                                                          |  |                           |  |            
|10.2*         |  | Entorian Technologies Inc. 2006 Equity-Based Compensation Plan                                                                                           |  | S-8                       |  | 33-133494   |  | 99.1    |  | 4/24/06    |  |              
|              |  |                                                                                                                                                          |  |                           |  |            
|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   |  |              



76



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|              |  |                                                                                                                                  |  |                           |  |             |  |         |  |            |  |              
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------- |  | ------- |  | ---------- |  | -------------
|              |  |                                                                                                                                  |  | Incorporated by Reference |  |            
|ExhibitNumber |  | Exhibit Description                                                                                                              |  | Form                      |  | File Number |  | Exhibit |  | FilingDate |  | FiledHerewith
|              |  |                                                                                                                                  |  |                           |  |            
|10.7          |  | Lease Agreement, dated August 31, 2007, among Staktek Group L.P. and Meehan Holdings LLC                                         |  |                           |  |             |  |         |  |            |  | X            
|              |  |                                                                                                                                  |  |                           |  |            
|10.8*         |  | 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   |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.9*         |  | Amended and Restated Executive Employment Agreement, dated March 12, 2008, among Staktek Holdings, Inc. and W. Kirk Patterson    |  |                           |  |             |  |         |  |            |  | X            
|              |  |                                                                                                                                  |  |                           |  |            
|10.10*        |  | Amended and Restated Executive Employment Agreement, dated March 12, 2008, among Staktek Holdings, Inc. and Stephanie A. Lucie   |  |                           |  |             |  |         |  |            |  | X            
|              |  |                                                                                                                                  |  |                           |  |            
|10.11*        |  | Form of Indemnification Agreement for Entorian Technologies Inc.s directors and officers                                        |  | S-1                       |  | 333-110806  |  | 10.9    |  | 11/26/03   |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.12*        |  | Entorian Technologies Inc. Medical Retiree Plan                                                                                  |  | 10-K                      |  | 000-50553   |  | 10.9    |  | 3/9/05     |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.13*        |  | Staktek Amended and Restated 2007 Bonus Incentive Plan                                                                           |  | 8-K                       |  | 000-50553   |  | 99.1    |  | 11/6/07    |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.14         |  | Loan Agreement, dated March 10, 2005, between Guaranty Bank and Staktek Holdings, Inc.                                           |  | 10-Q                      |  | 000-50553   |  | 10.1    |  | 5/11/05    |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.15         |  | Revolving Promissory Note in connection with the Loan Agreement dated March 10, 2005                                             |  | 10-Q                      |  | 000-50553   |  | 10.2    |  | 5/11/05    |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.16         |  | Guaranty Agreement, dated March 10, 2005, between Staktek Group, L.P. and Guarantee Bank                                         |  | 10-Q                      |  | 000-50553   |  | 10.3    |  | 5/11/05    |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.17         |  | Amendment No. 3 to Loan Agreement, dated July 25, 2007, between Guaranty Bank and Staktek Holdings, Inc.                         |  | 10-Q                      |  | 000-50553   |  | 10.1    |  | 8/14/07    |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|10.18*        |  | Offer Letter between Staktek Holdings, Inc. and Joseph A. Marengi                                                                |  | 8-K                       |  | 000-50553   |  | 10.1    |  | 10/17/07   |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|14.1          |  | Code of Conduct                                                                                                                  |  | 10-K                      |  | 000-50553   |  | 14.1    |  | 3/9/05     |  |              
|              |  |                                                                                                                                  |  |                           |  |            
|21.1          |  | List of Subsidiaries                                                                                                             |  |                           |  |             |  |         |  |            |  | X            
|              |  |                                                                                                                                  |  |                           |  |            
|23.1          |  | Consent of Independent Registered Public Accounting Firm                                                                         |  |                           |  |             |  |         |  |            |  | X            
|              |  |                                                                                                                                  |  |                           |  |            
|24.1          |  | Power of Attorney (See signature page of this Form 10-K)                                                                         |  |                           |  |             |  |         |  |            |  | X            
|              |  |                                                                                                                                  |  |                           |  |            
|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.
|---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



77



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



ENTORIAN TECHNOLOGIES INC.By:

/s/    WAYNE R.
LIEBERMANWayne R. Lieberman President and Chief Executive OfficerDate: March 14, 2008By:

/s/    W. KIRK
PATTERSONW. Kirk Patterson Senior Vice President and Chief Financial OfficerDate: March 14, 2008


KNOW BY THESE PRESENT, that each person whose signature appears below constitutes and
appoints each of Wayne R. Lieberman and W. Kirk Patterson, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of the attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, as amended, this Registration Statement 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)                  |  | March 14, 2008
|                                             |  |                                                                                               
|/S/    W. KIRK
PATTERSON W. Kirk Patterson   |  | Senior Vice President and Chief Financial Officer (principal accounting and financial officer) |  | March 14, 2008
|                                             |  |                                                                                               
|/S/    JOSEPH C.
ARAGONA Joseph C. Aragona   |  | Chairman of the Board of Directors                                                             |  | March 14, 2008
|                                             |  |                                                                                               
|/S/    HARVEY B.
CASH Harvey B. Cash         |  | Director                                                                                       |  | March 14, 2008
|                                             |  |                                                                                               
|/S/    KEVIN P.
HEGARTY Kevin P. Hegarty     |  | Director                                                                                       |  | March 14, 2008
|                                             |  |                                                                                               
|/S/    CLARK W.
JERNIGAN Clark W. Jernigan   |  | Director                                                                                       |  | March 14, 2008
|                                             |  |                                                                                               
|/S/    JOSEPH A.
MARENGI Joseph A. Marengi   |  | Director                                                                                       |  | March 14, 2008
|                                             |  |                                                                                               
|/S/    A. TRAVIS
WHITE A. Travis White       |  | Director                                                                                       |  | March 14, 2008



78