**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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

**Forthe fiscal year ended March 31, 2007 or**

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

**Forthe transition period from                           to                          **

**CommissionFile Number 000-33387**

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**GSI Technology, Inc.**

*(Exact name of registrant asspecified in its charter)*

| **Delaware**                                                      |   | **77-0398779**                       |
|-------------------------------------------------------------------|--------|--------------------------------------|
| *(State  or other jurisdiction of incorporation or organization)* |   | *(IRS  Employer Identification No.)* |

 

**2360 OwenStreetSanta Clara, California 95054***(Addressof principal executive offices, zip code)*

**(408) 980-8388***(Registrant’stelephone number, including area code)*

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

| **Title of Each Class**         |   | **Name of  Each Exchange on which Registered** |
|---------------------------------|--------|------------------------------------------------|
| Common Stock,  $0.001 par value |   | The Nasdaq Stock  Market LLC                   |

 

**Securities registered pursuant toSection 12(g) of the Act:None**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso   No x

Indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or Section 15(d) of theAct. Yes o   No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Act).   Large acceleratedfiler o   Accelerated filer o   Non-accelerated filer x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

The aggregate market value of the registrant’s votingstock held by non-affiliates of the registrant, based upon the closing saleprice of the common stock on June 1, 2007, as reported on the NasdaqGlobal Market was approximately $60.1 million. The registrant was not apublic company on the last day of its second fiscal quarter of 2007. Shares ofthe registrant’s common stock held by each officer and director and each personwho owns 5% or more of the outstanding common stock of the registrant have beenexcluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes. Number of shares of common stock outstanding at June 1,2007: 27,594,690.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the registrant’sdefinitive proxy statement for its 2007 annual meeting of stockholders areincorporated by reference into Part III hereof.

 

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**GSI TECHNOLOGY, INC.2007 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS**

|                               | ** ** | ** **                                                                                                              | ** ** | **Page** | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**               |       |                                                                                                                    |
| Item 1.                       |       | Business                                                                                                                |       |     | 3          |   |   |
| Item  1A.                     |       | Risk  Factors                                                                                                           |       |     | 16         |   |   |
| Item 1B.                      |       | Unresolved Staff Comments                                                                                               |       |     | 31         |   |   |
| Item 2.                       |       | Properties                                                                                                              |       |     | 31         |   |   |
| Item  3.                      |       | Legal  Proceedings                                                                                                      |       |     | 31         |   |   |
| 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                                                                                                 |       |     | 33         |   |   |
| Item 7.                       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                   |       |     | 35         |   |   |
| Item 7A.                      |       | Quantitative and Qualitative Disclosures About Market  Risk                                                             |       |     | 46         |   |   |
| Item 8.                       |       | Financial Statements and Supplementary Data                                                                             |       |     | 47         |   |   |
| Item 9.                       |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       |     | 75         |   |   |
| Item 9A(T).    |       | Controls and Procedures                                                                                                 |       |     | 75         |   |   |
| Item  9B.                     |       | Other  Information                                                                                                      |       |     | 75         |   |   |
| **PART III**             |       |                                                                                                                    |
| Item 10.                      |       | Directors and Executive Officers and Corporate  Governance                                                              |       |     | 76         |   |   |
| Item 11.                      |       | Executive Compensation                                                                                                  |       |     | 76         |   |   |
| Item 12.                      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       |     | 76         |   |   |
| Item 13.                      |       | Certain Relationships and Related Transactions, and  Director Independence                                              |       |     | 76         |   |   |
| Item 14.                      |       | Principal Accounting Fees and Services                                                                                  |       |     | 76         |   |   |
| **PART IV**              |       |                                                                                                                    |
| Item 15.                      |       | Exhibits and Financial Statement Schedules                                                                              |       |     | 77         |   |   |
| Signatures                    |       |                                                                                                                    | 79         |     |       |
| Exhibits                      |       |                                                                                                                    |       |     |       |

 

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**Forward-lookingStatements**

*In addition to historical information, this AnnualReport on Form 10-K includes forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended (“the Exchange Act”). Theseforward-looking statements involve risks and uncertainties. Forward-lookingstatements are identified by words such as “anticipates,” “believes,” “expects,”“intends,” “may,” “will,” and other similar expressions. In addition, anystatements which refer to expectations, projections, or other characterizationsof future events, or circumstances, are forward-looking statements. Actualresults could differ materially from those projected in the forward-looking statementsas a result of a number of factors, including those set forth in this reportunder “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and “Risk Factors,” those described elsewhere in this report,and those described in our other reports filed with the Securities and ExchangeCommission (“SEC”). We caution you not to place undue reliance on theseforward-looking statements, which speak only as of the date of this report, andwe undertake no obligation to update these forward-looking statements after thefiling of this report. You are urged to review carefully and consider ourvarious disclosures in this report and in our other reports publicly disclosedor filed with the SEC that attempt to advise you of the risks and factors thatmay affect our business.*

**PART I**

**Item 1.**                        *Business*

**Overview**

We develop and market “Very Fast” static random accessmemory, or SRAM, products that are incorporated primarily in high-performancenetworking and telecommunications equipment, such as routers, switches, widearea network infrastructure equipment, wireless base stations and networkaccess equipment. In addition, we serve the ongoing needs of the military,industrial, test equipment and medical markets for high-performance SRAMs. Basedon the performance characteristics of our products and the breadth of ourproduct portfolio, we consider ourselves to be a leading provider of Very FastSRAMs.

We sell our products to leading original equipmentmanufacturer, or OEM, customers including Alcatel-Lucent, Cisco Systems,Huawei Technologies and Nortel Networks. We utilize a fabless business model,which allows us both to focus our resources on research and development,product design and marketing, and to gain access to advanced process technologieswith only modest capital investment and fixed costs.

We were incorporated inCalifornia in 1995 under the name Giga Semiconductor, Inc. We changed ourname to GSI Technology in December 2003 and reincorporated in Delaware in June 2004under the name GSI Technology, Inc. Our principal executive offices arelocated at 2360 Owen Street, Santa Clara, California, 95054, and our telephonenumber is (408) 980-8388.

**Industry Background**

***SRAM Market Overview***

Virtually all types of high-performance electronicsystems incorporate SRAMs. An SRAM is a memory device that retains data aslong as power is supplied, without requiring any further user intervention.SRAMs offer the fastest access to stored data of any type of memory device.

There is a broadvariety of SRAMs, characterized by a number of attributes, such as speed,memory capacity, or density, and power consumption. There are several differentindustry measures of speed:

·       *latency*, also referred to as random accesstime, which is the delay between the request for data and the delivery of suchdata for use and is measured in nanoseconds, or ns;

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·       *bandwidth*, which is the rate at which datacan be streamed to or from a device and is measured in gigabits per second;

·       *clock frequency*, which is the cycle rateof a clock within a synchronous device and is measured in megahertz, or MHz;and

·       *clock access time*, which is the delaybetween the beginning of the clock cycle and the delivery of data as measuredin nanoseconds.

Historically, SRAMs havebeen utilized wherever other memory technologies have been inadequate. SRAMsdemonstrate lower latency, resulting in faster random access times, relative todynamic random access memory, or DRAM, and other types of memory technologies.However, over the past few decades, less expensive alternatives have beenintroduced to address certain applications formerly using lower performance SRAMs. Forexample, new types of DRAM are now in the process of displacing lowerperformance SRAM products in applications such as cell phones. As a result ofthe displacement of low performance SRAMs, the total market size for SRAMs isdiminishing. However, due to their inherent higher latency characteristics,DRAMs cannot match the random access speed of high-performance SRAMs. GartnerDataquest divides the SRAM market into segments based on speed. The highestperformance segment is comprised of SRAMs that operate at speeds of less than10 nanoseconds, which we refer to as “Very Fast SRAMs.” Very Fast SRAMsare predominantly utilized in high-performance networking andtelecommunications equipment. Gartner Dataquest estimates that this segment ofthe SRAM market will grow from $1.06 billion in 2006 to $1.12 billionin 2010.

***Increasing Need for Very Fast SRAMs***

Growth in data, voice andvideo traffic has driven the need for greater networking bandwidth, resultingin the continued expansion of the networking and telecommunicationsinfrastructure. The continued growth in the level of Internet usage has led tothe proliferation of a wide variety of equipment throughout the networking andtelecommunications infrastructure, including routers, switches, wireless localarea network infrastructure equipment, wireless base stations and networkaccess equipment and a demand for new equipment with faster and higherperformance. High-performance networking and telecommunications equipmentrequires Very Fast SRAMs. For example, in a typical router or switch,multiple Very Fast SRAMs are required to temporarily store, or buffer, datatraffic and to provide rapid lookup of information in data tables. Asnetworking equipment must increasingly support advanced traffic content such asVoice over Internet Protocol, or VoIP, and video streaming, demand for evenhigher performance Very Fast SRAMs is expected to continue to increase.

***Demanding Requirements for Success in the Very FastSRAM Market***

The pressure on networking and telecommunications OEMsto bring higher performance equipment to market rapidly to support not onlymore traffic but also more advanced traffic content is compounded by therequirement that this new equipment occupy no more space than the equipment itreplaces, which results in increased board density and the need for low poweroperations. In response to these pressures, OEMs have increasingly relied onproviders that are capable of rapidly developing and introducing advanced,higher density, low power Very Fast SRAMs. The variety of applications forVery Fast SRAMs within the networking and telecommunications markets has alsodriven a need for more specialized products available in relatively lowvolumes. These specialized products include high-speed synchronous SRAMs, withdifferent density, latency and bandwidth capabilities. In general, OEMs preferto work with a supplier who can address the full range of their high-performanceVery Fast SRAM product requirements and, just as importantly, can offer thetechnical and logistic support necessary to sustain and accelerate theirefforts.

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We believe the key successfactors for a Very Fast SRAM vendor are the ability to offer a broad catalog ofhigh-performance, high-quality and high-reliability Very Fast SRAM products, tocontinuously introduce new products with higher speeds, lower power and greaterdensities, to maintain timely availability of prior generations of products forseveral years after their introductions, and to provide effective logistic andtechnical support throughout OEM customers’ product development andmanufacturing life cycles.

**The GSI Solution**

We endeavor to address theoverall needs of our OEM customers for Very Fast SRAMs, not only satisfyingtheir immediate requirements for our latest generation, highest performance ICsbut also providing them with the ongoing long-term support necessary during theentire lives of the systems in which our products are utilized. Accordingly,the key elements of our solution include:

***Innovative Product Performance Leadership***

*HighSpeed.**  *Throughthe use of advanced architectures, design methodologies and silicon processtechnologies, we have developed a wide variety of high-performance VeryFast SRAMs. The vast majority of our products have random access times of9 nanoseconds or less, while our newest products have random access times ofless than 5 nanoseconds and clock access times as fast as0.45 nanoseconds with bandwidth as high as 48 gigabits per second. Byproviding higher performance Very Fast SRAMs, we enable our networking and telecommunicationsOEMs to continually design and develop higher performance products that supportincreasingly complex traffic content.

*LowPower Consumption.**  *Manyof our Very Fast SRAMs require significantly less power than comparableproducts offered by our principal competitors. Because these products utilizeless power and generate less heat, the reliability of the networking ortelecommunications equipment in which they are employed increases. Furthermore,the low power utilization of our Very Fast SRAMs helps enable OEMs to addcapabilities to their systems, which otherwise might not have been possible dueto overall system power constraints.

*ProcessTechnology Leadership.**  *Wemaintain our own process engineering capability and resources, which arelocated in close physical proximity to our manufacturer, Taiwan SemiconductorManufacturing Company, or “TSMC.” This enhances our ability to work closelywith TSMC to develop certain modifications of the advanced process technologiesused in the manufacturing of our Very Fast SRAMs in order to maximize productperformance, optimize yields, lower manufacturing costs and improve quality.Our most advanced 36 and 72 megabit, or Mb, synchronous Very Fast SRAMsare manufactured using 90 nanometer process technology. We are currentlydeveloping new synchronous Very Fast SRAMs using 65 nanometer processtechnology, which will allow us to further increase product performance, lowerpower consumption and reduce costs.

*Product Innovation.**  *We believe we have established aposition as a technology leader in the design and development of Very Fast SRAMs. Forexample, we were the first supplier to introduce 72-bit-wide SRAMsas single monolithic ICs. In addition, we are the only vendor to offer a fullline of Very Fast Synchronous SRAMs that operate and interface at 1.8 to3.3 volts, giving our OEM customers the ability to use the same product insystems of theirs that operate at any voltage within that range. Moreover, forcertain Very Fast Synchronous SRAMs, we are the only vendor to offer a productthat operates at 1.8 volts, which uses approximately one half to two-thirdsthe power of our competitors’ 2.5 volt products.

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***Broad and Readily Available Product Portfolio***

*ExtensiveProduct Catalog.**  *TheVery Fast SRAM market is highly fragmented in terms of product features andspecifications. To meet our OEM customers’ diverse needs, we have what webelieve is the broadest catalog of Very Fast SRAM products currently available.Our product line includes a wide range of Very Fast SRAMs with varyingdensities, features, clock speeds, and voltages, as well as several operatingtemperature ranges and numerous package options in both 5/6 (leaded) and 6/6 (lead-free)versions, which are compliant with the European Union’s Restriction on the Useof Hazardous Substances Directive 2002/95/EC.

*AdvancedFeature Sets.**  *Ourproducts offer features that address a broad range of our networking andtelecommunications OEMs’ system requirements. Among these features is a JTAGtest port, named for the IEEE Joint Test Action Group, which enablespost-assembly verification of the connection between our Very Fast SRAMs and anOEM customer’s system board, thereby allowing an OEM customer of ours todevelop, test and ship their products more rapidly. Additionally, we offer ourFLXDrive feature, which allows system designers to optimize the signalintegrity for any given requirement. We also provide OEMs the ability to employcertain of our Very Fast SRAMs in various modes of operation by using ourproducts’ mode control pins, thus increasing the flexibility of those productsand their ready availability from our inventory.

*SuperiorLifetime Availability of Products.**  *Unlike the market for consumerelectronics, the markets in which we compete, particularly the networking andtelecommunications market, generally keep their system designs in productionfor extended periods of time and maintenance of those systems in the field foreven longer periods is critical to their success. Our foundry-basedmanufacturing strategy, our process technology selections, our master-diedesign strategy and the design of our packaging, burn-in and test work-flowsall contribute to allow us to meet and exceed our guarantee of providing aproduct life of at least seven years for any new product family we bring tomarket. These techniques also allow us to keep our delivery lead-timesrelatively short even for specialized, infrequently ordered members of thoseproduct families. We believe our approach is better suited to address the needsof our target markets than attempts to apply mass market manufacturing strategiesto Very Fast SRAM products.

*Multiple TemperatureGrades.**  *Weoffer both commercial and industrial temperature grades for all of our VeryFast SRAMs. This ability to perform at specification throughout theindustrial temperature range of -40°Cto +85°C is critical for Very Fast SRAMs used in a broadvariety of networking and telecommunications applications, where the operatingenvironments may be harsh. We can also offer military and extended temperaturegrades upon request for most of our Very Fast SRAMs.

***Master Die Methodology***

Our master die methodology enables multiple productfamilies, and variations thereof, to be manufactured from a single mask set. Asa result, based upon the way available die from a wafer are metalized, wirebonded, packaged and tested, from 19 mask sets we have created over 8,500different products. Using these mask sets, we produce wafers that can befurther processed upon customer orders into the final specified product therebysignificantly shortening the overall manufacturing time. For example, from a72 megabit mask set, we can produce three families of 72 megabit SRAMproducts. Our unique methodology results in the following benefits:

*RapidOrder Fulfillment.**  *Wemaintain a common pool of wafers that incorporate all available master die.Because we can typically create several different products from a single masterdie, we can respond to unforecasted customer orders more quickly than ourcompetitors.

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*Reduced Cost.**  *Our master die methodology allowsus to reduce our costs through the purchase of fewer mask sets by allowingfaster and less expensive internal product qualifications, by enabling morecost-efficient use of engineering resources and by reducing the incidence ofobsolete inventory.

***Customer Responsiveness***

*Customer-drivenSolutions.**  *Wework closely with leading networking and telecommunications OEMs, as well astheir chip-set suppliers, to better anticipate their requirements and torapidly develop and implement solutions that allow them to meet their specificproduct performance objectives. Customer demand drives our business. Forexample, to address near term needs, we offer critical specificationvariations, such as special operating ranges or wire bond options on currentlyavailable products, while we also design new families of products to meet theiremerging long term needs. As a consequence, our portfolio not only includes thewidest select of catalog parts available, it also includes an extensive list ofcustom, customer-specific products. This degree of responsiveness enablesus to provide our OEM customers with the Very Fast SRAMs required for theirapplications.

*AcceleratedTime-to-market.**  *Ourextensive open libraries of design support tools as well as our ability todeliver the specific device required for system prototyping with very shortnotice enables networking and telecommunication OEMs to design and introducedifferentiated products quickly as well as to reduce their development costs. Ouropen libraries give designers access 24 hours a day, seven days a week toelectrical and behavioral simulation models. Behavioral models are offered inboth Verilog and VHDL format to better fit different customers’ simulationenvironments, further streamlining the customers’ development process.

*Quality and Reliability.**  *Networking and telecommunicationsequipment typically have long product lives, and the cost to repair or replacethis equipment due to product failure at any time is prohibitively expensive.The high-quality and reliability of Very Fast SRAMs incorporated in ourOEM customers’ products is, thus, critical. Every product family we offer issubjected to extensive long term reliability testing before receivingqualification certification, and every Very Fast SRAM shipped is firstsubjected to burn-in and then to final tests in which the SRAM is operatedbeyond its specified operating voltage and temperature ranges.

**The GSI Strategy**

Our objective is to profitably increase our marketshare in the Very Fast SRAM market. Our strategy includes the following keyelements:

*Continueto Focus on the Networking and Telecommunications Markets.**  *We intend to continue to focus ondesigning and developing low latency, high bandwidth and feature-rich memoryproducts targeted primarily at the networking and telecommunications markets.Increasing network complexity due to higher traffic volume and more advancedtraffic content continues to drive OEMs’ demand for high-performance VeryFast SRAMs. We believe our active high-performance SRAM developmentand manufacturing expertise will continue to allow us to provide networking andtelecommunications OEMs with the early access to next generation Very FastSRAMs that offer superior performance, advanced feature sets and continued highreliability, which they need to allow them to design and develop new productsthat support increasingly complex traffic content and to bring networking andtelecommunications equipment to market quickly.

*Strengthenand Expand Customer Relationships.**  *We are focused on maintaining closerelationships with industry leaders to facilitate rapid adoption of ourproducts and to enhance our position as a leading provider of high-performanceVery Fast SRAM. We work with both our customers and with their non-memoryintegrated circuit, or IC, suppliers that require high-performance memorysupport. We will continue to work with both groups at the pre-design and designstage of their projects in order to 

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anticipate their futurehigh-performance memory needs and to identify and respond to theirimmediate requests for currently available products and variants on currentlyavailable products. We plan to enhance our relationships with those leadingOEMs and IC vendors and to develop similar relationships with additional OEMsand IC vendors.

*Continueto Invest in Research and Development to Extend Our Technology Leadership.**  *We believe we have established aposition as a technology leader in the design and development of Very Fast SRAMs. OurVery Fast SRAM products most often provide the highest speed available at agiven density for a given device configuration. We intend to maintain andadvance our technology leadership through continual enhancement of our existingVery Fast SRAM products, particularly our SigmaQuad family of low latency, high-bandwidthsynchronous SRAMs while we continue to broaden our product line with theintroduction of other new Very Fast SRAMs.

*Collaboratewith Wafer Foundries to Leverage Leading-edge Process Technologies.**  *We will continue to rely uponadvanced complementary metal oxide semiconductor, or CMOS, technologies, themost commonly used process technologies for manufacturing semiconductordevices, from TSMC, to manufacture our products and will continue to provideTSMC with the sort of in-depth feedback for yield and performance improvementthat can best come from very large array structures like those found on ourproducts. Our most advanced products currently in production were designedusing 90 nanometer process technology on 300 millimeter wafers. We intendto continue to collaborate closely with TSMC in the refinement of65 nanometer process technology.

*Exploit New MarketOpportunities.**  *Whilewe design our Very Fast SRAMs specifically for the networking andcommunications sections, our products are applicable across a wide range ofindustries and applications. We have recently experienced significant growth inboth the defense and medical markets and intend to continue penetrating theseand other new markets with similar needs for high-performance memorytechnologies.

**Products**

We design, develop and market a broad range of high-performanceVery Fast SRAMs primarily for the networking and telecommunications markets. Wespecialize in Very Fast SRAMs featuring high density, low latency, highbandwidth, fast clock access times and low power consumption. We continue tooffer products for longer periods of time than our competitors, typically sevenyears or more following their initial introduction. Accordingly, we continue tooffer products in a variety of package types that have been discontinued byother suppliers.

We currently offer morethan 30 basic product configurations of our SRAMs based on their basic producttype and their storage densities. These basic product configurations are thebasis for over 8,500 individual products that incorporate a variety ofperformance specifications and optional features. Our products can be found ina wide range of networking and telecommunications equipment, including multi-serviceaccess routers, universal gateways, enterprise edge routers, service provideredge routers, optical edge routers, fast Ethernet switches, gigabit Ethernetswitches, wireless base stations, ADSL modems, wireless local area networks,Internet Protocol phones and OC192 layer 2 switches. We also sell our productsto OEMs that manufacture products for defense applications such as radar andguidance systems, for professional audio applications such as sound mixingsystems, for test and measurement applications such as high-speed testers, forautomotive applications such as smart cruise control and voice recognitionsystems, and for medical applications such as ultrasound and CAT scanequipment.

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***SynchronousSRAM Products***

Synchronous SRAMsare controlled by timing signals, referred to as clocks, which make them easierto use than older style asynchronous SRAMs with similar latency characteristicsin applications requiring high bandwidth data transfers. Synchronous SRAMs thatemploy double data rate interface protocols can transfer data at much higherbandwidth than both single data rate and asynchronous SRAMs. Our singledata rate synchronous SRAMs feature clock access times as short as2 nanoseconds and our double data rate synchronous SRAMs have clock accesstimes as fast as 0.45 nanoseconds. Today, we supply synchronous SRAMs thatcan cycle at operating frequencies as high as 357 MHz.

*Burst and NBT SRAMs.**  *We currently offer BurstRAMs and NoBus Turnaround, or NBT, SRAMs that implement a single data rate bus protocol.BurstRAMs were originally developed for microprocessor cache applications andhave become the most widely used synchronous SRAM on the market. They are usedin applications where large amounts of data are read or written in singlesessions, or bursts. NBT SRAMs are a variation on the BurstRAM theme that weredeveloped to address the needs of moderate performance networking applications.NBT SRAMs feature a single data rate bus protocol designed to minimize oreliminate wasted data transfer time slots on the bus when BurstRAMs switch fromread to write operations. Both families of products can perform burst datatransfers or single cycle transfers at the discretion of the user.

OurBurstRAMs and NBT SRAMs are offered in both pipeline and flow-through modes.Flow-through SRAMs allow the shortest latency. Pipelined SRAMs break the accessinto discrete clock-controlled steps, allowing new access commands to beaccepted while an access is already in progress. Therefore, while flow-throughSRAMs offer lower latency, pipelined SRAMs offer greater data bandwidth. OurBurstRAM and NBT SRAM products incorporate a number of features that reduce ourOEM customers’ cost of ownership and increase their design flexibility,including a JTAG test port and our FLXDrive feature, which allows systemdesigners to optimize signal integrity for a given application.

Wecurrently offer BurstRAMs and NBT SRAMs with storage densities of up to72 megabits with clock frequency of up to 333 MHz and clock accesstimes as fast as 2 nanoseconds that operate at 3.3, 2.5 or 1.8 volts.

*SigmaQuad Products.**  *High-performance quad datarate synchronous SRAMs have become the de facto standard for the networking andtelecommunications industry. We offer a full line of quad data rate SRAMs, ourSigmaQuad family. Quad data rate SRAMs are separate input/output, or I/O,synchronous SRAMs that features two independent double data rate data ports(two data ports times double data rate transfers equals quad data rate)controlled via a single address and control port. We offer our SigmaQuaddevices in two different bus protocol versions, two different power supply andinterface voltage versions, with two different data burst length options, allunder the name SigmaQuad or SigmaQuad-II. In addition, the family also includesderivative products including a family of common I/O (a single bi-directionaldata port) double data rate SRAMs known as SigmaCIO DDR-II SRAMs and a smallerfamily of double data rate separate I/O SRAMs designed to address some segmentsof the market currently served by dual-port SRAMs, known as SigmaSIO DDR-IISRAMs.

Wecurrently offer SigmaQuad products in three storage densities,18 megabits, 36 megabits and 72 megabits, with clock frequencyrates up to 333 MHz and clock access times as fast as0.45 nanoseconds, that operate at voltages of 2.5 and 1.8 volts.

*SigmaRAM Products.**  *We offer a family of high-performance,low voltage, HSTL, or high speed transceiver logic, I/O synchronous SRAMproducts based on the SigmaRAM architecture, which are designed for use onlarge format printed circuit boards common in many networking andtelecommunication products. These SRAMs utilize a unique architecture thatprovides the capability to incorporate the full range of popular SRAMfunctionality, including late write and double late write protocols, pipelinedread cycles, burst data transfers, and double data rate read and write datatransfers in common I/O format.

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We currently offerSigmaRAM products with storage density of 18 megabits, speeds of up to350 MHz and clock access times as fast as 1.7 nanoseconds thatoperate at 1.8 volts.

***Asynchronous SRAM Products***

Unlike synchronous SRAMs, asynchronous SRAMs employ a clock-freecontrol interface. They are widely used in support of high-end digital signalprocessors, or DSPs. We believe we have one of the broadest portfolios of3.3 volt, high-speed asynchronous SRAMs. These products aredesigned to meet the stringent power and performance requirements of networkingand telecommunications applications, such as VoIP, cellular base stations, DSLline cards and modems.

We currently offer asynchronous SRAM products with avariety of storage densities between 1 megabit and 8 megabits andrandom access times ranging from 7 nanoseconds to 15 nanoseconds. Allof our asynchronous SRAMs operate at 3.3 volts.

We intend to regularlyintroduce new products with high-performance advanced features ofincreasing complexity. These product solutions will require us to achievevolume production in a rapid timeframe. We believe that by using the advancedtechnologies offered by our fabrication partner and its expertise in high-volumemanufacturing, we can rapidly achieve volume production. However, lead timesfor materials and components we order vary significantly and depend on suchfactors as the specific supplier, contract terms and demand for a component ata given time.

**Customers**

Ourprimary sales and marketing strategy is to achieve design wins with OEMcustomers who are leading networking and telecommunications companies. Thefollowing is a representative list of our OEM customers that directly orindirectly purchased more than $600,000 of our products in the fiscal yearended March 31, 2007:

| Agere Systems |   | Agilent  Technologies |   | Alcatel-Lucent |
|---------------|--------|-----------------------|--------|----------------|
| Cisco Systems |   | Huawei  Technologies  |   | Motorola       |
| NEC           |   | Nortel Networks       |   | Tekelec        |

 

Many of our OEM customers use contract manufacturersto assemble their equipment. Accordingly, a significant percentage of our netrevenues is derived from sales to these contract manufacturers and toconsignment warehouses who purchase products from us for use by contractmanufacturers. In addition, we sell our products to networking and telecommunicationsOEM customers indirectly through domestic and international distributors.

In the case of sales of our products to distributorsand consignment warehouses, the decision to purchase our products is typicallymade by the OEM customers. In the case of contract manufacturers, OEM customerstypically provide a list of approved products to the contract manufacturer,which then has discretion whether or not to purchase our products from thatlist.

Direct sales to contract manufacturers and consignmentwarehouses accounted for 34.7%, 35.0% and 38.8% of our net revenues for fiscal2007, 2006 and 2005, respectively. Sales to foreign and domestic distributorsaccounted for 59.0%, 55.7% and 49.7% of our net revenues for fiscal 2007, 2006and 2005, respectively.

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Thefollowing direct customers accounted for 10% or more of our net revenues in oneor more of the following periods:

| ** **                 | ** ** | **Fiscal Year Ended  March 31,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Consignment warehouses:    |       |                                            |       |   |   |   |   |
| SMART Modular Technologies |       | 29.7                                            | %          | 27.3 | % | 31.8 | % |
| Distributors:              |       |                                            |       |   |   |   |   |
| Avnet Logistics            |       | 24.7                                            |       | 30.4 |   | 32.5 |   |
| Nu Horizons                |       | 8.7                                             |       | 10.3 |   | 6.1 |   |

 

Cisco Systems, our largestOEM customer, purchases our products primarily through its consignmentwarehouse, SMART Modular Technologies, and also purchases some products throughits contract manufacturers and directly from us. Based on information providedto us by Cisco Systems’ consignment warehouse and contract manufacturers,purchases by Cisco Systems represented approximately 30%, 28% and 34% of ournet revenues in fiscal 2007, 2006 and 2005, respectively.

**Sales, Marketingand Technical Support**

We sell our products primarily through our worldwidenetwork of independent sales representatives and distributors. As of March 31,2007, we employed 16 sales and marketing personnel, and were supported by over200 independent sales representatives. We have recently entered into anarrangement with Arrow Electronics, a leading distributor, to distribute ourproducts in the U.S. market. We believe that this new relationship, along withour two other U.S. distributors, Avnet and Nu Horizons, puts us in a strongposition to address the Very Fast SRAM market in the U.S. In addition, toexpand our international business, we have recently entered into newarrangements with sales representatives and distributors in Japan and Europethat we believe will enable us to increase our market share in these importantmarkets. We currently have regional sales offices located in Canada, China,Italy and the United States. We believe this international coverage allows usto better serve our distributors and OEM customers by providing them withcoordinated support. We believe that our customers’ purchasing decisions arebased primarily on product performance, availability, features, quality, reliability,price, manufacturing flexibility and service. Many of our OEM customers havehad long-term relationships with us based on our success in meeting thesecriteria.

Our sales are generally made pursuant to purchaseorders received between one and six months prior to the scheduled deliverydate. Because industry practice allows customers to reschedule or cancel orderson relatively short notice, these orders are not firm and hence we believe thatbacklog is not a good indicator of our future sales. We typically provide awarranty of up to 36 months on our products. Liability for a statedwarranty period is usually limited to replacement of defective products.

Our marketing efforts are focused on increasing brandname awareness and providing solutions that address our customers’ needs. Keycomponents of our marketing efforts include maintaining an active role inindustry standards committees, such as the JEDEC Solid State TechnologyAssociation (formerly the Joint Electron Device Engineering Council), or JEDEC,which is responsible for establishing detailed specifications, which can beutilized in future system designs. We believe that our participation in andsponsorship of numerous proposals within these committees have increased ourprofile among leading manufacturers in the networking and telecommunicationssegment of the Very Fast SRAM market. Our marketing group also providestechnical, strategic and tactical sales support to our direct sales personnel,sales representatives and distributors. This support includes in-depth productpresentations, datasheets, application notes, simulation models, sales tools,marketing communications, marketing research, trademark administration andother support functions.

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We emphasize customerservice and technical support in an effort to provide our OEM customers withthe knowledge and resources necessary to successfully use our products in theirdesigns. Our customer service organization includes a technical team ofapplications engineers, technical marketing personnel and, when required,product design engineers. We provide customer support throughout thequalification and sales process and continue providing follow-up service afterthe sale of our products and on an ongoing basis. In addition, we provide ourOEM customers with comprehensive datasheets, application notes and referencedesigns.

**Manufacturing**

We outsource our wafer fabrication, assembly and amajority of our testing, which enables us to focus on our design strengths,minimize fixed costs and capital expenditures and gain access to advancedmanufacturing technologies. Our engineers work closely with our outsourcepartners to increase yields, reduce manufacturing costs, and help assure thequality of our products.

Currently, all of our wafers are manufactured by TSMCunder individually negotiated purchase orders. We do not currently have along-term supply contract with TSMC, and therefore, TSMC is not obligated tomanufacture products for us for any specified period, in any specified quantityor at any specified price, except as may be provided in a particular purchaseorder. Our future success depends in part on our ability to secure sufficientcapacity at TSMC or other independent foundries to supply us with the wafers werequire.

Most of our products are implemented using 0.13 micronand 90 nanometer process technologies on 300 millimeter wafers usingprocess technology developed by TSMC. We currently have five separate productfamilies in production using the 0.13 micron process. Our 72 megabit SigmaQuadand 72 megabit synchronous BurstRAM and NBT SRAM products are currentlymanufactured using 90 nanometer process technology. We introduced our36 megabit SigmaQuad using 90 nanometer process technology in thequarter ended March 31, 2007. We are also developing new synchronous SRAMsusing 65 nanometer process technology.

Our master die methodology enables multiple productfamilies, and variations thereof, to be manufactured from a single mask set. Asa result, based upon the way available die from a wafer are metalized, wirebonded, packaged and tested, we can create a number of different products. Themanufacturing process consists of two phases, the first of which takesapproximately eight to twelve weeks and results in wafers that have thepotential to yield multiple products within a given product family. After thecompletion of this phase, the wafers are stored pending customer orders. Oncewe receive orders for a particular product, we perform the second phase,consisting of final wafer processing, assembly, burn-in and test, which takesapproximately six to ten weeks to complete. This two-step manufacturingprocess enables us to significantly shorten our product lead times, providingflexibility for customization and to increase the availability of our products.

All of our manufacturedwafers are tested for electrical compliance and most are packaged at AdvancedSemiconductor Engineering, or ASE, which is located in Taiwan. Our testprocedures require that all of our products be subjected to accelerated burn-inand extensive functional electrical testing, most of which occur at SigurdMicroelectronics Co. and King Yuan Electronics Company. We perform testing formost of our low volume products in-house at our Santa Clara, California and ourTaiwan facilities.

**Research andDevelopment**

The design process for our products is complex. As aresult, we have made substantial investments in computer-aided design andengineering resources to manage our design process. Research and developmentexpenses were $5.0 million in fiscal 2007, $5.4 million in fiscal2006 and $4.8 million in fiscal 2005. Our research and development staffincludes engineering professionals with extensive experience in 

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the areas of SRAM designand systems level networking and telecommunications equipment design. Ourcurrent development focus is on the SigmaQuad SRAM family.

We are also leveraging ouradvanced design capabilities to expand into other networking andtelecommunications products, including a channelized OC-3 processor thatincorporates 20 megabits of SRAM. When completed, we believe this will bethe first low-power, single IC device solution capable of simultaneouslyprocessing multiple types of traffic with OC-3 bandwidth. We haveestablished a design center in Norcross, Georgia, to focus on the developmentof these products.

**Competition**

Our existing competitors include many large domesticand international companies, some of which have substantially greaterresources, offer other sorts of memory and/or non-memory technologies and may havelonger standing relationships with OEM customers than we do. Unlike us, some ofour principal competitors maintain their own semiconductor fabs, which may, attimes, provide them with capacity, cost and technical advantages.

Our principal competitors include CypressSemiconductor, Integrated Device Technology, Integrated Silicon Solution, NEC,Renesas and Samsung Electronics. While some of our competitors offer a broadarray of memory products and offer some of their products at lower prices thanwe do, we believe that our focus on and performance leadership in low latency,high density Very Fast SRAMs provide us with key competitive advantages.

We believe that ourability to compete successfully in the rapidly evolving markets for Very FastSRAM products depends on a number of factors, including:

·       productperformance, features, quality, reliability and price;

·       manufacturingflexibility, product availability and customer service throughout the lifetimeof the product;

·       thetiming and success of new product introductions by us, our customers and ourcompetitors; and

·       ourability to anticipate and conform to new industry standards.

We believe we compete favorably with our competitorsbased on these factors. However, we may not be able to compete successfully inthe future with respect to any of these factors. Our failure to competesuccessfully in these or other areas could harm our business.

The market for Very Fast SRAM products is competitiveand is characterized by technological change, declining average selling pricesand product obsolescence. Competition could increase in the future fromexisting competitors and from other companies that may enter our existing orfuture markets with solutions that may be less costly or provide higherperformance or more desirable features than our products. This increasedcompetition may result in price reductions, reduced profit margins and loss ofmarket share.

In addition, we arevulnerable to advances in technology by competitors, including new SRAMarchitectures as well as new forms of DRAM and other new memory technologies.Because we have limited experience developing IC products other than Very FastSRAMs, any efforts by us to introduce new products based on a new memorytechnology may not be successful and our business may suffer.

**IntellectualProperty**

Our ability to compete successfully depends, in part,upon our ability to protect our proprietary technology and information. We relyon a combination of patents, copyrights, trademarks, trade secret laws, non-disclosureand other contractual arrangements and technical measures to protect ourintellectual 

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property. We currentlyhold three United States patents, expiring between November 2022 and April 2023,and have ten patent applications pending. We do not consider our existingpatents to be materially important to our business, and we cannot assure youthat any patents will issue as a result of our pending applications or that anypatents issued will be valuable to our business. We believe that factors suchas the technological and creative skills of our personnel and the success ofour ongoing product development efforts are more important than our patentportfolio in maintaining our competitive position. We generally enter intoconfidentiality or license agreements with our employees, distributors,customers and potential customers and limit access to our proprietaryinformation. Our intellectual property rights, if challenged, may not be upheldas valid, may not be adequate to prevent misappropriation of our technology ormay not prevent the development of competitive products. Additionally, we maynot be able to obtain patents or other intellectual property protection in thefuture. Furthermore, the laws of certain foreign countries in which ourproducts are or may be developed, manufactured or sold, including variouscountries in Asia, may not protect our products or intellectual property rightsto the same extent as do the laws of the United States and thus make thepossibility of piracy of our technology and products more likely in thesecountries.

The semiconductor industryis characterized by vigorous protection and pursuit of intellectual propertyrights, which have resulted in significant and often protracted and expensivelitigation. We or our foundry from time to time are notified of claims that wemay be infringing patents or other intellectual property rights owned by thirdparties. We have been subject to intellectual property claims in the past andwe may be subject to additional claims and litigation in the future. Litigationby or against us relating to allegations of patent infringement or otherintellectual property matters could result in significant expense to us anddivert the efforts of our technical and management personnel, whether or not suchlitigation results in a determination favorable to us. In the event of anadverse result in any such litigation, we could be required to pay substantialdamages, cease the manufacture, use and sale of infringing products, expendsignificant resources to develop non-infringing technology, discontinue the useof certain processes or obtain licenses to the infringing technology. Licensesmay not be offered or the terms of any offered licenses may not be acceptableto us. If we fail to obtain a license from a third party for technology used byus, we could incur substantial liabilities and be required to suspend themanufacture of products or the use by our foundry of certain processes.

**Employees**

As of March 31, 2007,we had 100 full-time employees, including 42 engineers, of which 21 are inresearch and development and 23 have PhD or MS degrees, 17 employees in salesand marketing, eight employees in general and administrative capacities and52 employees in manufacturing. Of these employees, 36 are based in ourSanta Clara facility and 41 are based in our Taiwan facility. We believe thatour future success will depend in large part on our ability to attract andretain highly-skilled, engineering, managerial, sales and marketingpersonnel. Our employees are not represented by any collective bargaining unit,and we have never experienced a work stoppage. We believe that our employeerelations are good.

**InvestorInformation**

You can access financial and other information in theInvestor Relations section of our website at www.gsitechnology.com. We makeavailable, on our website, free of charge, copies of our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after filingsuch material electronically or otherwise furnishing it to the SEC.

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The charters of our audit committee, our compensationcommittee, and our nominating and governance committee, and our code of conduct(including code of ethics provisions that apply to our principal executiveofficer, principal financial officer, controller, and senior financialofficers) are also available at our website under “Corporate Governance.” Theseitems are also available to any stockholder who requests them by calling(408) 980-8388. The contents of our website are not incorporated byreference in this report.

The SEC maintains anInternet site that contains reports, proxy statements and other informationregarding issuers that file electronically with the SEC at www.sec.gov.

**Executive Officers**

Thefollowing table sets forth certain information concerning our executiveofficers as of June 1, 2007:

| **Name**              | ** ** | ** ** | ** ** | **Age**                                             | ** ** | **Title** |
|-----------------------|------------|------------|------------|-----------------------------------------------------|------------|-----------|
| Lee-Lean Shu          |       | 52         |       | President, Chief  Executive Officer and Chairman    |
| David Chapman         |       | 51         |       | Vice President,  Marketing                          |
| Didier Lasserre       |       | 42         |       | Vice President, Sales                               |
| Suengliang (Leon) Lee |       | 53         |       | Vice President,  Telecommunications Division        |
| Douglas Schirle       |       | 52         |       | Chief Financial Officer                             |
| Bor-Tay Wu            |       | 55         |       | Vice President, Taiwan  Operations                  |
| Ping Wu               |       | 50         |       | Vice President, U.S.  Operations                    |
| Robert Yau            |       | 54         |       | Vice President, Engineering, Secretary and Director |

 

*Lee-LeanShu* co-founded our company in March 1995 and hasserved as our President and Chief Executive Officer and as a member of ourBoard of Directors since inception. In October 2000, Mr. Shu becameChairman of our Board. From January 1995 to March 1995, Mr. Shuwas Director, SRAM Design at Sony Microelectronics Corporation, a semiconductorcompany and a subsidiary of Sony Corporation, and from July 1990 to January 1995,he was a design manager at Sony Microelectronics Corporation.

*DavidChapman* has served as our Vice President, Marketingsince July 2002. From November 1998 to June 2002, Mr. Chapmanserved as our Director of Strategic Marketing and Applications Engineering.From February 1988 to November 1998, Mr. Chapman served invarious product planning and applications engineering management capacities inthe Memory Operation division and later the Fast SRAM division of MotorolaSemiconductor Product Sector, Motorola, Inc., an electronics manufacturer.Mr. Chapman has been a member of JEDEC since 1985, and served as Chairmanof its SRAM committee in 1999.

*DidierLasserre* has served as our Vice President, Sales sinceJuly 2002. From November 1997 to July 2002, Mr. Lasserreserved as our Director of Sales for the Western United States and Europe. FromJuly 1996 to October 1997, Mr. Lasserre was an account manager atSolectron Corporation, a provider of electronics manufacturing services. FromJune 1988 to July 1996, Mr. Lasserre was a field sales engineerat Cypress Semiconductor, a semiconductor company.

*Suengliang(Leon) Lee* has served as our Vice President,Telecommunications Division since December 1999. From July 1996 toNovember 1999, Mr. Lee was Director of Engineering at LucentTechnologies, a telecommunications equipment company. From October 1993 toJune 1996, Mr. Lee was an engineering manager at Nortel Networks, atelecommunications equipment manufacturer.

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*DouglasSchirle* has served as our Chief Financial Officersince August 2000. From June 1999 to August 2000, Mr. Schirleserved as our Corporate Controller. From March 1997 to June 1999, Mr. Schirlewas the Corporate Controller at Pericom Semiconductor Corporation, a providerof digital and mixed signal integrated circuits. From November 1996 to February 1997,Mr. Schirle was Vice President, Finance for Paradigm Technology, amanufacturer of SRAMs, and from December 1993 to October 1996, he wasthe Controller for Paradigm Technology. Mr. Schirle was formerly acertified public accountant.

*Bor-TayWu* has served as our Vice President, Taiwan Operationssince January 1997. From January 1995 to December 1996, Mr. Wuwas a design manager at Atalent, an IC design company in Taiwan.

*PingWu* has served as our Vice President, U.S. Operationssince September 2006. He served in the same capacity from February 2004to April 2006. From April 2006 to August 2006, Mr. Wu wasVice President of Operations at QPixel Technology, a semiconductor company.From July 1999 to January 2004, Mr. Wu served as our Director ofOperations. From July 1997 to June 1999, Mr. Wu served as VicePresident of Operations at Scan Vision, a semiconductor manufacturer.

*Robert Yau*co-founded our company in March 1995 and has served as our Vice President,Engineering and as a member of our Board of Directors since inception. From December 1993to February 1995, Mr. Yau was design manager for specialty memorydevices at Sony Microelectronics Corporation. From 1990 to 1993, Mr. Yauwas design manager at MOSEL/VITELIC, a semiconductor company.

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

*Our future performance is subject to a variety ofrisks. If any of the following risks actually occur, our business, financialcondition and results of operations could suffer and the trading price of ourcommon stock could decline. Additional risks that we currently do not knowabout or that we currently believe to be immaterial may also impair ourbusiness operations. You should also refer to other information contained inthis report, including our consolidated financial statements and related notes.*

***Unpredictable fluctuations in our operating resultscould cause our stock price to decline.***

Our quarterly andannual revenues, expenses and operating results have varied significantly andare likely to vary in the future. For example, in the eight most recent fiscalquarters ended March 31, 2007, we have recorded net revenues of as much as$15.3 million and as little as $10.4 million and quarterly operatingincome of as much as $3.4 million and as little as $508,000. We thereforebelieve that period-to-period comparisons of our operating results are not agood indication of our future performance, and you should not rely on them topredict our future performance or the future performance of our stock price.Our net revenues for the quarter ended March 31, 2007 were less than forthe previous quarter due to the implementation of a new inventory system byCisco Systems, our largest OEM customer. In other future periods, we may nothave any revenue growth, or our revenues could again decline. Furthermore, ifour operating expenses exceed our expectations, our financial performance couldbe adversely affected. Factors that may affect periodic operating results inthe future include:

·       ourability to attract new customers, retain existing customers and increase salesto such customers;

·       unpredictabilityof the timing and size of customer orders, since most of our customers purchaseour products on a purchase order basis rather than pursuant to a long termcontract;

·       changesin our customers’ inventory management practices;

·       fluctuationsin availability and costs associated with materials needed to satisfy customerrequirements;

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·       manufacturingdefects, which could cause us to incur significant warranty, support and repaircosts, lose potential sales, harm our relationships with customers and resultin write-downs;

·       changesin our product pricing policies, including those made in response to newproduct announcements and pricing changes of our competitors; and

·       ourability to address technology issues as they arise, improve our products’functionality and expand our product offerings.

Our expenses are, to alarge extent, fixed, and we expect that these expenses will increase in thefuture. We will not be able to adjust our spending quickly if our revenues fallshort of our expectations. If this were to occur, our operating results wouldbe harmed. If our operating results in future quarters fall below the expectationsof market analysts and investors, the price of our common stock could fall.

***Cisco Systems, ourlargest OEM customer, accounts for a significant percentage of our netrevenues. If Cisco Systems, or any of our other major customers reduce theamount they purchase or stop purchasing our products, our operating resultswill suffer.***

Cisco Systems, our largest OEM customer, purchases ourproducts through SMART Modular Technologies, its consignment warehouse, throughits contract manufacturers and directly from us. Based on information providedto us by consignment warehouses and contract manufacturers, purchases by CiscoSystems represented approximately 30%, 28% and 34% of our net revenues infiscal 2007, 2006 and 2005, respectively. Cisco Systems has implemented a “leanmanufacturing” program under which it plans to reduce the levels of inventorycarried by it and by its contract manufacturers. The transition to this newprogram resulted in reductions in purchases of our products by Cisco Systems’contract manufacturers during the quarter ended March 31, 2007, as theydrew down their existing inventories, and such reductions resulted in our netrevenues for the quarter being less than in the previous quarter. Thistransition will also impact our revenues in the quarter ending June 30,2007.

We expect that ouroperating results in any given period will continue to depend significantly onorders from our key OEM customers, particularly Cisco Systems, and our futuresuccess is dependent to a large degree on the business success of theseOEMs over which we have no control. We do not have long-term contractswith Cisco Systems or any of our other major OEM customers, distributors orcontract manufacturers that obligate them to purchase our products. If we failto continue to sell to our key OEM customers, distributors or contractmanufacturers in sufficient quantities, the growth of our business could beharmed.

***We have incurred significant losses in prior periodsand may incur losses in the future.***

We have incurredsignificant losses in prior periods. For example, in fiscal 2003 and 2004, weincurred losses of $7.4 million and $670,000, respectively. Although wehave operated profitably during the last three fiscal years, there can be noassurance that our Very Fast SRAMs will continue to receive broad marketacceptance or that we will be able to sustain revenue growth or profitability.Our failure to do so may result in additional losses in the future. Inaddition, we expect our operating expenses to increase as we expand ourbusiness. If our revenues do not grow to offset these expected increasedexpenses, our business will suffer.

***We depend upon thesale of our Very Fast SRAMs for most of our revenues, and a downturn indemand for these products could significantly reduce our revenues and harm ourbusiness.***

We derive most of ourrevenues from the sale of Very Fast SRAMs, and we expect that sales of theseproducts will represent the substantial majority of our revenues for theforeseeable future. Our business depends in large part upon continued demandfor our products in the markets we currently serve, and 

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adoptionof our products in new markets. Market adoption will be dependent upon ourability to increase customer awareness of the benefits of our products and toprove their high-performance and cost-effectiveness. We may not beable to sustain or increase our revenues from sales of our products,particularly if the networking and telecommunications markets were toexperience another significant downturn in the future. Any decrease in revenuesfrom sales of our products could harm our business more than it would if weoffered a more diversified line of products.

***We are subject to the highly cyclical nature of thenetworking and telecommunications markets.***

Our products areincorporated into routers, switches, wireless local area network infrastructureequipment, wireless base stations and network access equipment used in thehighly cyclical networking and telecommunications markets. Our operatingresults declined sharply in fiscal 2002 and 2003 as a result of the severecontraction in demand for networking and telecommunications equipment in whichour products are incorporated. Prior to this period of contraction, thenetworking and telecommunications markets experienced a period of rapid growth,which resulted in a significant increase in demand for our products. We expectthat the networking and telecommunications markets will continue to be highlycyclical, characterized by periods of rapid growth and contraction. Ourbusiness and our operating results are likely to fluctuate, perhaps quiteseverely, as a result of this cyclicality.

***The average sellingprices of our products are expected to decline, and if we are unable to offsetthese declines, our operating results will suffer.***

Historically, the averageunit selling prices of our products have declined substantially over the livesof the products, and we expect this trend to continue. A reduction in overallaverage selling prices of our products could result in reduced revenues andlower gross margins. Our ability to increase our net revenues and maintain ourgross margins despite a decline in the average selling prices of our productswill depend on a variety of factors, including our ability to introduce lower costversions of our existing products, increase unit sales volumes of theseproducts, and introduce new products with higher prices and greater margins. Ifwe fail to accomplish any of these objectives, our business will suffer. Toreduce our costs, we may be required to implement design changes that lower ourmanufacturing costs, negotiate reduced purchase prices from our independentfoundry, TSMC, and our independent assembly and test vendors, and successfullymanage our manufacturing and subcontractor relationships. Because we do notoperate our own wafer foundry or assembly facilities, we may not be able toreduce our costs as rapidly as companies that operate their own foundries orfacilities.

***We rely heavily ondistributors and our success depends on our ability to develop and manage ourindirect distribution channels.***

A significant percentageof our sales are made to distributors and to contract manufacturers whoincorporate our products into end products for OEMs. For example, infiscal 2007, 2006 and 2005, our distributor Avnet Logistics accounted for24.7%, 30.4% and 32.5%, respectively, of our net revenues and our distributorNu Horizons accounted for 8.7%, 10.3% and 6.1%, respectively, of our netrevenues. Avnet Logistics, Nu Horizons and our other existing distributors maychoose to devote greater resources to marketing and supporting the products ofother companies. Since we sell through multiple channels and distributionnetworks, we may have to resolve potential conflicts between these channels. Forexample, these conflicts may result from the different discount levels offeredby multiple channel distributors to their customers or, potentially, from ourdirect sales force targeting the same equipment manufacturer accounts as ourindirect channel distributors. These conflicts may harm our business orreputation.

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***We may be unable toaccurately predict future sales through our distributors, which could harm ourability to efficiently manage our resources to match market demand.***

Our financial results, quarterlyproduct sales, trends and comparisons are affected by fluctuations in thebuying patterns of the OEMs that purchase our products from ourdistributors. While we attempt to assist our distributors in maintainingtargeted stocking levels of our products, we may not consistently be accurateor successful. This process involves the exercise of judgment and use ofassumptions as to future uncertainties, including end user demand. Inventorylevels of our products held by our distributors may exceed or fall below thelevels we consider desirable on a going-forward basis. This could resultin distributors returning unsold inventory to us, or in us not havingsufficient inventory to meet the demand for our products. If we are not able toaccurately predict sales through our distributors or effectively manage ourrelationships with our distributors, our business and financial results willsuffer.

***A small number ofcustomers generally account for a significant portion of our accountsreceivable in any period, and if any one of them fails to pay us, our operatingresults will suffer.***

At March 31, 2007,SMART Modular Technologies, Avnet Logistics and Nu Horizons accounted for25.0%, 13.6% and 11.0%, respectively, of our accounts receivable. If any ofthese customers do not pay us, our operating results will be harmed. Generally,we do not require collateral from our customers.

***We could becomesubject to claims and litigation regarding intellectual property rights, whichcould seriously harm our business and require us to incur significant costs.***

In recent years,there has been significant litigation in the semiconductor industry involvingpatents and other intellectual property rights. In the past, we have beensubject to claims and litigation regarding alleged infringement of otherparties’ intellectual property rights. In 2002, we settled patent litigationfiled against us by one of our competitors. In connection with the settlement,we obtained a license from that competitor and agreed to pay a license fee andongoing royalties. We could become subject to additional litigation in thefuture as a result of allegations that we infringe others’ intellectualproperty rights or that our use of intellectual property otherwise violates thelaw. Claims that our products infringe the proprietary rights of others wouldforce us to defend ourselves and possibly our customers or manufacturersagainst the alleged infringement. Any such litigation regarding intellectualproperty could result in substantial costs and diversion of resources and couldhave a material adverse effect on our business, financial condition and resultsof operations. Similarly, changing our products or processes to avoidinfringing the rights of others may be costly or impractical. If any claimsreceived in the future were to be upheld, the consequences to us would besevere and could require us to:

·       stopselling our products that incorporate the challenged intellectual property;

·       obtaina license to sell or use the relevant technology, which license may not beavailable on reasonable terms or at all;

·       paydamages; or

·       redesignthose products that use the disputed technology.

Although patent disputesin the semiconductor industry have often been settled through cross-licensingarrangements, we may not be able in any or every instance to settle an allegedpatent infringement claim through a cross-licensing arrangement. We havea more limited patent portfolio than many of our competitors. If a successfulclaim is made against us or any of our customers and a license is not madeavailable to us on commercially reasonable terms or we are required to paysubstantial damages or awards, our business, financial condition and results ofoperations would be materially adversely affected.

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***Our business will suffer if we are unable to protectour intellectual property.***

Our success and ability tocompete depends in large part upon protecting our proprietary technology. Werely on a combination of patent, trade secret, copyright and trademark laws andnon-disclosure and other contractual agreements to protect our proprietaryrights. These agreements and measures may not be sufficient to protect ourtechnology from third-party infringement, or to protect us from theclaims of others. Monitoring unauthorized use of our products is difficult andwe cannot be certain that the steps we have taken will prevent unauthorized useof our technology, particularly in foreign countries where the laws may notprotect our proprietary rights as fully as in the United States. Our attempts toenforce our intellectual property rights could be time consuming and costly.Litigation may be necessary in order to enforce our intellectual propertyrights, to protect our trade secrets, to determine the validity and scope ofthe proprietary rights of others or to defend against claims of infringement.If competitors are able to use our technology without our approval orcompensation, our ability to compete effectively could be harmed.

***The market for Very Fast SRAMs is highlycompetitive.***

The market for VeryFast SRAMs, which are used primarily in networking and telecommunicationsequipment, is characterized by price erosion, rapid technological change,cyclical market patterns and heightened foreign and domestic competition.Several of our competitors offer a broad array of memory products and havegreater financial, technical, marketing, distribution and other resources thanwe have. Some of our competitors maintain their own semiconductor fabricationfacilities, which may provide them with capacity, cost and technical advantagesover us. We cannot assure you that we will be able to compete successfullyagainst any of these competitors. Our ability to compete successfully in thismarket depends on factors both within and outside of our control, including:

·       realor perceived imbalances in supply and demand of Very Fast SRAMs;

·       therate at which OEMs incorporate our products into their systems;

·       thesuccess of our customers’ products;

·       ourability to develop and market new products;

·       accessto advanced process technologies at competitive prices; and

·       thesupply and cost of wafers.

In addition, we arevulnerable to advances in technology by competitors, including new SRAMarchitectures and new forms of DRAM, or the emergence of new memorytechnologies that could enable the development of products that feature higherperformance, lower cost or lower power capabilities. Additionally, the trendtoward incorporating SRAM into other chips in the networking andtelecommunications markets has the potential to reduce future demand for VeryFast SRAM products. There can be no assurance that we will be able to competesuccessfully in the future. Our failure to compete successfully in these orother areas could harm our business.

***We may experiencedifficulties in transitioning to smaller geometry process technologies andother more advanced manufacturing process technologies, which may result inreduced manufacturing yields, delays in product deliveries and increasedexpenses.***

In order to remaincompetitive, we expect to continue to transition the manufacture of ourproducts to smaller geometry process technologies. This transition will requireus to migrate to new manufacturing processes for our products and redesigncertain products. The manufacture and design of our products is complex, and wemay experience difficulty in transitioning to smaller geometry processtechnologies or new manufacturing processes. These difficulties could result inreduced manufacturing yields, delays in product deliveries and increased expenses.We are dependent on our relationships with TSMC to 

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transitionsuccessfully to smaller geometry process technologies and to more advancedmanufacturing processes. We cannot assure you that TSMC will be able toeffectively manage the transition or that we will be able to maintain ourrelationship with TSMC. If we or TSMC experience significant delays in thistransition or fail to implement these transitions, our business, financialcondition and results of operations could be materially and adversely affected.

***Manufacturingprocess technologies are subject to rapid change and require significantexpenditures for research and development.***

We continuously evaluatethe benefits of migrating to smaller geometry process technologies in order toimprove performance and reduce costs. Historically, these migrations to newmanufacturing processes have resulted in significant initial design anddevelopment costs associated with pre-production mask sets for the manufactureof new products with smaller geometry process technologies. For example, in thefiscal year ended March 31, 2006, we incurred $678,000 in research anddevelopment associated with pre-production mask sets, which were not later usedin production as part of the transition to our new 90 nanometer processtechnology. We will incur similar expenses in the future as we continue totransition our products to smaller geometry processes. The transition costsinherent in the transition to new manufacturing process technologies willadversely affect our operating results and our gross margin.

***Our products arecomplex to design and manufacture and could contain defects, which could reducerevenues or result in claims against us.***

We develop complex products. Despite testing by us andour OEM customers, design or manufacturing errors may be found in existing ornew products. These defects could result in a delay in recognition or loss ofrevenues, loss of market share or failure to achieve market acceptance. Thesedefects may also cause us to incur significant warranty, support and repaircosts, divert the attention of our engineering personnel from our productdevelopment efforts, result in a loss of market acceptance of our products andharm our relationships with our OEM customers. Our OEM customers could also seekand obtain damages from us for their losses. A product liability claim broughtagainst us, even if unsuccessful, would likely be time consuming and costly todefend.

Defects in wafers andother components used in our products and arising from the manufacturing ofthese products may not be fully recoverable from TSMC or other suppliers. Forexample, in the quarter ended December 31, 2005, we incurred a charge ofapproximately $900,000 related to the write-off of inventory resulting from anerror in the assembly process at one of our suppliers. This write-off adverselyaffected our operating results for fiscal 2006.

***We are dependent ona number of single source suppliers, and if we fail to obtain adequatesupplies, our business will be harmed and our prospects for growth will becurtailed.***

We currently purchase several key components used inthe manufacture of our products from single sources and are dependent uponsupply from these sources to meet our needs. If any of these suppliers cannotprovide components on a timely basis, at the same price or at all, our abilityto manufacture our products will be constrained and our business will suffer.For example, we obtain wafers from a single foundry, TSMC. If we are unable toobtain an adequate supply of wafers from TSMC or find alternative sources in atimely manner, we will be unable to fulfill our customer orders and ouroperating results will be harmed. We do not have supply agreements with TSMC orany of our independent assembly and test suppliers, and instead obtainmanufacturing services and products on a purchase-order basis. Oursuppliers, including TSMC, have no obligation to supply products or services tous for any specific product, in any specific quantity, at any specific price orfor any specific time period. As a result, the loss or failure to perform byany of these suppliers could adversely affect our business and operatingresults.

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Should any of our singlesource suppliers experience manufacturing failures or yield shortfalls, bedisrupted by natural disaster or political instability, choose to prioritizecapacity or inventory for other uses or reduce or eliminate deliveries to us,we likely will not be able to enforce fulfillment of any delivery commitmentsand we would have to identify and qualify acceptable replacements fromalternative sources of supply. In particular, if TSMC is unable to supply uswith sufficient quantities of wafers to meet all of our requirements, we wouldhave to allocate our products among our customers, which would constrain ourgrowth and might cause some of them to seek alternative sources of supply.Since the manufacturing of wafers and other components is extremely complex,the process of qualifying new foundries and suppliers is a lengthy process andthere is no assurance that we will be able to find and qualify another supplierwithout materially adversely affecting our business, financial condition andresults of operations.

***Because weoutsource our wafer manufacturing and independent wafer foundry capacity is limited,we may be required to enter into costly long-term supply arrangements to securefoundry capacity.***

We do not havelong-term supply agreements with TSMC, but instead obtain our wafers on apurchase order basis. In order to secure future wafer supply from TSMC or fromother independent foundries, we may be required to enter into variousarrangements with them, which could include:

·       contractsthat commit us to purchase specified quantities of wafers over extendedperiods;

·       investmentsin and joint ventures with the foundries; or

·       non-refundabledeposits with or prepayments or loans to foundries in exchange for capacitycommitments.

We may not be able to makeany of these arrangements in a timely fashion or at all, and thesearrangements, if any, may not be on terms favorable to us. Moreover, even if weare able to secure independent foundry capacity, we may be obligated to use allof that capacity or incur penalties. These penalties may be expensive and couldharm our financial results.

***If we are unable tooffset increased wafer fabrication costs by increasing the average sellingprices of our products, our gross margins will suffer.***

If there is a significantupturn in the networking and telecommunications markets that results inincreased demand for our products and competing products, the available supplyof wafers may be limited. As a result, we could be required to obtainadditional manufacturing capacity in order to meet increased demand. Securingadditional manufacturing capacity may cause our wafer fabrication costs toincrease. If we are unable to offset these increased costs by increasing theaverage selling prices of our products, our gross margins will decline.

***Demand for ourproducts may decrease if our OEM customers experience difficulty manufacturing,marketing or selling their products.***

Our products areused as components in our OEM customers’ products. For example, Cisco Systems,our largest OEM customer, incorporates our products in a number of itsnetworking routers and switches. Accordingly, demand for our products issubject to factors affecting the ability of our OEM customers to successfullyintroduce and market their products, including:

·       capitalspending by telecommunication and network service providers and other end userswho purchase our OEM customers’ products;

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·       thecompetition our OEM customers face, particularly in the networking andtelecommunications industries;

·       thetechnical, manufacturing, sales and marketing and management capabilities ofour OEM customers;

·       thefinancial and other resources of our OEM customers; and

·       theinability of our OEM customers to sell their products if they infringe third-partyintellectual property rights.

As a result, if OEMcustomers reduce their purchases of our products, our business will suffer.

***Downturns in the semiconductor industry may harm ourrevenues and margins.***

The semiconductor industry is highly cyclical. Theindustry has experienced significant downturns, often in connection with, or inanticipation of, maturing product cycles of both semiconductor companies’ andtheir customers’ products and declines in general economic conditions. Thesedownturns have been characterized by production overcapacity, high inventorylevels and accelerated erosion of average selling prices. From time to time,the semiconductor industry also has experienced periods of increased demand andproduction capacity constraints.

Our operating results maysuffer during the down portion of these cycles. For example, the SRAM industryexperienced significant declines in the average selling prices of SRAM productsduring the recent downturn in the semiconductor industry. We expect similardeclines to occur in the future. Downturns in the semiconductor industry couldcause our stock price to be volatile, and a prolonged decline in the industry couldadversely affect our revenues. If we are unable to control our expensesadequately in response to reduced net sales, our results of operations would benegatively impacted. For example, the industry downturn in 2001 resulted in a$3.9 million inventory write-off in fiscal 2002.

***If we do notsuccessfully develop new products to respond to rapid market changes due tochanging technology and evolving industry standards, particularly in thenetworking and telecommunications markets, our business will be harmed.***

If we fail to offertechnologically advanced products and respond to technological advances andemerging standards, we may not generate sufficient revenues to offset ourdevelopment costs and other expenses, which will hurt our business. Thedevelopment of new or enhanced products is a complex and uncertain process thatrequires the accurate anticipation of technological and market trends. Inparticular, the networking and telecommunications markets are rapidly evolvingand new standards are emerging. We are vulnerable to advances in technology bycompetitors, including new SRAM architectures, new forms of DRAM and theemergence of new memory technologies that could enable the development ofproducts that feature higher performance or lower cost. We may experiencedevelopment, marketing and other technological difficulties that may delay orlimit our ability to respond to technological changes, evolving industrystandards, competitive developments or end-user requirements. For example,because we have limited experience developing integrated circuits, or IC,products other than Very Fast SRAMs, our efforts to introduce new products maynot be successful and our business may suffer. Other challenges that we faceinclude:

·       ourproducts may become obsolete upon the introduction of alternative technologies;

·       wemay incur substantial costs if we need to modify our products to respond tothese alternative technologies;

·       wemay not have sufficient resources to develop or acquire new technologies or tointroduce new products capable of competing with future technologies;

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·       newproducts that we develop may not successfully integrate with our end-users’products into which they are incorporated;

·       wemay be unable to develop new products that incorporate emerging industrystandards;

·       wemay be unable to develop or acquire the rights to use the intellectual propertynecessary to implement new technologies; and

·       when introducing new orenhanced products, we may be unable to manage effectively the transition fromolder products.

***Our products have lengthy sales cycles that make itdifficult to plan our expenses and forecast results.***

Our products are generallyincorporated in our OEM customers’ products at the design stage. However, theirdecisions to use our products often require significant expenditures by uswithout any assurance of success, and often precede volume sales, if any, by ayear or more. If an OEM customer decides at the design stage not to incorporateour products into their products, we will not have another opportunity for adesign win with respect to that customer’s product for many months or years, ifat all. Our sales cycle can take up to 24 months to complete, and becauseof this lengthy sales cycle, we may experience a delay between increasing expensesfor research and development and our sales and marketing efforts and thegeneration of volume production revenues, if any, from these expenditures.Moreover, the value of any design win will largely depend on the commercialsuccess of our OEM customers’ products. There can be no assurance that we willcontinue to achieve design wins or that any design win will result in futurerevenues.

***Any significant order cancellations or order deferralscould adversely affect our operating results.***

We typically sell productspursuant to purchase orders that customers can generally cancel or defer onshort notice without incurring a significant penalty. Any significantcancellations or deferrals in the future could materially and adversely affectour business, financial condition and results of operations. Cancellations ordeferrals could cause us to hold excess inventory, which could reduce ourprofit margins, increase product obsolescence and restrict our ability to fundour operations. We generally recognize revenue upon shipment of products to acustomer. If a customer refuses to accept shipped products or does not pay forthese products, we could miss future revenue projections or incur significantcharges against our income, which could materially and adversely affect ouroperating results.

***We are subject to pending legal proceedings.***

We have been named as adefendant in a number of civil antitrust complaints filed against semiconductorcompanies on behalf of purported classes of direct and indirect purchasers of SRAMproducts throughout the United States. The complaints allege that thedefendants conspired to raise the price of SRAM in violation of Section 1of the Sherman Act, the California Cartwright Act, and several other stateantitrust, unfair competition and consumer protection statutes. We believe thatwe have meritorious defenses to the allegations in the complaints, and weintend to defend these lawsuits vigorously. However, the litigation is in thepreliminary stage and we cannot predict its outcome. Multidistrict antitrustlitigation is particularly complex and can extend for a protracted time, whichcan substantially increase the cost of such litigation. The defense of theselawsuits is also expected to divert the efforts and attention of some of our keymanagement and technical personnel. As a result, our defense of thislitigation, regardless of its eventual outcome, will likely be costly and timeconsuming. Should the outcome of the litigation be adverse to us, we could berequired to pay significant monetary damages, which could adversely affect ourbusiness, financial condition, operating results and cash flows.

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***As our business grows, such growth may place asignificant strain on our management and operations and, as a result, ourbusiness may suffer.***

We plan to continue expanding our business, and ourexpected growth could place a significant strain on our management systems,infrastructure and other resources. To manage the expected growth of ouroperations and increases in the number of our personnel, we will need to investthe necessary capital to improve our operational, financial and managementcontrols and our reporting systems and procedures. Accordingly, we arecurrently transitioning the preparation of all of our internal reporting to anew enterprise resource planning system, which is expected to be implemented inthe first half of fiscal 2008. If we encounter problems with the implementationof this system, we may have difficulties tracking internal information, whichwould adversely affect our ability to timely report our financial results. Ourcontrols, systems and procedures might not be adequate to support a growingpublic company. In addition, we likely do not have sufficient administrativestaff to support our operations. For example, we currently have only threeemployees in our finance department in the United States, including our ChiefFinancial Officer. Furthermore, our officers have limited experience inmanaging large or rapidly growing businesses and the majority of our managementhas no experience in managing a public company or communicating with securitiesanalysts and public company investors. If our management fails to respondeffectively to changes in our business, our business may suffer.

***Ourinternational business exposes us to additional risks.***

Products shipped to destinations outside of the UnitedStates accounted for 48.9%, 48.3% and 51.9% of our net revenues in fiscal 2007,2006 and 2005, respectively. Moreover, a substantial portion of our products ismanufactured and tested in Taiwan. We intend to expand our internationalbusiness in the future. Conducting business outside of the United Statessubjects us to additional risks and challenges, including:

·       heightened pricesensitivity from customers in emerging markets;

·       compliance with a widevariety of foreign laws and regulations;

·       legal uncertaintiesregarding taxes, tariffs, quotas, export controls, competition, export licensesand other trade barriers;

·       political and economicinstability in, or foreign conflicts that involve or affect, the countries ofour customers;

·       difficulties in collectingaccounts receivable and longer accounts receivable payment cycles;

·       difficulties in staffingand managing personnel, distributors and representatives;

·       limited protection forintellectual property rights in some countries; and

·       fluctuations in freightrates and transportation disruptions.

Moreover, our reporting currency is the U.S. dollar.However, a portion of our cost of revenues and our operating expenses isdenominated in currencies other than the U.S. dollar, primarily the NewTaiwanese dollar. As a result, appreciation or depreciation of other currenciesin relation to the U.S. dollar could result in transaction gains or losses thatcould impact our operating results. We do not currently engage in currencyhedging activities.

***TSMC, our otherindependent suppliers and many of our OEM customers have operations in thePacific Rim, an area subject to significant earthquake risk and adverseconsequences related to the potential outbreak of contagious diseases such asthe Avian Flu.***

The foundry that manufactures our products, TSMC, andall of the principal independent suppliers that assemble and test our productsare located in Taiwan. Many of our customers are also located in the PacificRim. The risk of an earthquake in these Pacific Rim locations is significant.The occurrence of an 

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earthquake or othernatural disaster near the fabrication facilities of TSMC or our otherindependent suppliers could result in damage, power outages and otherdisruptions that impair their production and assembly capacity. Any disruptionresulting from such events could cause significant delays in the production orshipment of our products until we are able to shift our manufacturing, assembling,packaging or production testing from the affected contractor to another third-partyvendor. In such an event, we may not be able to obtain alternate foundrycapacity on favorable terms, or at all.

The outbreak of SARS in2003 curtailed travel to and from certain countries, primarily in theAsia-Pacific region, and limited travel within those countries. If there wereto be another outbreak of a contagious disease, such as SARS or the Avian Flu,that significantly affected the Asia-Pacific region, the operations of our keysuppliers could be disrupted. In addition, our business could be harmed if suchan outbreak resulted in travel being restricted, as it was during parts of2003, or if it adversely affected the operations of our OEM customers or thedemand for our products or our OEM customers’ products.

***Changes in Taiwan’s political, social and economicenvironment may affect our business performance.***

Because much of themanufacturing and testing of our products is conducted in Taiwan, our businessperformance may be affected by changes in Taiwan’s political, social andeconomic environment. For example, any political instability resulting from therelationship among the United States, Taiwan and the People’s Republic of Chinacould damage our business. Moreover, the role of the Taiwanese government inthe Taiwanese economy is significant. Taiwanese policies toward economicliberalization, and laws and policies affecting technology companies, foreigninvestment, currency exchange rates, taxes and other matters could change,resulting in greater restrictions on our ability and our suppliers’ ability todo business and operate facilities in Taiwan. If any of these changes were tooccur, our business could be harmed and our stock price could decline.

***Market demand forour products may decrease as a result of changes in general economicconditions, as well as incidents of terrorism, war and other social andpolitical instability.***

Our revenues and grossprofit depend largely on general economic conditions and, in particular, thestrength of demand for our products in the markets in which we are doingbusiness. From time to time, customers and potential customers have elected notto make purchases of our products due to reduced budgets and uncertainty aboutthe future, and, in the case of distributors, declining demand from theircustomers for their solutions in which they integrate our products. Similarly,from time to time, acts of terrorism, in particular in the United States, havehad a negative impact on information technology spending. High fuel prices andturmoil in the Middle East and elsewhere have increased uncertainty in theUnited States and our other markets. Should the current conflicts in the MiddleEast and in other parts of the world suppress economic activity in the UnitedStates or globally, our customers may delay or reduce their purchases oninformation technology, which would result in lower demand for our products andadversely affect our results of operations.

***We aresubstantially dependent on the continued services and performance of our seniormanagement and other key personnel.***

Our future success issubstantially dependent on the continued services and continuing contributionsof our senior management who must work together effectively in order to designour products, expand our business, increase our revenues and improve ouroperating results. The loss of services of Lee-Lean Shu, our President andChief Executive Officer, Robert Yau, our Vice President of Engineering, anyother executive officer or other key employee could significantly delay orprevent the achievement of our development and strategic objectives. We do nothave employment contracts with, nor maintain key person insurance on, any ofour executive officers.

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***If we are unable to recruit or retain qualifiedpersonnel, our business and product development efforts could be harmed.***

We must continue to identify, recruit, hire, train,retain and motivate highly skilled technical, managerial, sales and marketingand administrative personnel. Competition for these individuals is intense, andwe may not be able to successfully recruit, assimilate or retain sufficientlyqualified personnel. We may encounter difficulties in recruiting and retaininga sufficient number of qualified engineers, which could harm our ability todevelop new products and adversely impact our relationships with existing andfuture end-users at a critical stage of development. The failure to recruit andretain necessary technical, managerial, sales, marketing and administrativepersonnel could harm our business and our ability to obtain new OEM customersand develop new products.

***We may need to raise additional capital in the future,which may not be available on favorable terms or at all, and which may causedilution to existing stockholders.***

We may need to seek additional funding in the future.We do not know if we will be able to obtain additional financing on favorableterms, if at all. If we cannot raise funds on acceptable terms, if and whenneeded, we may not be able to develop or enhance our products, take advantageof future opportunities or respond to competitive pressures or unanticipatedrequirements, and we may be required to reduce operating costs, which couldseriously harm our business. In addition, if we issue equity securities, ourstockholders may experience additional dilution or the new equity securitiesmay have rights, preferences or privileges senior to those of our common stock.

***Our products are increasingly being incorporated intoadvanced military electronics, and changes in international geopoliticalcircumstances and domestic budget considerations may hurt our business.***

Our products are increasingly being incorporated intoadvanced military electronics such as radar and guidance systems. Militaryexpenditures and appropriations for such purchases have risen significantly inrecent years. However, should the current conflicts in Iraq and Afghanistan andthe general war on terror subside, our operating results would likely suffer.Domestic budget considerations may also adversely affect our operating results.For example, if governmental appropriations for military purchases ofelectronic devices that include our products are reduced, our revenues willlikely decline.

***If we acquire any companies or technologies in thefuture, they could prove difficult to integrate, disrupt our business, dilutestockholder value and adversely affect our operating results.***

In the future, we may acquire or make investments incompanies, assets or technologies that we believe are complementary orstrategic. We have not made any acquisitions or investments to date, andtherefore our ability as an organization to make acquisitions or investments isunproven. If we decide to make an acquisition or investment, we face numerousrisks, including:

·       difficulties in integratingoperations, technologies, products and personnel;

·       diversion of financial andmanagerial resources from existing operations;

·       risk of overpaying for ormisjudging the strategic fit of an acquired company, asset or technology;

·       problems or liabilitiesstemming from defects of an acquired product or intellectual propertylitigation that may result from offering the acquired product in our markets;

·       challenges in retaining keyemployees to maximize the value of the acquisition or investment;

·       inability to generatesufficient return on investment;

·       incurrence of significantone-time write-offs; and

·       delays in customerpurchases due to uncertainty.

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If we proceed with anacquisition or investment, we may be required to use a considerable amount ofour cash, or to finance the transaction through debt or equity securitiesofferings, which may decrease our financial liquidity or dilute ourstockholders and affect the market price of our stock. As a result, if we failto properly evaluate and execute acquisitions or investments, our business andprospects may be harmed.

***We will incurincreased costs as a result of being a public company, which may divert managementattention from our business and impair our financial results.***

As a public company, we will incur additional legal,accounting and other expenses that we did not incur as a private company. TheSecurities Exchange Act of 1934, or the Exchange Act, the Sarbanes-OxleyAct of 2002, or the Sarbanes-Oxley Act, and The Nasdaq Marketplace Rules nowapply to us as a public company. Compliance with these rules andregulations will necessitate significant increases in our legal and financialbudgets and may also strain our personnel, systems and resources.

The Exchange Act requires, among other things, filingof annual, quarterly and current reports with respect to our business andfinancial condition. The Sarbanes-Oxley Act requires, among other things,that we maintain effective disclosure controls and procedures and internalcontrol over financial reporting. Satisfying these requirements involves acommitment of significant resources and management oversight. As a result ofmanagement’s efforts to comply with such requirements, other important businessconcerns may receive insufficient attention, which could have a materialadverse effect on our business, financial condition and results of operations.Failure to meet certain of these regulatory requirements could also cause us tobe delisted from the Nasdaq Global Market.

In addition, in order to comply with these additionalrequirements, we are hiring and will continue to hire additional accounting andfinancial staff with appropriate public company experience and technicalaccounting knowledge, which will increase our operating expenses in futureperiods.

We also expect these rules andregulations to make it more difficult and more expensive for us to obtaindirector and officer liability insurance, and we may be required to acceptreduced coverage or incur substantially higher costs to maintain coverage. Ifwe are unable to maintain adequate directors’ and officers’ insurance, it maybe more difficult for us to attract and retain qualified persons to serve onour board of directors, particularly to serve on our audit committee, andqualified executive officers.

***If we fail tomaintain proper and effective internal controls, our ability to produceaccurate financial statements could be impaired, which could adversely affectour operating results, our ability to operate our business and investors’ viewsof us.***

Ensuring that we haveadequate internal financial and accounting controls and procedures in place sothat we can produce accurate financial statements on a timely basis is a costlyand time-consuming process. We are in the process of documenting, reviewingand, where appropriate, improving our internal controls and procedures inanticipation of becoming subject to Section 404 of the Sarbanes-Oxley Act,which will in the future require annual management assessments of theeffectiveness of our internal control over financial reporting and a report byour independent registered public accounting firm addressing these assessments.Both we and our independent registered public accounting firm will be testingour internal controls in anticipation of becoming subject to Section 404requirements and, as part of that documentation and testing, will identifyareas for further attention and improvement. Implementing any appropriatechanges to our internal controls may entail substantial costs in order tomodify our existing financial and accounting systems, take a significant periodof time to complete, and distract our officers, directors and employees fromthe operation of our business. These changes may not, however, be effective inmaintaining the adequacy of our internal controls. Any failure to maintain thatadequacy, or a consequent inability to produce accurate financial statements ona timely basis, could increase our operating costs, materially impair ourability to operate our business, and adversely affect our stock price.

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***Our operationsinvolve the use of hazardous and toxic materials, and we must comply withenvironmental laws and regulations, which can be expensive, and may affect ourbusiness and operating results.***

We are subject to federal, state and local regulationsrelating to the use, handling, storage, disposal and human exposure tohazardous and toxic materials. If we were to violate or become liable underenvironmental laws in the future as a result of our inability to obtainpermits, human error, accident, equipment failure or other causes, we could besubject to fines, costs, or civil or criminal sanctions, face property damageor personal injury claims or be required to incur substantial investigation orremediation costs, which could be material, or experience disruptions in ouroperations, any of which could have a material adverse effect on our business.In addition, environmental laws could become more stringent over time imposinggreater compliance costs and increasing risks and penalties associated withviolations, which could harm our business.

We also face increasingcomplexity in our product design as we adjust to new and future requirements relatingto the materials composition of our products, including the restrictions onlead and other hazardous substances applicable to specified electronic productsplaced on the market in the European Union (Restriction on the Use of HazardousSubstances Directive 2002/95/EC, also known as the RoHS Directive). We alsoexpect that our operations will be affected by other new environmental laws andregulations on an ongoing basis. Although we cannot predict the ultimate impactof any such new laws and regulations, they will likely result in additionalcosts, and could require that we change the design and/or manufacturing of ourproducts, any of which could have a material adverse effect on our business.

***The trading price of our common stock is subject tofluctuation and is likely to be volatile.***

The trading priceof our common stock may fluctuate significantly in response to a number offactors, some of which are beyond our control, including:

·       actualor anticipated declines in operating results;

·       changesin financial estimates or recommendations by securities analysts;

·       announcementsby us or our competitors of financial results, new products, significanttechnological innovations, contracts, acquisitions, strategic relationships,joint ventures, capital commitments or other events;

·       rapidchanges in industry estimates in demand for Very Fast SRAM products;

·       thegain or loss of significant orders or customers;

·       recruitmentor departure of key personnel; and

·       marketconditions in our industry, the industries of our customers and the economy asa whole.

In recent years the stockmarket in general, and the market for technology stocks in particular, haveexperienced extreme price fluctuations, which have often been unrelated to theoperating performance of affected companies. The market price of our commonstock might experience significant fluctuations in the future, includingfluctuations unrelated to our performance. These fluctuations could materiallyadversely affect our business relationships, our ability to obtain futurefinancing on favorable terms or otherwise harm our business. In addition, inthe past, securities class action litigation has often been brought against acompany following periods of volatility in the market price of its securities.This risk is especially acute for us because the extreme volatility of marketprices of technology companies has resulted in a larger number of securitiesclass action claims against them. Due to the potential volatility of our stockprice, we may in the future be the target of similar litigation. Securitieslitigation could result in substantial costs and divert management’s attentionand resources. This could harm our business and cause the value of our stock todecline.

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***We are controlled by our executive officers, directorsand major stockholders.***

As of June 1, 2007,our executive officers, directors and major stockholders beneficially ownedapproximately 53% of our outstanding common stock. As a result, thesestockholders will be able to exercise control over all matters requiringstockholder approval, including the election of directors and approval ofsignificant corporate transactions, which could have the effect of delaying orpreventing a third party from acquiring control over or merging with us.

***The provisions ofour charter documents might inhibit potential acquisition bids that astockholder might believe are desirable, and the market price of our commonstock could be lower as a result.***

Our Board ofDirectors has the authority to issue up to 5,000,000 shares of preferred stock.Our Board of Directors can fix the price, rights, preferences, privileges andrestrictions of the preferred stock without any further vote or action by ourstockholders. The issuance of shares of preferred stock might delay or preventa change in control transaction. As a result, the market price of our commonstock and the voting and other rights of our stockholders might be adverselyaffected. The issuance of preferred stock might result in the loss of votingcontrol to other stockholders. We have no current plans to issue any shares ofpreferred stock. Our charter documents also contain other provisions, whichmight discourage, delay or prevent a merger or acquisition, including:

·       ourstockholders have no right to remove directors without cause;

·       ourstockholders have no right to act by written consent;

·       ourstockholders have no right to call a special meeting of stockholders; and

·       stockholdersmust comply with advance notice requirements to nominate directors or submit proposalsfor consideration at stockholder meetings.

These provisions couldalso have the effect of discouraging others from making tender offers for ourcommon stock. As a result, these provisions might prevent the market price ofour common stock from increasing substantially in response to actual or rumoredtakeover attempts. These provisions might also prevent changes in ourmanagement.

***There are a largenumber of shares of our common stock that may be sold in the market followingour initial public offering on March 29, 2007, which may depress themarket price of our common stock.***

The market price of our common stock could decline asa result of sales of substantial amounts of our common stock in the publicmarket, or the perception that those sales could occur. These sales or thepossibility that they may occur also could make it more difficult for us toraise funds through future offerings of common stock. The number of shares ofcommon stock available for sale in the public market is limited by restrictionsunder federal securities laws. In addition, we and the holders of approximately99% of our common stock outstanding prior to our initial public offering,including all of our executive officers and directors, have agreed not to sellshares of our common stock without the consent of the underwriters for180 days after March 29, 2007, the date of our initial publicoffering. The managing underwriters of the offering may, however, in their solediscretion and without notice, release all or any portion of the shares fromthe restrictions in these lock-up agreements.

We intend to register on aForm S-8 registration statement under the Securities Act of 1933 atotal of approximately 3,500,000 shares of common stock reserved forissuance under our stock option and employee stock purchase plans. As of March 31,2007, there were outstanding options to purchase 4,312,419 shares of commonstock, of which options to purchase 3,010,111 shares were vested andexercisable.

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***We donot expect to pay any cash dividends for the foreseeable future.***

We do not anticipate that we will pay any cashdividends to holders of our common stock in the foreseeable future.Accordingly, investors must rely on sales of their common stock after priceappreciation, which may never occur, as the only way to realize any futuregains on their investment. Investors seeking cash dividends in the foreseeablefuture should not purchase our common stock.

**Item1B.**               *Unresolved Staff Comments*

None.

**Item2.**                        *Properties*

Our executive offices, our principal administration,marketing and sales operations and a portion of our research and developmentoperations are located in approximately 20,300 square feet of space in SantaClara, California, which we occupy under a lease expiring in May 2010. Webelieve that our Santa Clara facility is adequate for our needs for theforeseeable future. In addition, we lease approximately 15,250 square feet inTaiwan to support our manufacturing activities. We also lease space in Georgiaand Texas. The aggregate annual gross rent for our facilities was approximately$525,000 in fiscal 2007.

**Item3.**                        *Legal Proceedings*

On October 23, 2006, we were served with a civilantitrust complaint filed by Reclaim Center, Inc. and other plaintiffs inthe United States District Court for the Northern District of Californiaagainst the Company and a number of other semiconductor companies. Thecomplaint was filed on behalf of a purported class of indirect purchasers ofSRAM products throughout the United States. The complaint alleges that thedefendants conspired to raise the price of SRAM in violation of Section 1of the Sherman Act, the California Cartwright Act, and several other stateantitrust, unfair competition and consumer protection statutes. Shortlythereafter, a number of similar complaints were filed by other plaintiffs invarious jurisdictions on behalf of purported classes of both direct andindirect purchasers. We have been served in some but not all of thesesubsequent actions. Many of these cases have been transferred by the JudicialPanel on Multidistrict Litigation to the Northern District of California. Webelieve that we have meritorious defenses to the allegations in the complaints,and we intend to defend these lawsuits vigorously. However, the litigation isin the preliminary stage and we cannot predict its outcome. The litigationprocess is inherently uncertain. Multidistrict antitrust litigation isparticularly complex and can extend for a protracted time, which cansubstantially increase the cost of such litigation. The defense of theselawsuits is also expected to divert the efforts and attention of some of ourkey management and technical personnel. As a result, our defense of thislitigation, regardless of its eventual outcome, will likely be costly and timeconsuming. Should the outcome of the litigation be adverse to us, we could berequired to pay significant monetary damages, which could adversely affect ourbusiness, financial condition, operating results and cash flows.

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

On March 22, 2007,our stockholders acted by written consent pursuant to Section 228 of theDelaware General Corporation Law. The following actions were approved:

| **Vote Solicited**                                            | ** ** | ** ** | ** ** | **For** | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|---------|------------|-------------|------------|-------------|------------|
| Approval of  Amended and Restated Certificate of Incorporation     |       | 17,138,270 |       | 0       |       | 37,947      |       |
| Approval form of  indemnity agreement for officers and directors   |       | 17,138,270 |       | 0       |       | 37,947      |       |
| Approval of the  adoption of our 2007 Equity Incentive Plan        |       | 16,584,939 |       | 553,331 |       | 37,947      |       |
| Approval of the adoption  of our 2007 Employee Stock Purchase Plan |       | 17,138,270 |       | 0       |       | 37,947      |       |

 

There were no broker non-votes.

31

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**PART II**

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

**Market Information**

Ourcommon stock has traded on the Nasdaq Global Market under the symbol “GSIT”since March 29, 2007. Prior to trading on the Nasdaq Global Market ourcommon stock was not listed or quoted on any national exchange or market system.The following table sets forth, for the period indicated, the high and lowsales prices for our common stock on such market.

| **Year Ended March 31, 2007**       | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| 4th Quarter (March 29  through March 31) |       | $          | 5.50       |     | $          | 5.00    |       |
|                                                         |            |            |            |          |            |         |            |  |  |

 

**Holders of CommonStock**

On June 1, 2007, theclosing price was $4.24 and there were 135 holders of record of our commonstock. Because many of such shares are held by brokers and other institutionson behalf of stockholders, we are unable to estimate the total number ofstockholders represented by these record holders.

**Dividend Policy**

We have never declared orpaid cash dividends on our common stock. We currently intend to retain futureearnings to finance the growth and development of our business, and we do notanticipate declaring or paying any cash dividends in the foreseeable future.Our line of credit with Mega International Commercial Bank Co., Ltd.prohibited us from paying cash dividends without the consent of that bank. Theline of credit expired on May 9, 2007 and was not renewed.

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

Please see Part III,Item 12 of this report for information regarding securities authorized forissuance under our equity compensation plans. Such information is incorporatedby reference from our definitive proxy statement for our 2007 annual meeting ofstockholders.

**Recent Sales ofUnregistered Securities**

From April 1, 2006 through March 31, 2007,we granted options to purchase an aggregate of 1,204,169 shares of our commonstock at a weighted average exercise price of $5.57 per share to our employeesunder our 2000 Stock Option Plan. These issuances of securities were deemed tobe exempt from registration under the Securities Act of 1933, as amended, inreliance upon Rule 701 promulgated under Section 3(b) thereof astransactions pursuant to compensatory benefit plans and contracts relating tocompensation as provided under Rule 701.

None of the foregoingtransactions involved any underwriters, underwriting discounts or commissions,or any public offering, and we believe each transaction was exempt from theregistration requirements of the Securities Act as stated above. The recipientsof securities in these transactions represented their intention to acquire thesecurities for investment only and not with a view to or for sale in connectionwith any distribution thereof, and appropriate legends were affixed to the sharecertificates and instruments issued in these transactions. All recipientseither received adequate information about the registrant or had access,through their relationships with the registrant, to such information.

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**Use of Proceeds**

On March 29, 2007, our Registration Statement on Form S-1(333-139885) covering the initial public offering of our common stock wasdeclared effective by the SEC. We registered 6,131,111 shares to be sold by usand up to 919,667 shares to be sold by the selling stockholders to cover anover-allotment option granted to the underwriters. Needham & Company,LLC, WR Hambrecht + Co., Robert W. Baird & Co. and StanfordGroup Company acted as managing underwriters.

All 6,131,111 shares offered by us were sold at aninitial public offering price of $5.50, for an aggregate offering price of$33,721,111. On April 27, 2007, the underwriters partially exercised theirover-allotment option, and an additional 303,583 shares were sold by theselling stockholders for an aggregate offering price of $1,669,706. We did notreceive any portion of the proceeds from the sale of shares by the sellingstockholders upon exercise of the underwriters’ over-allotment option. Theoffering has terminated and the underwriters’ over-allotment option has lapsed withrespect to the remaining 616,084 shares.

In connection with the issuance and distribution ofthe securities in the offering, we incurred an underwriting discount of$2,360,478 and estimated offering expenses of approximately $1.2 million,including approximately $30,000 of estimated offering expenses payable by us onbehalf of the selling stockholders. HolyStone Enterprises Co., Ltd. (“HolyStone”)and Koowin Co., Ltd. (“Koowin”) sold approximately 16.0% and 18.7%,respectively, of the shares sold by the selling stockholders and benefited fromoffering expenses paid by us on their behalf. Jing Rong Tang, a member of ourBoard of Directors, is also the Chief Executive Officer of HolyStone and adirector of Koowin. No other payments of offering expenses have been made,directly or indirectly, to any of our officers or directors, or to personsowning 10% or more of our outstanding common stock.

The principal purposes ofthe offering were to obtain additional capital, establish a public market forour common stock and facilitate our future access to public capital markets. Weintend to use the net proceeds of the offering for working capital and othergeneral corporate purposes, including capital expenditures and research anddevelopment. We may use a portion of the net proceeds to acquire businesses,products or technologies that are complementary to our current or futurebusiness and product lines; however, we have never made an acquisition andcurrently have no specific acquisitions planned. Our management has significantflexibility in applying the net proceeds of the offering. Pending such uses,the net proceeds of the offering have been invested in investment grade,interest-bearing securities.

**Issuer Purchases ofEquity Securities**

We did not repurchase anyshares of our equity securities during the fiscal quarter ended March 31,2007.

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

Youshould read the following selected consolidated financial data in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and our consolidated financial statements and the related notesincluded elsewhere in this report. The selected consolidated statement ofoperations data set forth below for the fiscal years ended March 31, 2007,2006 and 2005 and the selected consolidated balance sheet data as of March 31,2007 and 2006 are derived from, and are qualified by reference to, our auditedconsolidated financial statements included elsewhere in this report. Theselected consolidated statement of operations data set forth below for thefiscal years ended March 31, 2004 and 2003 and the selected consolidatedbalance sheet data as of March 31, 2005, 2004 and 2003 are derived fromaudited consolidated financial statements not included in this report. Theunaudited quarterly financial data for the fiscal years ended March 31,2007 and 2006 presented below includes, in the opinion of our management, alladjustments, consisting only of normal, recurring adjustments, that 

33

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management considers necessary for a fair statement ofthe results of those periods. Our historical results are not necessarilyindicative of the results to be expected in any future period.

| ** **                                                                       | ** ** | **Fiscal Year Ended March 31,**                   | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007(1)**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003(2)** | ** ** |
| ** **                                                                       | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Consolidated Statement of  Operations Data:**                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net revenues                                                                     |       | $                                                                     | 58,159     |   | $ | 43,141 |   | $ | 45,736 |   | $ | 35,419 |   | $ | 20,981 |   |
| Cost of revenues                                                                 |       | 36,042                                                                |       | 29,229 |   | 30,715 |   | 26,619 |   | 18,477 |   |
| Gross profit                                                                     |       | 22,117                                                                |       | 13,912 |   | 15,021 |   | 8,800 |   | 2,504 |   |
| Operating expenses:                                                              |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Research and development                                                         |       | 4,951                                                                 |       | 5,377 |   | 4,804 |   | 5,500 |   | 6,206 |   |
| Selling, general and administrative                                              |       | 6,209                                                                 |       | 4,797 |   | 5,756 |   | 4,152 |   | 4,500 |   |
| Total operating expenses                                                         |       | 11,160                                                                |       | 10,174 |   | 10,560 |   | 9,652 |   | 10,706 |   |
| Income (loss)  from operations                                                   |       | 10,957                                                                |       | 3,738 |   | 4,461 |   | (852 | ) | (8,202 | ) |
| Interest and  other income (expense), net                                        |       | 728                                                                   |       | 682 |   | 164 |   | 182 |   | 144 |   |
| Income (loss)  before income taxes                                               |       | 11,685                                                                |       | 4,420 |   | 4,625 |   | (670 | ) | (8,058 | ) |
| Provision for  (benefit from) income taxes                                       |       | 4,251                                                                 |       | 171 |   | (155 | ) | — |   | (620 | ) |
| Net income (loss)                                                                |       | $                                                                     | 7,434      |   | $ | 4,249 |   | $ | 4,780 |   | $ | (670 | ) | $ | (7,438 | ) |
| Basic and diluted net  income (loss) per share available to common stockholders: |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                            |       | $                                                                     | 1.04       |   | $ | 0.54 |   | $ | 0.63 |   | $ | (0.12 | ) | $ | (1.39 | ) |
| Diluted                                                                          |       | $                                                                     | 0.32       |   | $ | 0.19 |   | $ | 0.21 |   | $ | (0.12 | ) | $ | (1.39 | ) |
| Weighted average shares  used in per share calculations:                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                            |       | 6,253                                                                 |       | 6,148 |   | 6,112 |   | 5,737 |   | 5,334 |   |
| Diluted                                                                          |       | 22,837                                                                |       | 22,586 |   | 22,562 |   | 5,737 |   | 5,334 |   |

 

| ** **                                         | ** ** | **March 31,**      | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **Consolidated Balance Sheet  Data:**              |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and short-term investments |       | $                       | 8,275      |   | $ | 15,505 |   | $ | 11,522 |   | $ | 3,488 |   | $ | 6,150 |   |
| Working capital                                    |       | 32,999                  |       | 26,453 |   | 23,504 |   | 18,152 |   | 17,694 |   |
| Total assets                                       |       | 49,910                  |       | 39,544 |   | 33,524 |   | 30,899 |   | 23,803 |   |
| Redeemable  convertible preferred stock            |       | 9,007                   |       | 9,007 |   | 9,007 |   | 9,007 |   | 9,007 |   |
| Total stockholders’  equity                   |       | 29,732                  |       | 20,958 |   | 16,568 |   | 11,619 |   | 11,696 |   |
|                                                    |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          On April 1, 2006,we adopted SFAS No. 123(R), *Share-BasedPayment* (“SFAS 123(R)”), using the modified prospectivetransition method. The impact of adoption of SFAS 123(R) was toreduce income before income taxes by $1,216,000, net income by $1,165,000 andbasic and diluted net income per share by $0.19 and $0.05, respectively, forfiscal 2007.

(2)          Infiscal 2003, we received $876,000 of refunds from the United States CustomsService, or USCS, in connection with the revocation by the United StatesDepartment of Commerce of an order that had imposed a duty on us for sellingour Taiwan-manufactured products in the U.S. at less than their fair marketvalue. The revocation followed a ruling in our favor by the Court ofInternational Trade. Of this amount, $792,000 was credited to a receivable fromthe USCS that had been recorded on the date of the refund order and $84,000 wascredited to interest income.

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***Quarterly FinancialData (unaudited)***

| ** **                                      | ** ** | **Three Months Ended(1)**                                   | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **June 30,  2006**                                               | ** ** | **Sept. 30,  2006** | ** ** | **Dec. 31,  2006** | ** ** | **March 31,  2007** | ** ** |
| ** **                                      | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Consolidated Statement of  Operations Data:** |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net revenues                                    |       | $                                                                     | 13,973     |   | $ | 14,956 |   | $ | 15,251 |   |   | $ | 13,979 |   |   |
| Gross profit                                    |       | $                                                                     | 5,578      |   | $ | 5,909 |   | $ | 5,480 |   |   | $ | 5,150 |   |   |
| Net income                                      |       | $                                                                     | 2,110      |   | $ | 2,387 |   | $ | 1,522 |   |   | $ | 1,415 |   |   |
| Net income per  common share—Basic         |       | $                                                                     | 0.30       |   | $ | 0.35 |   | $ | 0.21 |   |   | $ | 0.19 |   |   |
| Net income per common  share—Diluted       |       | $                                                                     | 0.09       |   | $ | 0.10 |   | $ | 0.07 |   |   | $ | 0.06 |   |   |

 

| ** **                                | ** ** | **Three Months Ended**                                      | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **June 30,  2005**                                               | ** ** | **Sept. 30,  2005(2)** | ** ** | **Dec. 31,  2005** | ** ** | **March 31,  2006** | ** ** |
| ** **                                | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net revenues                              |       | $                                                                     | 11,215     |   | $ | 10,425 |   | $ | 11,097 |   |   | $ | 10,404 |   |   |
| Gross profit                              |       | $                                                                     | 3,595      |   | $ | 3,441 |   | $ | 2,875 |   |   | $ | 4,001 |   |   |
| Net income                                |       | $                                                                     | 842        |   | $ | 1,347 |   | $ | 753 |   |   | $ | 1,307 |   |   |
| Net income per  common share—Basic   |       | $                                                                     | 0.10       |   | $ | 0.18 |   | $ | 0.09 |   |   | $ | 0.18 |   |   |
| Net income per common  share—Diluted |       | $                                                                     | 0.04       |   | $ | 0.06 |   | $ | 0.03 |   |   | $ | 0.06 |   |   |

----

(1)          On April 1, 2006,we adopted SFAS No. 123(R), *Share-BasedPayment* (“SFAS 123(R)”), using the modified prospectivetransition method. For further information, see “Note 1-The Company andSummary of Significant Accounting Policies” and “Note 10-Stock Option Plans”.

(2)          Thetax provision during this quarter reflects the release of $895,000 of taxreserves following the conclusion of an income tax audit by the InternalRevenue Service.

**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

*Thefollowing discussion contains forward-looking statements that involverisks and uncertainties. Our actual results could differ substantially fromthose anticipated in these forward-looking statements as a result of manyfactors, including those set forth under “Risk Factors” and elsewhere in thisreport. The following discussion should be read together with our consolidatedfinancial statements and the related notes included elsewhere in this report.*

**Overview**

We are a fabless semiconductor company that designs,develops and markets Very Fast SRAMs primarily for the networking andtelecommunications markets. We were founded in March 1995 to developSRAMs then targeted principally at the personal computer, or PC, market.We shipped our first products in commercial volumes in fiscal 1998. During thatyear, we changed our focus from marketing commodity SRAMs in the highlycompetitive PC market to developing and marketing advanced Very FastSRAMs for the networking and telecommunications markets. Subsequent tofiscal 1998, product sales in these markets have represented approximately 70%to 90% of our net revenues. We are subject to the highly cyclical nature of thesemiconductor industry, which has experienced significant fluctuations, often inconnection with fluctuations in demand for the products in which semiconductordevices are used. Beginning in fiscal 2001, the networking andtelecommunications markets experienced an extended period of severecontraction, during which our operating results sharply declined. Betweenfiscal 2004 and fiscal 2006, demand for networking and telecommunicationsequipment recovered. In recent quarters, demand for such equipment hasaccelerated and, as a result, our operating results have improved.

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*Revenues.**  *Our revenues are derived primarilyfrom sales of our Very Fast SRAM products. Sales to networking andtelecommunications OEMs accounted for 70% to 80% of our net revenuesduring our last three fiscal years. We also sell our products to OEMs thatmanufacture products for defense applications such as radar and guidancesystems, for professional audio applications such as sound mixing systems, fortest and measurement applications such as high-speed testers, for automotiveapplications such as smart cruise control and voice recognition systems, andfor medical applications such as ultrasound and CAT scan equipment. As istypical in the semiconductor industry, the selling prices of our productsgenerally decline over the life of the product. Our ability to increase netrevenues, therefore, is dependent upon our ability to increase unit salesvolumes of existing products and to introduce and sell new products with higheraverage selling prices in quantities sufficient to compensate for theanticipated declines in selling prices of our more mature products. Although weexpect the average selling prices of individual products to decline over time,we believe that, over the next several quarters, our overall average sellingprices will increase due to a continuing shift in product mix to a higherpercentage of higher price, higher density products. Our ability to increaseunit sales volumes is dependent primarily upon increases in customer demandbut, particularly in periods of increasing demand, can also be affected by ourability to increase production through the availability of increased waferfabrication capacity from TSMC, our wafer supplier, and our ability to increasethe number of good integrated circuit die produced from each wafer through diesize reductions and yield enhancement activities.

We may experience fluctuations in quarterly netrevenues for a number of reasons. Historically, orders on hand at the beginningof each quarter are insufficient to meet our revenue objectives for thatquarter and are generally cancelable up to 30 days prior to scheduleddelivery. Accordingly, we depend on obtaining and shipping orders in the samequarter to achieve our revenue objectives. In addition, the timing of productreleases, purchase orders and product availability could result in significantproduct shipments at the end of a quarter. Failure to ship these products bythe end of the quarter may adversely affect our operating results. Furthermore,our customers may delay scheduled delivery dates and/or cancel orders withinspecified time frames without significant penalty.

We sell our products through our direct sales force,international and domestic sales representatives and distributors. Revenuesfrom product sales, except for sales to distributors, are generally recognizedupon shipment, net of sales returns and allowances. Sales to consignmentwarehouses, who purchase products from us for use by contract manufacturers,are recorded upon delivery to the contract manufacturer. Sales to distributorsare recorded as deferred revenues for financial reporting purposes andrecognized as revenues when the products are resold by the distributors to theOEM.

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Historically,a small number of OEM customers have accounted for a substantial portion of ournet revenues, and we expect that significant customer concentration willcontinue for the foreseeable future. Many of our OEMs use contractmanufacturers to manufacture their equipment. Accordingly, a significantpercentage of our net revenues is derived from sales to these contractmanufacturers and to consignment warehouses. In addition, a significant portionof our sales are made to foreign and domestic distributors who resell ourproducts to OEMs, as well as their contract manufacturers. Direct sales tocontract manufacturers and consignment warehouses accounted for 34.7%, 35.0%and 38.8% of our net revenues for fiscal 2007, 2006 and 2005, respectively.Sales to foreign and domestic distributors accounted for 59.0%, 55.7% and 49.7%of our net revenues for fiscal 2007, 2006 and 2005, respectively. The followingdirect customers accounted for 10% or more of our net revenues in one or moreof the following periods:

| ** **                 | ** ** | **Fiscal Year Ended   March 31,** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Consignment warehouses:    |       |                                                  |       |   |   |   |   |
| SMART Modular Technologies |       | 29.7                                                  | %          | 27.3 | % | 31.8 | % |
| Distributors:              |       |                                                  |       |   |   |   |   |
| Avnet Logistics            |       | 24.7                                                  |       | 30.4 |   | 32.5 |   |
| Nu Horizons                |       | 8.7                                                   |       | 10.3 |   | 6.1 |   |

 

Cisco Systems, our largest OEM customer, purchases ourproducts primarily through its consignment warehouse, SMART ModularTechnologies, and also purchases some products through its contractmanufacturers and directly from us. Cisco Systems is one of two of our OEMcustomers that purchase our products through a consignment warehouse.Historically, purchases by Cisco Systems have fluctuated from period to period.Based on information provided to us by Cisco Systems’ consignment warehouse andcontract manufacturers, purchases by Cisco Systems represented approximately30%, 28% and 34% of our net revenues in fiscal 2007, 2006 and 2005,respectively. During the quarter ended March 31, 2007, Cisco Systemsannounced the implementation of a “lean manufacturing” program under which itplans to reduce the levels of inventory carried by it and by its contractmanufacturers. The transition to this new program resulted in reductions inpurchases of our products by Cisco Systems’ contract manufacturers during thequarter ended March 31, 2007, as they drew down existing inventories. Thistransition will also impact our revenues in the quarter ending June 30,2007.

To our knowledge, none of our other OEM customersaccounted for more than 10% of our net revenues during any of these periods.

*Costof Revenues.**  *Ourcost of revenues consists primarily of wafer fabrication costs, wafer sort,assembly, test and burn-in expenses, the amortized cost of production masksets, stock-based compensation and the cost of materials and overhead fromoperations. All of our wafer manufacturing and assembly operations, and most ofour product testing operations, are outsourced. Accordingly, most of our costof revenues consists of payments to TSMC and independent assembly and testhouses. Because we do not have long-term, fixed-price supply contracts,our wafer fabrication and other outsourced manufacturing costs are subject tothe cyclical fluctuations in demand for semiconductors. Cost of revenues alsoincludes expenses related to supply chain management, quality assurance, andfinal product testing and documentation control activities conducted at ourheadquarters in Santa Clara, California and our branch operations in Taiwan.

*GrossProfit.**  *Ourgross profit margins vary among our products and are generally greater on ourhigher density products and, within a particular density, greater on our higherspeed and industrial temperature products. We expect that our overall grossmargins will fluctuate from period to period as a result of shifts in productmix, changes in average selling prices and our ability to control our cost ofrevenues, including costs associated with outsourced wafer fabrication andproduct assembly and testing.

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*Researchand Development Expenses.**  *Research and development expenses consist primarilyof salaries and related expenses for design engineers and other technicalpersonnel, the cost of developing prototypes, stock-based compensationand fees paid to consultants. We charge all research and development expensesto operations as incurred. We charge mask costs used in production to costs ofrevenues over a 12-month period. However, we charge costs related topre-production mask sets, which are not used in production, to research anddevelopment expenses at the time they are incurred. These charges often ariseas we transition to new process technologies and, accordingly, can causeresearch and development expenses to fluctuate on a quarterly basis. We believethat continued investment in research and development is critical to ourlong-term success, and we expect to continue to devote significant resources toproduct development activities. Accordingly, we expect that our research anddevelopment expenses will increase in future periods, although such expenses asa percentage of net revenues may fluctuate.

*Selling,General and Administrative Expenses.**  *Selling, general and administrativeexpenses consist primarily of commissions paid to independent salesrepresentatives, salaries, stock-based compensation and related expensesfor personnel engaged in sales, marketing, administrative, finance and human resourcesactivities, professional fees, costs associated with the promotion of ourproducts and other corporate expenses. We expect that our sales and marketingexpenses will increase in absolute dollars in future periods as we continue togrow and expand our sales force but that, to the extent our revenues increasein future periods, these expenses will generally decline as a percentage of netrevenues. We also expect that, in support of our continued growth and ouroperations as a public company, general and administrative expenses willcontinue to increase in absolute dollars for the foreseeable future but willfluctuate as a percentage of net revenues.

*Provision for (Benefitfrom) Income Taxes.**  *Weincurred operating losses in each of the fiscal years ended March 31, 2003and March 31, 2004. Due to operating losses incurred in fiscal 2003, weestablished a full valuation allowance in fiscal 2003 for deferred tax assets.This valuation allowance was based on our assessment that realization of deferredtax assets was uncertain due to our recent history of operating losses and ourinability to conclude that it was more likely than not that sufficient taxableincome would be generated in future periods to realize those deferred taxassets.

**Results ofOperations**

Thefollowing table sets forth statement of operations data as a percentage of netrevenues for the periods indicated:

| ** **                                 | ** ** | **Fiscal Year Ended   March 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues                               |       | 100.0                                                 | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                           |       | 62.0                                                  |       | 67.7 |   | 67.2 |   |
| Gross profit                               |       | 38.0                                                  |       | 32.3 |   | 32.8 |   |
| Operating expenses:                        |       |                                                  |       |   |   |   |   |
| Research and development                   |       | 8.5                                                   |       | 12.5 |   | 10.5 |   |
| Selling, general and administrative        |       | 10.7                                                  |       | 11.1 |   | 12.6 |   |
| Total operating expenses                   |       | 19.2                                                  |       | 23.6 |   | 23.1 |   |
| Income from  operations                    |       | 18.8                                                  |       | 8.7 |   | 9.7 |   |
| Interest and  other income (expense), net  |       | 1.3                                                   |       | 1.6 |   | 0.4 |   |
| Income before  income taxes                |       | 20.1                                                  |       | 10.3 |   | 10.1 |   |
| Provision for  (benefit from) income taxes |       | 7.3                                                   |       | 0.4 |   | (0.4 | ) |
| Net income                                 |       | 12.8                                                  | %          | 9.9 | % | 10.5 | % |

 

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***Fiscal Year Ended March 31, 2007 Compared toFiscal Year Ended March 31, 2006***

*NetRevenues.**  *Netrevenues increased by 34.8% from $43.1million in fiscal 2006 to$58.2 million in fiscal 2007. This increase was primarily due to anincrease in unit sales of approximately 12% as a result of increased demandfrom our networking and telecommunications OEMs. Unit sales increasedacross our product lines, particularly for our 18 and 36 megabit Very Fast SRAMproducts. Net revenues also improved as a result of an increase in the overallaverage selling price of our products of approximately 17% due to a shift inproduct mix to a larger percentage of higher price, higher density products. Webelieve that OEM demand increased largely as a result of a general improvementin the business environment and an increase in capital expenditures fornetworking and telecommunications equipment. Net revenues declined in thefourth quarter of fiscal 2007 compared to the third quarter of fiscal 2007 from$15.3 million to $14.0 million primarily due to the impact of Cisco Systems’ “leanmanufacturing” program described above. The transition to this new programresulted in reductions in purchases of our products by Cisco Systems’ contractmanufacturers during the quarter ended March 31, 2007, as they drew downexisting inventories.

*Costof Revenues.**  *Costof revenues increased by 23.3% from $29.2 million in fiscal 2006 to$36.0 million in fiscal 2007. This increase was primarily due to theincrease in unit shipments of approximately 12% and a shift in product mix tohigher cost, higher density products, partially offset by various costreduction measures, including the negotiation of price reductions for waferspurchased from TSMC and for assembly and test services provided by ourcontractors.

Cost of revenues included stock-basedcompensation of $227,000 and $13,000 for fiscal 2007 and 2006, respectively.

*GrossProfit.**  *Grossprofit increased by 59.0% from $13.9 million in fiscal 2006 to$22.1million in fiscal 2007. Gross margin increased from 32.3% in fiscal 2006to 38.0% in fiscal 2007. This increase in gross margin was primarily related tothe shift in product mix. The cost reduction measures described above alsocontributed to the improvement in gross margin.

*Researchand Development Expenses.**  *Research and development expenses decreased 7.9% from$5.4 million in fiscal 2006 to $5.0 million in fiscal 2007. Thisdecrease was primarily due to $678,000 in costs incurred in September 2005for pre-production mask sets related to the transition to our new 90 nanometerprocess technology and a decrease in payroll related expenses of $303,000. Thedecrease was partially offset by increases of $158,000 in other prototypeexpenses and $50,000 in outside design consultant expenses.

Research and development expenses included stock-basedcompensation expense of $515,000 and $70,000 for fiscal 2007 and 2006,respectively.

*Selling,General and Administrative Expenses.**  *Selling, general and administrativeexpenses increased 29.4% from $4.8 million in fiscal 2006 to$6.2 million in fiscal 2007. This increase was primarily related to anincrease of $408,000 in commissions paid to manufacturers’ representativesresulting from the increase in net revenues, an increase of $257,000 in outsideaccounting fees and an increase of $72,000 in payroll related expenses.

Selling, general and administrative expenses includedstock-based compensation expense of $474,000 and $12,000 for fiscal 2007and 2006, respectively.

*Interestand Other Income (Expense), Net.**  *Interest and other income(expense), net increased by 6.7%, from $682,000 in fiscal 2006 to $728,000 infiscal 2007. This increase was primarily the result of an increase in interestincome of $294,000 due to higher interest rates and higher average balances ofinvested cash, offset in part by a foreign exchange loss related to our Taiwanbranch operations.

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*Provisionfor (Benefit from) Income Taxes.**  *The provision for income taxesincreased from $171,000 in fiscal 2006 to $4.3 million in fiscal 2007. Thisincrease was due to the increase in pre-tax income and the release of $895,000of tax reserves in 2006 following the conclusion of an income tax audit by theInternal Revenue Service.

*Net Income.**  *Net income increased 75.0% from$4.2 million in fiscal 2006 to $7.4 million in fiscal 2007. Thisincrease was primarily due to increased net revenues and improved grossmargins.

***Fiscal Year Ended March 31, 2006 Compared toFiscal Year Ended March 31, 2005***

*NetRevenues.**  *Netrevenues decreased by 5.7% from $45.7 million in fiscal 2005 to$43.1 million in fiscal 2006. This decrease was primarily due to an 18.9%decrease in unit sales, partially offset by an increase of 15.3% in the overallaverage selling price of our products due to a shift in product mix to a largerpercentage of higher price, higher density products. Revenue growth duringfiscal 2006 was adversely impacted by our inability to ship certain of our 36megabit products due to an error in the assembly process at one of oursuppliers.

*Costof Revenues.**  *Costof revenues decreased by 4.8% from $30.7 million in fiscal 2005 to$29.2 million in fiscal 2006. This decrease was primarily due to the 18.9%decrease in unit shipments and a decrease in unit cost due to various costreduction measures, including the negotiation of price reductions for waferspurchased from TSMC and for assembly and test services provided by ourcontractors. Offsetting these reductions was a charge of approximately $900,000in fiscal 2006 related to the write-off of inventory resulting from theassembly error cited above.

*GrossProfit.**  *Grossprofit decreased by 7.4% from $15.0 million in fiscal 2005 to$13.9 million in fiscal 2006 primarily due to the 5.7% decline in netrevenues. Gross margin decreased from 32.8% in fiscal 2005 to 32.3% in fiscal2006. This decrease in gross margin was primarily related to the write-off ofinventory resulting from the assembly error cited above. The decrease in grossmargin was partially offset by the shift in product mix and the cost reductionmeasures described above.

*Researchand Development Expenses.**  *Research and development expenses increased by 11.9%from $4.8 million in fiscal 2005 to $5.4 million in fiscal 2006**.** This increase was primarily due to$678,000 in costs incurred in fiscal 2006 for pre-production mask sets relatedto the transition to our new 90 nanometer process technology. The increase waspartially offset by a decrease of $85,000 in payroll related expenses.

*Selling,General and Administrative Expenses.**  *Selling, general and administrativeexpenses decreased by 16.7% from $5.8 million in fiscal 2005 to$4.8 million for fiscal 2006. This decrease was primarily related to thewrite-off in fiscal 2005 of $962,000 in costs incurred in 2004 in connectionwith a planned initial public offering of our common stock, which was notconsummated, and a decrease in commissions paid to manufacturers’representatives, partially offset by increased payroll related expenses.

*Interestand Other Income (Expense), Net.**  *Interest and other income(expense), net increased by 315.9% from $164,000 in fiscal 2005 to $682,000 infiscal 2006. Net interest earned on invested cash balances increased from$166,000 to $482,000 due to an increase in average cash balances and higher interestrates. In addition, foreign exchange gains related to our Taiwan branchoperations increased from $6,000 in fiscal 2005 to $207,000 in fiscal 2006.

*Provisionfor (Benefit from) Income Taxes.**  *There was a $155,000 benefit fromincome taxes in fiscal 2005 compared to a tax expense of $171,000 in fiscal2006. The income tax benefit in fiscal 2005 resulted from the release of our$1.7 million deferred tax valuation allowance. During fiscal 2005, wedetermined that there was sufficient positive evidence, including a recenthistory of generating taxable income, to release the deferred tax assetvaluation allowance that was recorded as of March 31, 2004. The taxprovision in fiscal 2006 reflects the release of $895,000 of tax reservesfollowing the conclusion of an income tax audit by the Internal RevenueService.

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*Net Income.**  *Net income decreased by 11.1% from$4.8 million in fiscal 2005 to $4.2 million in fiscal 2006. Thisdecrease was primarily due to decreased gross margins on reduced net revenues.

**Liquidity andCapital Resources**

Since our inception, we have used proceeds from anumber of sources, including the private sale of $9.6 million of equitysecurities, bank borrowings and cash generated by operating activities tosupport our operations, acquire capital equipment and finance accountsreceivable and inventory growth.

As of March 31, 2007, our principal sources ofliquidity were $8.3 million in cash, cash equivalents and short terminvestments, and our $4.0 million line of credit with Mega InternationalCommercial Bank Co., Ltd. Borrowings under our credit line were limited to$1.0 million plus 70.0% of eligible United States accounts receivablebalances and 35.0% of finished goods inventory, with a sublimit of $500,000 forinventory. As of March 31, 2007, no amounts were outstanding under thecredit line. The credit line expired in May 2007 and was not renewed.  Subsequent to March 31, 2007, ourliquidity was enhanced by the receipt of net proceeds of approximately $30.2million from the initial public offering of our common stock.

Net cash used in operating activities was $4.7 millionfor fiscal 2007 compared to net cash provided by operating activities of$5.2 million for fiscal 2006 and $8.2 million for fiscal year 2005. Theprimary uses of cash in fiscal 2007 were increases of $12.0 million forinventoryand $2.0 million for accounts receivable. Inventory levels increasedin fiscal 2007 as we took advantage of favorable wafer pricing offered to us byTSMC. The increased level of accounts receivable reflects the higher level ofnet revenues in the fourth quarter of fiscal 2007 compared to the fourthquarter of fiscal 2006. These uses of cash were partially offset by net incomeof $7.4 million. The primary use of cash in fiscal 2006 was for prepaid expensesand other assets of $1.1 million, accrued expenses and other liabilitiesof $1.4 million, inventory of $1.7 million and deferred income taxesof $734,000. These uses of cash were partially offset by $3.0 million ofincreased accounts payable primarily for wafers purchased from TSMC acquired atthe end of fiscal 2006. The primary uses of cash in fiscal 2005 were accountspayable of $2.4 million and deferred income taxes of $1.3 million. Theseuses of cash  were offset primarily by$2.4 million of decreased accounts receivable and $2.7 million ofdecreased inventory. Inventory levels decreased in fiscal 2005 as we continuedto fulfill orders from inventory on hand.

Net cash used in investing activities was$2.0 million in fiscal 2007, $2.2 million in fiscal 2006 and$3.2 million in fiscal 2005. Investment activities in fiscal 2007consisted primarily of purchases of test equipment and expenditures related tothe implementation of our new enterprise resource planning, or ERP, system. Investingactivities in fiscal 2006 and fiscal 2005 consisted primarily of purchases oftest equipment and the investment of excess cash in auction rate securities.

Net cash provided by financing activities included netproceeds from the sale of common stock pursuant to option exercises of $124,000in fiscal 2007, $46,000 in fiscal 2006 and $50,000 in fiscal 2005. Fiscal 2007financing activities included a use of cash of $580,000 incurred for offeringexpenses paid in connection with our initial public offering that closed on April 3,2007.

We had commitments for capital expenditures at March 31,2007 of approximately $108,000. These expenditures will primarily be for theimplementation of our ERP system, which is scheduled to become operationalduring the second quarter of fiscal 2008. We also have total minimum leaseobligations of approximately $1.3 million from April 1, 2007 through May 31,2010, under non-cancelable operating leases.

We believe that ourexisting balances of cash, cash equivalents and short-term investments, andcash flow expected to be generated from our future operations will besufficient to meet our cash needs for working capital and capital expendituresfor at least the next 12 months, although we could be required, or 

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couldelect, to seek additional funding prior to that time. Our future capitalrequirements will depend on many factors, including the rate of revenue growththat we experience, the extent to which we utilize subcontractors, the levelsof inventory and accounts receivable that we maintain, the timing and extent ofspending to support our product development efforts and the expansion of oursales and marketing efforts. Additional capital may also be required for theconsummation of any acquisition of businesses, products or technologies that wemay undertake. We cannot assure you that additional equity or debt financing,if required, will be available on terms that are acceptable or at all.

**ContractualObligations**

Thefollowing table describes our contractual obligations as of March 31,2007:

| ** **                                   | ** ** | **Payments due by period** | ** ** | ** **     | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|
| ** **                                   | ** ** | **Up to  1 year**               | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** | **Total** | ** ** |
| Facilities and  equipment leases             |       | $                                         | 731,000    |           | $          | 567,000 |   | $ | 47,000 |   |   | — |   |   | $ | 1,345,000 |   |
| Wafer purchase  obligations                  |       | 872,000                                   |       | —         |       | — |   |   | — |   |   | 872,000 |   |
| Property and  equipment purchase obligations |       | 108,000                                   |       | —         |       | — |   |   | — |   |   | 108,000 |   |
|                                         |       | $                                         | 1,711,000  |           | $          | 567,000 |   | $ | 47,000 |   |   | — |   |   | $ | 2,325,000 |   |

 

**Critical AccountingPolicies and Estimates**

The preparation of our financial statements andrelated disclosures in conformity with accounting principles generally acceptedin the United States requires us to make judgments and estimates that affectthe amounts that we report in our financial statements and accompanying notes.We believe that we consistently apply these judgments and estimates and thatour financial statements and accompanying notes fairly represent all periodspresented. However, any errors in these judgments and estimates may have amaterial impact on our balance sheet and statement of operations. Criticalaccounting estimates, as defined by the Securities and Exchange Commission, arethose that are most important to the portrayal of our financial condition andresults of operations and require our most difficult and subjective judgmentsand estimates of matters that are inherently uncertain. Our critical accountingestimates include those regarding revenue recognition, the valuation ofinventories, taxes and stock-based compensation.

*RevenueRecognition.**  *Werecognize revenue when persuasive evidence of an arrangement exists, deliveryhas occurred, the price is fixed or determinable and collectibility of theresulting receivable is reasonably assured. Under these criteria, revenue fromthe sale of our products is generally recognized upon shipment according to ourshipping terms, net of accruals for estimated sales returns and allowancesbased on historical experience. Sales to distributors are made under agreementsallowing for returns or credits under certain circumstances. We deferrecognition of revenue on sales to distributors until products are resold bythe distributor to the end-user. Sales to consignment warehouses, who purchaseproducts from us for use by contract manufacturers, are recorded upon deliveryto the contract manufacturers.

The timing of recognizing revenues on product sales todistributors is dependent on receiving pertinent and accurate data from ourdistributors in a timely fashion. Distributors provide us monthly dataregarding the product, price, quantity, and end customer for their shipments aswell as the quantities of our products they have in stock at month end. Indetermining the appropriate amount of revenue to recognize, we use this data inreconciling differences between our estimate of their inventory levels andtheir reported inventories and shipment activities. If distributors incorrectlyreport their inventories or shipment activities, it could lead to inaccuratereporting of our revenues and income. As of March 31, 2007 and 2006,reconciling differences were not significant after appropriately accounting forgoods-in-transit.

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*Valuationof Inventories.**  *Inventoriesare stated at the lower of cost or market value, cost being determined on aweighted average basis. Our inventory write-down allowance is established when conditions indicate that theselling price of our products could be less than cost due to physicaldeterioration, obsolescence, changes in price levels, or other causes. Weconsider the need to establish the allowance for excess inventory generallybased on inventory levels in excess of 12 months of forecasted demand foreach specific product. Inventory consists of finished goods at our premises orconsignment warehouses, work in progress at our premises or our contractmanufacturers and  finished goods atdistributors. Historically, it has been difficult to forecast customer demandespecially at the part-number level. Many of the orders we receive from ourcustomers and distributors request delivery of product on relatively shortnotice and with lead times less than our manufacturing cycle time. In order toprovide competitive delivery times to our customers, we build and stock acertain amount of inventory in anticipation of customer demand that may notmaterialize. Moreover, as is common in the semiconductor industry, we may allowcustomers to cancel orders with minimal advance notice. Thus, even productbuilt to satisfy specific customer orders may not ultimately be required tofulfill customer demand. Nevertheless, at any point in time, some portion ofour inventory is subject to the risk of being materially in excess of ourprojected demand. Additionally, our average selling prices could decline due tomarket or other conditions, which creates a risk that costs of manufacturingour inventory may not be recovered. These factors contribute to the riskthat  we may be required to recordadditional inventory write-downs in the future, which could be material. Inaddition, if actual market conditions are more favorable than expected,inventory previously written down may be sold to customers resulting in lowercost of sales and higher income from operations than expected in that period.

*Taxes.*   Weaccount for income taxes under the liability method, whereby deferred taxassets and liabilities are determined based on the difference between thefinancial statement and tax bases of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected to affecttaxable income. We make certain estimates and judgments in the calculation oftax liabilities and the determination of deferred tax assets, which arise fromtemporary differences between tax and financial statement recognition methods.We record a valuation allowance to reduce our deferred tax assets to the amountthat management estimates is more likely than not to be realized. If in thefuture we determine that we are not likely to realize all or part of our netdeferred tax assets, an adjustment to deferred tax assets would be charged toearnings in the period such determination is made.

In addition, the calculation of tax liabilitiesinvolves inherent uncertainty in the application of complex tax laws. We recordtax reserves for additional taxes that we estimate we may be required to pay asa result of future potential examinations by federal and state taxingauthorities. If the payment ultimately proves to be unnecessary, the reversalof these tax reserves would result in tax benefits being recognized in theperiod we determine such reserves are no longer necessary. If an ultimate taxassessment exceeds our estimate of tax liabilities, an additional charge toexpense will result.

*StockBased Compensation.**  *Priorto April 1, 2006, we accounted for employee stock options using theintrinsic value method in accordance with Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB 25”), and Financial Accounting Standards Board (“FASB”) Interpretation No. 44,*Accounting for Certain TransactionsInvolving Stock Compensation, an Interpretation of APB No. 25,*and had adopted the disclosure-only provisions using the fair value method ofSFAS No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”), and SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure.* In accordance with APB 25, we recognizedcompensation cost for options granted to the extent the exercise price waslower than the fair value of the underlying common stock on the date of grant.Prior to April 1, 2006, we allocated stock-based compensation costsusing the straight line method and recognized the effect of forfeitures whenthey occurred.

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On April 1, 2006, we adopted SFASNo. 123(R), *Share-Based Payment*(“SFAS 123(R)”), using the modified prospective transition method. Underthis method, our stock-based compensation costs recognized during thefiscal year ended March 31, 2007 were comprised of compensation costs forall share-based payment awards granted subsequent to April 1, 2006and of compensation costs related to share-based payment awards that wereunvested on April 1, 2006, based on their grant-date fair value estimatedusing the Black-Scholes option pricing model. Prior periods were notrestated. As stock-based compensation expense recognized in the statementof operations for fiscal 2007 is based on options ultimately expected to vest,it has been reduced by the amount of estimated forfeitures.

We chose the straight-line method of allocatingcompensation cost over the requisite service period of the related award underSFAS 123(R). We calculated the expected term based on the historicalaverage period of time that options were outstanding as adjusted for expectedchanges in future exercise patterns, which, for options granted in the infiscal 2007, resulted in an expected term of approximately four years. We basedour estimate of expected volatility on the estimated volatility of similarentities whose share prices are publicly available. The risk-free interest rateis based on the U.S. Treasury yields in effect at the time of grant for periodscorresponding to the expected life of the options. The dividend yield is 0%,based on the fact that we have never paid dividends and have no presentintention to pay dividends. Determining some of these assumptions requiressignificant judgment and changes to these assumptions could result in asignificant change to the calculation of stock-based compensation in futureperiods.

The impact of adoption of SFAS 123(R) was toreduce income before tax by $1,216,000, net income by $1,165,000 and basic anddiluted net income per share by $0.19 and $0.05, respectively, for fiscal 2007.SFAS 123(R) requires cash flows, if any, resulting from the taxbenefits from tax deductions in excess of the compensation cost recognized forthose options (excess tax benefits) to be classified as financing cash flows.Adoption of FAS No. 123(R) did not have an impact on operating andfinancing cash flows because we did not have any excess tax benefits in theperiod of adoption.

Prior to the adoption of SFAS No. 123(R), werecognized forfeitures of unvested stock options as they occurred. Uponadoption of SFAS No. 123(R), we began estimating future forfeitures andrecognizing the effect of such forfeitures on the grant date of the awards.SFAS No. 123(R) requires a one-time cumulative adjustment at theadoption date to record an estimate of future forfeitures on the unvested outstandingawards. Based on our estimate of the impact of future forfeitures on theexpense recognized for unvested options at the date of adoption, such one-timecumulative adjustment was determined to be immaterial.

We have no stock-based compensation arrangementswith non-employees.

Given the absenceof an active market for our common stock, our board of directors estimated thefair value of our common stock for purposes of determining stock-basedcompensation expense for the periods presented. Through September 2006,the board of directors determined the estimated fair value of our common stock,based in part on our historic net revenues and a market determined revenuemultiplier as well as the following:

·       theprices for our convertible preferred stock sold to investors in arms-lengthtransactions, and the rights, preferences and privileges of that redeemableconvertible preferred stock relative to those of our common stock;

·       thelaunch of new products;

·       ourfinancial position, historic operating results and revenue growth;

·       thefact that the option grants involved illiquid securities in a private company;and

·       thelikelihood of achieving a liquidity event, such as an initial public offeringor sale of the company, for the shares of common stock underlying the optionsgiven prevailing market conditions.

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In October 2006, we obtained an independentvaluation from a third party valuation consultant of our common stock as of September 30,2006 which assisted in our determination of value for grants made from October 2006to November 21, 2006. We continued to rely in part on this third partyvaluation for options granted in January 2007 in addition to the methodsdescribed above for grants prior the October 2006.

We believe that we haveused reasonable methodologies, approaches and assumptions consistent with theAmerican Institute of Certified Public Accountants Practice Guide, Valuation ofPrivately-Held-Company Equity Securities Issued as Compensation, to determinethe fair value of our common stock. If we had made different assumptions andestimates than those described above, the amount of our recognized and to berecognized stock-based compensation expense, net income (loss) and netincome (loss) per share amounts could have been materially different.

**Off-Balance SheetArrangements**

At March 31, 2007, wedid not have any off-balance sheet arrangements or relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, established forthe purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. Accordingly, we are not exposed tothe type of financing, liquidity, market or credit risk that could arise if wehad engaged in such relationships.

**Recent AccountingPronouncements**

In February 2007, the Financial AccountingStandards Board, or FASB, issued SFAS No. 159, *“The Fair Value Option for Financial Assets and Financial Liabilities,”*which permits entities to choose to measure eligible financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. Unrealized gains and losses on items forwhich the fair value option has been elected are reported in earnings at each subsequentreporting date. SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. We are currently evaluating the effect that theadoption of SFAS 159 will have on our consolidated financial position andresults of operations.

In September 2006, the Securities and ExchangeCommission, or SEC, issued Staff Accounting Bulletin No. 108, or SAB No. 108,*Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatements*, which provides interpretive guidance on how the effectsof the carryover or reversal of prior year misstatements should be consideredin quantifying a current year misstatement. The adoption of SAB No. 108did not have a material impact on our consolidated financial position, resultsof operations or cash flows.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. SFAS No. 157establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. The changes to current practice resulting from theapplication of this Statement relate to the definition of fair value, themethods used to measure fair value, and the expanded disclosures about fairvalue measurements. We will be required to adopt the provisions of SFAS No. 157beginning with our fiscal quarter ending June 30, 2008. We are currentlyevaluating the impact of the adoption of SFAS No. 157, but we do notcurrently believe its adoption will have a material impact on our consolidatedfinancial position, results of operations or cash flows.

In July 2006, the FASB, issued FASBInterpretation No. 48, *Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement 109*,or FIN 48. FIN 48 prescribes a comprehensive model for how a company shouldrecognize, measure, present, and disclose in its financial statements uncertaintax positions that the company has taken or expects to take on a tax return(including a decision whether to file or not to file a return in aparticular jurisdiction). Under the Interpretation, the financial statementswill reflect expected future tax consequences of such positions presuming thetaxing authorities’ full knowledge of the position and all relevant facts, butwithout considering time values. The Interpretation substantially 

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changes the applicableaccounting model and is likely to cause greater volatility in income statementsas more items are recognized discretely within income tax expense. TheInterpretation also revises disclosure requirements and introduces aprescriptive, annual, tabular roll-forward of the unrecognized tax benefits.The Interpretation requires qualitative and quantitative disclosures, includingdiscussion of reasonably possible changes that might occur in the recognizedtax benefits over the next 12 months; a description of open tax years bymajor jurisdictions; and a roll-forward of all unrecognized tax benefits,presented as a reconciliation of the beginning and ending balances of theunrecognized tax benefits on a worldwide aggregated basis. The Interpretationis effective as of the beginning of fiscal years that start after December 15,2006. We are currently evaluating the effect that the adoption of FIN 48 willhave on our consolidated results of operations and financial condition.

In June 2006, EITF No. 06-3,How Sales Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross VersusNet Presentation) was issued, which states that a company must disclose itsaccounting policy (i.e., gross or net presentations) regarding presentations oftaxes within the scope of EITF No. 06-03. If taxes included in grossrevenue are significant, a company must disclose the amount of these taxes foreach period for which an income statement is presented. The disclosures arerequired for annual and interim financial statements for each period for whichan income statement is presented. EITF No. 06-03 will be effectivefor us beginning April 1, 2007. Based on our current evaluation of EITF No. 06-03,we do not expect its adoption to have a material impact on our consolidatedresults of operations or financial position.

**Item 7A.**                *Quantitative and QualitativeDisclosures About Market Risk*

*ForeignCurrency Exchange Risk.**  *Our revenues and expenses, except those expensesrelated to our operations in Taiwan, including subcontractor manufacturingexpenses, are denominated in U.S. dollars. As a result, we have relativelylittle exposure for currency exchange risks, and foreign exchange losses havebeen minimal to date. We do not currently enter into forward exchange contractsto hedge exposure denominated in foreign currencies or any other derivativefinancial instruments for trading or speculative purposes. In the future, if wefeel our foreign currency exposure has increased, we may consider entering intohedging transactions to help mitigate that risk.

*Interest Rate Sensitivity.**  *We had unrestricted cash, cashequivalents and short term investments totaling $8.3 million at March 31,2007. These amounts were invested primarily in money market funds and auctionrate securities. The unrestricted cash, cash equivalents and short-termmarketable securities are held for working capital purposes. We do not enterinto investments for trading or speculative purposes. Due to the short-termnature of these investments, we believe that we do not have any materialexposure to changes in the fair value of our investment portfolio as a resultof changes in interest rates. Declines in interest rates, however, will reducefuture investment income.

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**Item 8.**                        *Financial Statements andSupplementary Data*

**GSI TECHNOLOGY, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                    | ** ** | **Page** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                           |       |     | 48         |   |   |
| Consolidated Balance Sheets As of March 31, 2007  and 2006                                                    |       |     | 49         |   |   |
| Consolidated Statements of Operations For the Three  Years Ended March 31, 2007, 2006 and 2005                |       |     | 50         |   |   |
| Consolidated Statements of Stockholders’ Equity For  the Three Years Ended March 31, 2007, 2006 and 2005 |       |     | 51         |   |   |
| Consolidated Statements of Cash Flows For the Three  Years Ended March 31, 2007, 2006 and 2005                |       |     | 52         |   |   |
| Notes to Consolidated Financial Statements                                                                         |       |     | 53         |   |   |

 

 

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors and Stockholdersof GSI Technology, Inc.:

In our opinion, the consolidated financial statementslisted in the index appearing under Item 15(a)(1) present fairly, in allmaterial respects, the financial position of GSI Technology, Inc.****and its subsidiaries****as of March 31,2007 and March 31, 2006, and the results of their operations and theircash flows for each of the three years in the period ended March 31, 2007****in conformity with accounting principles generally acceptedin the United States of America. In addition, in our opinion, the financialstatement schedule listed in the index appearing under Item 15(a)(2) presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements. Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

As discussed in Note 1 tothe consolidated financial statements, the Company changed the manner in whichit accounts for stock-based compensation in fiscal 2007.

/s/ PricewaterhouseCoopers LLP

San Jose, CaliforniaJune 14, 2007

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**GSI TECHNOLOGY, INC.CONSOLIDATED BALANCE SHEETS**

| ** **                                                                               | ** ** | **March 31,**                                                                    | ** **   |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|--------------|
| ** **                                                                               | ** ** | **     2007     **                  | ** **   | **     2006     ** | ** ** |
| ** **                                                                               | ** ** | **(In thousands, except share  and per share amounts)** | ** **   |
| **ASSETS**                                                                               | ** ** |                                                                                  | ** **   | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                                               |       |                                                                                  | $            | 4,275 | ** ** |   |   | $ | 11,505 |   |   |
| Restricted cash                                                                          |       |                                                                                  | 1,000        | ** ** |   |   | 1,000 |   |   |
| Short-term  investments                                                                  |       |                                                                                  | 4,000        | ** ** |   |   | 4,000 |   |   |
| Accounts  receivable, net                                                                |       |                                                                                  | 6,397        | ** ** |   |   | 4,295 |   |   |
| Inventories                                                                              |       |                                                                                  | 24,209       | ** ** |   |   | 12,600 |   |   |
| Prepaid expenses  and other current assets                                               |       |                                                                                  | 3,205        | ** ** |   |   | 1,824 |   |   |
| Deferred income  taxes                                                                   |       |                                                                                  | 1,084        | ** ** |   |   | 808 |   |   |
| Total current assets                                                                     |       |                                                                                  | 44,170       | ** ** |   |   | 36,032 |   |   |
| Property and  equipment, net                                                             |       |                                                                                  | 4,745        | ** ** |   |   | 2,206 |   |   |
| Other assets                                                                             |       |                                                                                  | 995          | ** ** |   |   | 1,306 |   |   |
| Total assets                                                                             |       |                                                                                  | $            | 49,910 | ** ** |   |   | $ | 39,544 |   |   |
| **LIABILITIES, REDEEMABLE  CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**   |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Accounts payable                                                                         |       |                                                                                  | $            | 4,864 | ** ** |   |   | $ | 5,195 |   |   |
| Accrued expenses  and other liabilities                                                  |       |                                                                                  | 2,603        | ** ** |   |   | 1,280 |   |   |
| Deferred revenue                                                                         |       |                                                                                  | 3,704        | ** ** |   |   | 3,104 |   |   |
| Total current liabilities                                                                |       |                                                                                  | 11,171       | ** ** |   |   | 9,579 |   |   |
| Commitments and  contingencies (Notes 7 and 13)                                          |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Redeemable  convertible preferred stock: $0.001 par value                                |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Authorized: 15,120,168 shares                                                            |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Issued and outstanding: 15,120,168 and 15,120,168                                        |       |                                                                                  |         | ** ** |   |   |   |   |   |
| shares, respectively                                                                     |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Liquidation preference: $9,007 and $9,007,  respectively                                 |       |                                                                                  | 9,007        | ** ** |   |   | 9,007 |   |   |
| Stockholders’ equity:                                                               |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Preferred stock: $0.001 par value                                                        |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Authorized: 5,000,000 shares                                                             |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Issued and outstanding: none                                                             |       |                                                                                  | —       | ** ** |   |   | — |   |   |
| Common stock: $0.001 par value                                                           |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Authorized: 150,000,000 shares                                                           |       |                                                                                  |         | ** ** |   |   |   |   |   |
| Issued and outstanding: 6,343,411 and 6,164,286                                          |       |                                                                                  |    | ** ** |   |   |   |   |   |
| shares, respectively                                                                     |       |                                                                                  | 6            | ** ** |   |   | 6 |   |   |
| Additional paid-in  capital                                                              |       |                                                                                  | 7,542        | ** ** |   |   | 6,368 |   |   |
| Deferred stock-based  compensation                                                       |       |                                                                                  | —       | ** ** |   |   | (166 | ) |   |
| Retained earnings                                                                        |       |                                                                                  | 22,184       | ** ** |   |   | 14,750 |   |   |
| Total stockholders’ equity                                                          |       |                                                                                  | 29,732       | ** ** |   |   | 20,958 |   |   |
| Total  liabilities, redeemable convertible preferred stock and stockholders’ equity |       |                                                                                  | $            | 49,910 | ** ** |   |   | $ | 39,544 |   |   |

 

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

49

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**GSI TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                | ** ** | **Year Ended March 31,**                               | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **     2007     **  | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                                                                | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net revenues                                                              |       |                                                                  | $          | 58,159 |   |   |   | $ | 43,141 |   |   |   | $ | 45,736 |   |   |
| Cost of revenues                                                          |       |                                                                  | 36,042     |   |   |   | 29,229 |   |   |   | 30,715 |   |   |
| Gross profit                                                              |       |                                                                  | 22,117     |   |   |   | 13,912 |   |   |   | 15,021 |   |   |
| Operating expenses:                                                       |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Research and development                                                  |       |                                                                  | 4,951      |   |   |   | 5,377 |   |   |   | 4,804 |   |   |
| Selling, general and administrative                                       |       |                                                                  | 6,209      |   |   |   | 4,797 |   |   |   | 5,756 |   |   |
| Total operating expenses                                                  |       |                                                                  | 11,160     |   |   |   | 10,174 |   |   |   | 10,560 |   |   |
| Income from  operations                                                   |       |                                                                  | 10,957     |   |   |   | 3,738 |   |   |   | 4,461 |   |   |
| Interest income,  net                                                     |       |                                                                  | 769        |   |   |   | 475 |   |   |   | 158 |   |   |
| Other income  (expense), net                                              |       |                                                                  | (41        | ) |   |   | 207 |   |   |   | 6 |   |   |
| Income before  income taxes                                               |       |                                                                  | 11,685     |   |   |   | 4,420 |   |   |   | 4,625 |   |   |
| Provision for  (benefit from) income taxes                                |       |                                                                  | 4,251      |   |   |   | 171 |   |   |   | (155 | ) |   |
| Net income                                                                |       |                                                                  | $          | 7,434 |   |   |   | $ | 4,249 |   |   |   | $ | 4,780 |   |   |
| Basic and diluted net  income per share available to common stockholders: |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                     |       |                                                                  | $          | 1.04 |   |   |   | $ | 0.54 |   |   |   | $ | 0.63 |   |   |
| Diluted                                                                   |       |                                                                  | $          | 0.32 |   |   |   | $ | 0.19 |   |   |   | $ | 0.21 |   |   |
| Weighted average shares  used in per share calculations:                  |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                     |       |                                                                  | 6,253      |   |   |   | 6,148 |   |   |   | 6,112 |   |   |
| Diluted                                                                   |       |                                                                  | 22,837     |   |   |   | 22,586 |   |   |   | 22,562 |   |   |

 

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

50

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**GSI TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                                                       | ** ** | **Common Stock**                                        | ** ** | **Additional  Paid-in** | ** ** | **Deferred  Stock-Based** | ** ** | **Retained**     | ** ** | **Total  Stockholders’** | ** ** |       |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------------|------------|-------------------------------|------------|------------|
| ** **                                                                       | ** ** | **Shares**                                                   | ** ** | **Amount**              | ** ** | **Capital**               | ** ** | **Compensation** | ** ** | **Earnings**                  | ** ** | **Equity** | ** ** |   |
| ** **                                                                       | ** ** | **(In thousands, except share amounts)** | ** ** |                    |
| Balance,  March 31, 2004                                                    |       | 6,069,550                                                    |       |                    | $          | 6                         |       |             |       | $                             | 6,244      |       |   |   | $ | (352 | ) |   | $ | 5,721 |   |   | $ | 11,619 |   |   |   |
| Issuance of  common stock upon exercise of stock options                         |       | 58,800                                                       |       |                    | —     |                      |       |             | 50         |                          |       |       | — |   |   | — |   |   | 50 |   |   |   |
| Deferred stock-based  compensation                                               |       | —                                                       |       |                    | —     |                      |       |             | 28         |                          |       |       | (28 | ) |   | — |   |   | — |   |   |
| Amortization of  deferred stock-based compensation                               |       | —                                                       |       |                    | —     |                      |       |             | —     |                          |       |       | 119 |   |   | — |   |   | 119 |   |   |
| Net income and  comprehensive income                                             |       | —                                                       |       |                    | —     |                      |       |             | —     |                          |       |       | — |   |   | 4,780 |   |   | 4,780 |   |   |
| Balance,  March 31, 2005                                                    |       | 6,128,350                                                    |       |                    | 6          |                      |       |             | 6,322      |                          |       |       | (261 | ) |   | 10,501 |   |   | 16,568 |   |   |
| Issuance of common  stock upon exercise of stock options                         |       | 35,936                                                       |       |                    | —     |                      |       |             | 46         |                          |       |       | — |   |   | — |   |   | 46 |   |   |
| Amortization of  deferred stock-based compensation                               |       | —                                                       |       |                    | —     |                      |       |             | —     |                          |       |       | 95 |   |   | — |   |   | 95 |   |   |
| Net income and  comprehensive income                                             |       | —                                                       |       |                    | —     |                      |       |             | —     |                          |       |       | — |   |   | 4,249 |   |   | 4,249 |   |   |
| Balance,  March 31, 2006                                                    |       | 6,164,286                                                    |       |                    | 6          |                      |       |             | 6,368      |                          |       |       | (166 | ) |   | 14,750 |   |   | 20,958 |   |   |
| Reversal of  deferred stock-based compensation upon adoption of SFAS 123(R) |       | —                                                       |       |                    | —     |                      |       |             | (166       | )                             |       |       | 166 |   |   | — |   |   | — |   |   |
| Issuance of  common stock upon exercise of stock options                         |       | 179,125                                                      |       |                    | —     |                      |       |             | 124        |                          |       |       | — |   |   | — |   |   | 124 |   |   |
| Stock-based  compensation expense                                                |       | —                                                       |       |                    | —     |                      |       |             | 1,216      |                          |       |       | — |   |   | — |   |   | 1,216 |   |   |
| Net income and  comprehensive income                                             |       | —                                                       |       |                    | —     |                      |       |             | —     |                          |       |       | — |   |   | 7,434 |   |   | 7,434 |   |   |
| Balance, March 31,  2007                                                    |       | 6,343,411                                                    |       |                    | $          | 6                         |       |             |       | $                             | 7,542      |       |   |   | $ | — |   |   | $ | 22,184 |   |   | $ | 29,732 |   |   |
|                                                                                  |            |                                                              |            |                         |            |                           |            |                  |            |                               |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

51

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**GSI TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                   | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **(In thousands)**                 | ** ** |
| Cash flows from  operating activities:                                                       |       |                                    |       |   |   |   |   |
| Net income                                                                                   |       | $                                       | 7,434      |   | $ | 4,249 |   | $ | 4,780 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                    |       |   |   |   |   |
| Allowance for sales returns and doubtful accounts                                            |       | (105                                    | )          | 63 |   | (17 | ) |
| Provision for excess and obsolete inventories                                                |       | 388                                     |       | 1,111 |   | 48 |   |
| Depreciation and amortization                                                                |       | 836                                     |       | 893 |   | 926 |   |
| Stock-based compensation                                                                     |       | 1,216                                   |       | 95 |   | 119 |   |
| Deferred income taxes                                                                        |       | 40                                      |       | (734 | ) | (1,291 | ) |
| Changes in assets  and liabilities:                                                          |       |                                    |       |   |   |   |   |
| Accounts receivable                                                                          |       | (1,997                                  | )          | 589 |   | 2,442 |   |
| Inventory                                                                                    |       | (11,997                                 | )          | (1,672 | ) | 2,738 |   |
| Prepaid expenses and other assets                                                            |       | (806                                    | )          | (1,057 | ) | 804 |   |
| Accounts payable                                                                             |       | (512                                    | )          | 2,961 |   | (2,363 | ) |
| Accrued expenses and other liabilities                                                       |       | 162                                     |       | (1,409 | ) | 22 |   |
| Deferred revenue                                                                             |       | 600                                     |       | 78 |   | 17 |   |
| Net cash provided by (used in) operating activities                                          |       | (4,741                                  | )          | 5,167 |   | 8,225 |   |
| Cash flows from  investing activities:                                                       |       |                                    |       |   |   |   |   |
| Decrease (increase) in restricted cash                                                       |       | —                                  |       | 159 |   | (8 | ) |
| Purchase of short-term investments                                                           |       | (9,500                                  | )          | (1,000 | ) | (3,000 | ) |
| Sales and maturities of short-term investments                                               |       | 9,500                                   |       | — |   | — |   |
| Purchases of property and equipment                                                          |       | (2,033                                  | )          | (1,389 | ) | (233 | ) |
| Net cash used in investing activities                                                        |       | (2,033                                  | )          | (2,230 | ) | (3,241 | ) |
| Cash flows from  financing activities:                                                       |       |                                    |       |   |   |   |   |
| Initial public offering costs paid during the year                                           |       | (580                                    | )          | — |   | — |   |
| Proceeds from issuance of common stock upon option  exercises                                |       | 124                                     |       | 46 |   | 50 |   |
| Net cash provided by (used in) financing activities                                          |       | (456                                    | )          | 46 |   | 50 |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | (7,230                                  | )          | 2,983 |   | 5,034 |   |
| Cash and cash  equivalents at beginning of the year                                          |       | 11,505                                  |       | 8,522 |   | 3,488 |   |
| Cash and cash  equivalents at end of the year                                                |       | $                                       | 4,275      |   | $ | 11,505 |   | $ | 8,522 |   |
| Non-cash financing  activities:                                                              |       |                                    |       |   |   |   |   |
| Deferred stock-based compensation                                                            |       | $                                       | —     |   | $ | — |   | $ | 28 |   |
| Purchases of property and equipment through accounts  payable and accruals                   |       | $                                       | (1,342     | ) | $ | — |   | $ | — |   |
| Supplemental cash flow  information:                                                         |       |                                    |       |   |   |   |   |
| Cash paid for income taxes                                                                   |       | $                                       | 4,096      |   | $ | 2,492 |   | $ | 919 |   |
| Cash paid for  interest                                                                      |       | $                                       | 8          |   | $ | 8 |   | $ | 8 |   |

 

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

52

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1—THE COMPANYAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***The Company***

GSI Technology, Inc.(the “Company”) was incorporated in California in March 1995 andreincorporated in Delaware on June 9, 2004. The Company is a provider of “VeryFast” SRAM products that are incorporated primarily in high-performancenetworking and telecommunications equipment, such as routers, switches, widearea network infrastructure equipment, wireless base stations and networkaccess equipment. In addition, the Company serves the ongoing needs of themilitary, industrial, test equipment and medical markets for high-performanceSRAMs.

***Accounting principles***

The consolidated financialstatements and accompanying notes were prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).

***Basis of consolidation***

The consolidated financialstatements include the accounts of the Company’s two wholly-ownedsubsidiaries, GSI Technology Holdings, Inc. and GSI Technology (BVI), Inc.All significant inter-company transactions and balances have beeneliminated in consolidation.

***Use of estimates***

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period. Significant estimates are inherent in thepreparation of the consolidated financial statements and include revenuerecognition, obsolete and excess inventory, the valuation allowance on deferredtax assets, the valuation of equity instruments and stock-basedcompensation. Actual results could differ from those estimates.

***Risk and uncertainties***

The Company buys all of its wafers, an integralcomponent of its products, from a single supplier and is also dependent onindependent suppliers to assemble and test its products. During the years endedMarch 31, 2007, 2006 and 2005, all of the Company’s wafers were suppliedby Taiwan Semiconductor Manufacturing Company Limited, or TSMC. If thissupplier fails to satisfy the Company’s requirements on a timely basis atcompetitive prices, the Company could suffer manufacturing delays, a possibleloss of revenues, or higher cost of revenues, any of which could adverselyaffect operating results.

A majority of the Company’s net revenues come fromsales to customers in the networking and telecommunications equipment industry.A decline in demand in this industry could have a material adverse affect onthe Company’s operating results and financial condition.

Because much of the manufacturing and testing of theCompany’s products is conducted in Taiwan, its business performance may be affectedby changes in Taiwan’s political, social and economic environment. For example,any political instability resulting from the relationship among the UnitedStates, Taiwan and the People’s Republic of China could damage the Company’sbusiness. Moreover, the role of the Taiwanese government in the Taiwaneseeconomy is significant. Taiwanese policies toward economic 

53

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

liberalization, and lawsand policies affecting technology companies, foreign investment, currencyexchange rates, taxes and other matters could change, resulting in greaterrestrictions on the Company’s and its suppliers’ ability to do business andoperate facilities in Taiwan. If any of these risks were to occur, the Company’sbusiness could be harmed.

Some of the Company’ssuppliers are located near fault lines. In the event of a major earthquake orother natural disaster near the facilities of any of these suppliers, theCompany’s business could be harmed.

***Revenue recognition***

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred, the price is fixed or determinable and collectibility of theresulting receivable is reasonably assured. Under these criteria, revenue fromthe sale of products is generally recognized upon shipment according to theCompany’s shipping terms, net of accruals for estimated sales returns andallowances based on historical experience. Sales to distributors are made underagreements allowing for returns or credits under certain circumstances. TheCompany defers recognition of revenue on sales to distributors until productsare resold by the distributor. Sales to consignment warehouses, who purchaseproducts from the Company for use by contract manufacturers, are recorded upondelivery to the contract manufacturer.

***Cash and cash equivalents***

Cash and cash equivalentsinclude cash in demand accounts and highly liquid investments purchased with anoriginal or remaining maturity of three months or less at the date of purchase,stated at cost, which approximates their fair market value.

***Short-term investments***

All of the Company’sshort-term investments are classified as available-for-sale. Short-terminvestments consist of auction rate securities with a contractual maturity inexcess of five years. Even though the stated maturity dates of theseinvestments may be one year or more beyond the balance sheet date, the Companyhas classified all auction rate securities as short-term investments. Inaccordance with Accounting Research Bulletin No. 43, Chapter 3A, *Working Capital-Current Assets and CurrentLiabilities*, the Company views its available-for-sale portfolio asavailable for use in its current operations. Based upon historical experiencein the financial markets as well as the Company’s specific experience withauction rate securities, the Company believes there is reasonable expectationof completing a successful auction in the next twelve month period. During itshistory of investing in these securities, the Company has not been unable tosell its holdings of these investments. Accordingly, the Company believes thatthe risk of non-redemption of these investments within a year is minimal.Investments are reported at fair value with unrealized gains and losses, net ofrelated tax, as a component of other comprehensive income (loss). There were nounrealized gains or losses in relation to short-term investments for the yearsended March 31, 2007, 2006 and 2005 because of the frequent interest rateresetting nature of auction rate securities.

54

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Restricted cash***

At March 31, 2007 and2006, restricted cash consists of certificates of deposit totaling $1,000,000held with a financial institution as collateral for the Company’s line ofcredit. Subsequent to March 31, 2007, the line of credit was terminatedand this cash is no longer restricted.

***Concentration of credit risk***

Financial instruments that potentially subject theCompany to a concentration of credit risk consist primarily of cash, cashequivalents, short term investments and accounts receivable. The Company placesits cash primarily in checking, certificate of deposit, and money marketaccounts with reputable financial institutions. The Company’s accountsreceivable are derived primarily from revenue earned from customers located inthe U.S. and Asia. The Company performs ongoing credit evaluations of itscustomers’ financial condition and, generally, requires no collateral from itscustomers. The Company maintains an allowance for doubtful accounts receivablebased upon the expected collectibility of accounts receivable. The Company’swrite offs of accounts receivable were $29,000 for the year ended March 31,2005. There were no write offs in the years ended March 31, 2007 or 2006.

In fiscal 2007, 2006 and2005, sales to the Company’s top 10 customers accounted for approximately 88%,88% and 88% of net revenues, respectively. At March 31, 2007, fivecustomers accounted for 25%, 16%, 14%, 11% and 11% of accounts receivable, andfor the year then ended, two customers accounted for 30% and 25% of netrevenues.  At March 31, 2006, threecustomers accounted for 28%, 17% and 12% of accounts receivable, and for theyear then ended, three customers accounted for 30%, 27% and 10% of net revenues. At March 31, 2005, four customersaccounted for 24%, 13%, 13% and 12% of accounts receivable, and for the yearthen ended, three customers accounted for 32%, 18% and 15% of net revenues.

***Inventories***

Inventories are stated atthe lower of cost or market value, cost being determined on a weighted averagebasis. Inventory write-down allowances are established when conditions indicatethat the selling price could be less than cost due to physical deterioration,obsolescence, changes in price levels, or other causes. These allowances, oncerecorded, result in a new cost basis for the related inventory. Theseallowances are also considered for excess inventory generally based oninventory levels in excess of 12 months of forecasted demand, as estimatedby management, for each specific product. The allowance is not reversed untilthe inventory is sold or disposed of.

***Property and equipment, net***

Propertyand equipment are stated at cost. Depreciation is computed using thestraight-line method over the estimated useful lives of the assets as presentedbelow:

| Software                          |   | 3 years |   |
|-----------------------------------|--------|---------|--------|
| Computer and  other and equipment |   | 5 years |   |
| Furniture and fixtures            |   | 7 years |   |

 

Leasehold improvements areamortized using the straight-line method over the shorter of the estimateduseful lives of the assets or the remaining lease term of the respectiveassets. Gains or losses on 

55

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

disposalsof property and equipment are recorded within income from operations. Costs ofrepairs and maintenance are typically included as part of operating expensesunless they are incurred in relation to major improvements to existing propertyand equipment, at which time they are capitalized.

***Impairment of long-lived assets***

Long-lived assets held andused by the Company are reviewed for impairment whenever events or changes incircumstances indicate that their net book value may not be recoverable. Animpairment loss is recognized if the sum of the expected future cash flows(undiscounted and before interest) from the use of the assets is less than thenet book value of the asset. The amount of the impairment loss, if any, willgenerally be measured as the difference between net book value of the assetsand their estimated fair values. There were no impairment losses recognizedduring the years ended March 31, 2007, 2006 and 2005.

***Research and development***

Research and developmentexpenses are related to new product designs, including, salaries, stock-basedcompensation, contractor fees, and allocation of corporate costs and arecharged to the statement of operations as incurred.

***Income taxes***

The Company accounts forincome taxes under the liability method, whereby deferred tax assets andliabilities are determined based on the difference between the financialstatement and tax bases of assets and liabilities using enacted tax rates ineffect for the year in which the differences are expected to affect taxableincome. Valuation allowances are established when it is more likely than notthat the deferred tax asset will not be realized.

***Shipping and handling costs***

The Company records costsrelated to shipping and handling in cost of revenues.

***Advertising expense***

Advertising costs arecharged to expense in the period incurred. Advertising expense was $8,000 and$1,000 for the years ended March 31, 2007, and 2006, respectively. Therewas no advertising expense in the year ended March 31, 2005.

***Foreign currency transactions***

The U.S. dollar is thefunctional currency for all of the Company’s foreign operations. Foreigncurrency transaction gains and losses, resulting from transactions denominatedin currencies other than U.S. dollars are included in the statements ofoperations. These gains and losses have not been material for the years ended March 31,2007, 2006 and 2005.

***Segments***

The Company operates inone segment for the design, development and sale of integrated circuits.

56

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Accounting for stock-based compensation***

Prior to April 1, 2006, the Company accounted foremployee stock options using the intrinsic value method in accordance withAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”), andFinancial Accounting Standards Board (“FASB”) Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation, an Interpretation of APB No. 25,* and had adoptedthe disclosure-only provisions using the fair value method of SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS 123”), and SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure.* Inaccordance with APB 25, the Company recognized compensation cost for optionsgranted to the extent the exercise price was lower than the fair value of theunderlying common stock on the date of grant. Prior to April 1, 2006, theCompany allocated stock-based compensation costs using the straight linemethod and recognized the effect of forfeitures when they occurred.

On April 1, 2006, the Company adopted SFAS No. 123(R),*Share-Based Payment* (“SFAS 123(R)”),using the modified prospective transition method. Under this method, theCompany’s stock-based compensation costs recognized during the fiscalyear ended March 31, 2007 were comprised of compensation costs for allshare-based payment awards granted subsequent to April 1, 2006 andof compensation costs related to share-based payment awards that wereunvested on April 1, 2006, based on their grant-date fair value estimatedusing the Black-Scholes option pricing model. Prior periods were notrestated. As stock-based compensation expense recognized in the statementof operations for fiscal 2007 is based on options ultimately expected to vest,it has been reduced by the amount of estimated forfeitures.

The Company chose the straight-line method ofallocating compensation cost over the requisite service period of the relatedaward under SFAS 123(R). The Company calculated the expected term based onthe historical average period of time that options were outstanding as adjustedfor expected changes in future exercise patterns, which, for options granted infiscal 2007, resulted in an expected term of approximately four years. TheCompany based its estimate of expected volatility on the estimated volatilityof similar entities whose share prices are publicly available. The risk-freeinterest rate is based on the U.S. Treasury yields in effect at the time ofgrant for periods corresponding to the expected life of the options. Thedividend yield is 0%, based on the fact that the Company has never paiddividends and has no present intention to pay dividends. Changes to theseassumptions may have a significant impact on the results of operations.

In November 2005, the FASB issued Staff Position No. FAS123(R)-3, *Transition Election Related to Accountingfor the Tax Effects of Share-Based Payment Awards* (“FSP 123R-3”).The Company has elected to adopt the alternative transition method provided inFSP 123R-3 for calculating the tax effects of stock-based compensationunder SFAS 123R. The alternative transition method includes simplified methodsto establish the beginning balance of the additional paid-in-capital pool (“APICpool”) related to the tax effects of stock-based compensation, and fordetermining the subsequent impact on the APIC pool and consolidated statementsof cash flows of the tax effects of stock-based compensation awards that areoutstanding upon adoption of SFAS 123R.

The impact of adoption of SFAS 123(R) was toreduce income before tax by $1,216,000, net income by $1,165,000 and basic anddiluted earnings per share by $0.19 and $0.05, respectively, for fiscal 2007. SFAS 123(R) requirescash flows, if any, resulting from the tax benefits from tax deductions inexcess of the compensation cost recognized for those options (excess taxbenefits) to be classified as financing cash flows. Adoption of FAS No. 123(R) didnot have an impact on operating and financing cash flows because the Companydid not have any excess tax benefits in the period of adoption.

57

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Prior to the adoption ofSFAS No. 123(R), the Company recognized forfeitures of unvested stockoptions as they occurred. Upon adoption of SFAS No. 123(R), the Companybegan estimating future forfeitures and recognizing the effect of suchforfeitures on the grant date of the awards. SFAS No. 123(R) requiresa one-time cumulative adjustment at the adoption date to record an estimate offuture forfeitures on the unvested outstanding awards. Based on the Company’sestimate of the impact of future forfeitures on the expense recognized forunvested options at the date of adoption, such one-time cumulative adjustmentwas determined to be immaterial.

***Comprehensive income***

Comprehensive income isdefined to include all changes in equity during a period except those resultingfrom investments by owners and distributions to owners. For the years ended March 31,2007, 2006 and 2005, net income equaled comprehensive income as there were noother components of comprehensive income.

***Recent accounting pronouncements***

In February 2007, the FASB issued SFAS No. 159,*“The Fair Value Option for Financial Assetsand Financial Liabilities,”*which permits entities to choose tomeasure eligible financial instruments and certain other items at fair valuethat are not currently required to be measured at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings at each subsequent reporting date. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. The Companyis currently evaluating the effect that the adoption of SFAS 159 will haveon its consolidated financial position and results of operations.

In September 2006, the SEC issued StaffAccounting Bulletin No. 108, or SAB No. 108, *Considering the Effects of Prior Year MisstatementsWhen Quantifying Misstatements in Current Year Financial Statements*,which provides interpretive guidance on how the effects of the carryover orreversal of prior year misstatements should be considered in quantifying acurrent year misstatement. The adoption of SAB No. 108 did not have amaterial impact on its consolidated financial position, results of operationsor cash flows.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. SFAS No. 157establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. The changes to current practice resulting from theapplication of this Statement relate to the definition of fair value, themethods used to measure fair value, and the expanded disclosures about fairvalue measurements. The Company will be required to adopt the provisions ofSFAS No. 157 beginning with its fiscal quarter ending June 30, 2008.The Company is currently evaluating the impact of the adoption of SFAS No. 157,but we do not currently believe its adoption will have a material impact on ourconsolidated financial position, results of operations or cash flows.

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement 109* (“FIN 48”). FIN 48 prescribes acomprehensive model for how a company should recognize, measure, present, anddisclose in its financial statements uncertain tax positions that the companyhas taken or expects to take on a tax return (including a decision whether tofile or not to file a return in a particular jurisdiction). Under theInterpretation, the financial statements will reflect expected future taxconsequences of such positions presuming the taxing authorities’ full knowledgeof the position and all relevant facts, but without 

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

considering time values.The Interpretation substantially changes the applicable accounting model and islikely to cause greater volatility in income statements as more items arerecognized discretely within income tax expense. The Interpretation alsorevises disclosure requirements and introduces a prescriptive, annual, tabularroll-forward of the unrecognized tax benefits. The Interpretation requiresqualitative and quantitative disclosures, including discussion of reasonablypossible changes that might occur in the recognized tax benefits over the next12 months; a description of open tax years by major jurisdictions; and aroll-forward of all unrecognized tax benefits, presented as a reconciliation ofthe beginning and ending balances of the unrecognized tax benefits on aworldwide aggregated basis. The Interpretation is effective as of the beginningof fiscal years that start after December 15, 2006. The Company iscurrently evaluating the effect that the adoption of FIN 48 will have onits financial position and results of operations.

In June 2006, EITF No. 06-3,*How Sales Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross Versus Net Presentation)* (“EITF No. 06-03”),was issued, which states that a company must disclose its accounting policy(i.e., gross or net presentations) regarding presentations of taxes within thescope of EITF No. 06-3. If taxes included in gross revenue aresignificant, a company must disclose the amount of these taxes for each periodfor which an income statement is presented. The disclosures are required forannual and interim financial statements for each period for which an incomestatement is presented. EITF No. 06-3 is in effect for the Companyas of April 1, 2007. Based on the Company’s current evaluation of EITF No. 06-3,the Company does not expect its adoption to have a material impact on theCompany’s consolidated results of operations or financial position.

**NOTE 2—NET INCOMEPER COMMON SHARE**

The Company applies the provisions of EITF Issue No. 03-6,*Participating Securities and the Two—Class Methodunder FASB Statement 128* (“EITF No. 03-6”), whichestablished standards regarding the computation of earnings per share bycompanies with participating securities or multiple classes of common stock.The Company’s Series A through E redeemable convertible preferred stockare participating securities due to their participation rights related to cashdividends declared by the Company as described in Note 8.

Basic net income available to common stockholders pershare is computed by dividing the net income available to common stockholdersby the weighted-average common shares outstanding for the year. The netincome available to common stockholders is calculated by deducting dividendsallocable to the Company’s redeemable convertible preferred stock from netincome to determine the net income available to common stockholders.

Diluted net income available to common stockholdersper share is computed giving effect to all potentially dilutive common stock,including options and common stock subject to repurchase using the treasurystock method, and all convertible securities using the if-converted method tothe extent it is dilutive.

59

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing table sets forth the computation of basic and diluted net incomeattributable to common stockholders per share:

| ** **                                                                           | ** ** | **Year Ended March 31,**                               | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **     2007     **  | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                                                                           | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Numerators:                                                                          |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                           |       |                                                                  | $          | 7,434 |   |   |   | $ | 4,249 |   |   |   | $ | 4,780 |   |   |
| Net income  allocated to participating redeemable convertible preferred stockholders |       |                                                                  | (901       | ) |   |   | (901 | ) |   |   | (901 | ) |   |
| Net income  available to common stockholders—Basic                              |       |                                                                  | $          | 6,533 |   |   |   | $ | 3,348 |   |   |   | $ | 3,879 |   |   |
| Net income  allocated to participating redeemable convertible preferred stockholders |       |                                                                  | 855        |   |   |   | 855 |   |   |   | 855 |   |   |
| Net income  available to common stockholders—Diluted                            |       |                                                                  | $          | 7,388 |   |   |   | $ | 4,203 |   |   |   | $ | 4,734 |   |   |
| Denominators:                                                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average  common shares outstanding                                          |       |                                                                  | 6,253      |   |   |   | 6,148 |   |   |   | 6,112 |   |   |
| Weighted average  shares—Basic                                                  |       |                                                                  | 6,253      |   |   |   | 6,148 |   |   |   | 6,112 |   |   |
| Dilutive effect  of employee stock options                                           |       |                                                                  | 1,584      |   |   |   | 1,438 |   |   |   | 1,450 |   |   |
| Dilutive effect  of redeemable convertible preferred shares                          |       |                                                                  | 15,000     |   |   |   | 15,000 |   |   |   | 15,000 |   |   |
| Weighted average  shares—Dilutive                                               |       |                                                                  | 22,837     |   |   |   | 22,586 |   |   |   | 22,562 |   |   |
| Net income per  common share—Basic                                              |       |                                                                  | $          | 1.04 |   |   |   | $ | 0.54 |   |   |   | $ | 0.63 |   |   |
| Net income per common  share—Diluted                                            |       |                                                                  | $          | 0.32 |   |   |   | $ | 0.19 |   |   |   | $ | 0.21 |   |   |

 

Thefollowing outstanding redeemable convertible preferred stock and common stockoptions were excluded from the computation of diluted net income per share asthey had an antidilutive effect:

| ** **                              | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**                 | ** ** |
| Redeemable  convertible preferred stock |       |                                    | 120        |   |   | 120 |   |   | 120 |   |   |
| Stock options                           |       |                                    | 610        |   |   | 883 |   |   | 821 |   |   |
|                                    |       |                                    | 730        |   |   | 1,003 |   |   | 941 |   |   |

 

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE 3—BALANCE SHEET DETAIL**

| ** **                 | ** ** | **March 31,**      | ** ** |
|----------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands)** | ** ** |
| **Inventories:**           |       |                    |       |   |   |
| Work-in-progress           |       | $                       | 14,009     |   | $ | 7,826 |   |
| Finished goods             |       | 8,893                   |       | 3,601 |   |
| Inventory at  distributors |       | 1,307                   |       | 1,173 |   |
|                       |       | $                       | 24,209     |   | $ | 12,600 |   |

 

| ** **                                                       | ** ** | **March 31,**      | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                                       | ** ** | **(In thousands)** | ** ** |
| **Accounts  receivable, net:**                                   |       |                    |       |   |   |
| Accounts receivable                                              |       | $                       | 6,505      |   | $ | 4,508 |   |
| Less: Allowances for sales returns, doubtful  accounts and other |       | (108                    | )          | (213 | ) |
|                                                             |       | $                       | 6,397      |   | $ | 4,295 |   |

 

| ** **                                      | ** ** | **March 31,**      | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| **Prepaid expenses and other  current assets:** |       |                    |       |   |   |
| Prepaid tooling and masks                       |       | $                       | 1,073      |   | $ | 1,120 |   |
| Prepaid initial public offering costs           |       | 1,197                   |       | — |   |
| Other prepaid expenses                          |       | 935                     |       | 704 |   |
|                                            |       | $                       | 3,205      |   | $ | 1,824 |   |
| **Property  and equipment, net:**               |       |                    |       |   |   |
| Computer and other equipment                    |       | $                       | 8,078      |   | $ | 5,758 |   |
| Software                                        |       | 2,353                   |       | 1,320 |   |
| Furniture and fixtures                          |       | 228                     |       | 227 |   |
| Leasehold improvements                          |       | 286                     |       | 277 |   |
|                                            |       | 10,945                  |       | 7,582 |   |
| Less: Accumulated depreciation and amortization |       | (6,200                  | )          | (5,376 | ) |
|                                            |       | $                       | 4,745      |   | $ | 2,206 |   |

 

Depreciationand amortization expense was $836,000, $893,000 and $926,000 for the yearsended March 31, 2007, 2006 and 2005, respectively.

| ** **                        | ** ** | **March 31,**      | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands)** | ** ** |
| **Other  Assets:**                |       |                    |       |   |   |
| Non-current deferred income taxes |       | $                       | 901        |   | $ | 1,217 |   |
| Deposits                          |       | 94                      |       | 89 |   |
|                              |       | $                       | 995        |   | $ | 1,306 |   |

 

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                                   | ** ** | **March 31,**      | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| **Accrued expenses and other  liabilities:** |       |                    |       |   |   |
| Accrued compensation                         |       | $                       | 373        |   | $ | 345 |   |
| Accrued professional fees                    |       | 100                     |       | 250 |   |
| Accrued commissions                          |       | 340                     |       | 173 |   |
| Accrued royalties                            |       | 20                      |       | 22 |   |
| Accrued income taxes                         |       | 227                     |       | 112 |   |
| Accrued equipment and software costs         |       | 1,161                   |       | — |   |
| Other accrued expenses                       |       | 382                     |       | 378 |   |
|                                         |       | $                       | 2,603      |   | $ | 1,280 |   |

 

**NOTE 4—RELATEDPARTY TRANSACTIONS**

Together, HolyStone Enterprises Co. Ltd., itssubsidiaries, and its Chief Executive Officer, who is also a director of theCompany, held approximately 22% of the outstanding shares of Series Aredeemable convertible preferred stock, 24% of the outstanding shares of Series Bredeemable convertible preferred stock and 15% of the outstanding shares of Series Dredeemable convertible preferred stock as of March 31, 2007 and 2006. TheCompany made sales of $2,782,000, $1,200,000 and $1,115,000 to HolyStoneEnterprises Co. Ltd. during the years ended March 31, 2007, 2006 and2005, respectively.

The Company had areceivable balance of $1,155,000 and $157,000 from HolyStone EnterprisesCo. Ltd. at March 31, 2007 and 2006, respectively.

**NOTE 5—INCOME TAXES**

The incometax expense (benefit) consists of the following:

| ** **    | ** ** | **Year Ended March 31,** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| ** **    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(In thousands)**                 | ** ** |
| **Current:**  |       |                                    |       |   |   |   |   |
| U.S. federal  |       | $                                       | 4,107      |   | $ | 875 |   | $ | 1,123 |   |
| Foreign       |       | 66                                      |       | 13 |   | — |   |
| State         |       | 38                                      |       | 17 |   | 13 |   |
|          |       | 4,211                                   |       | 905 |   | 1,136 |   |
| **Deferred:** |       |                                    |       |   |   |   |   |
| U.S. federal  |       | (132                                    | )          | (544 | ) | (596 | ) |
| State         |       | 172                                     |       | (190 | ) | (695 | ) |
|          |       | 40                                      |       | (734 | ) | (1,291 | ) |
|          |       | $                                       | 4,251      |   | $ | 171 |   | $ | (155 | ) |

 

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Theincome tax expense (benefit) differs from the amount of income tax determinedby applying the applicable U.S. statutory income tax rate to pre-tax income asfollows:

| ** **                            | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(In thousands)**                 | ** ** |
| U.S. Federal  taxes at statutory rate |       | $                                       | 3,974      |   | $ | 1,503 |   | $ | 1,572 |   |
| State taxes, net  of federal benefit  |       | 197                                     |       | (109 | ) | 130 |   |
| Stock-based  compensation             |       | 367                                     |       | 32 |   | 40 |   |
| Tax credits                           |       | (123                                    | )          | (228 | ) | (219 | ) |
| Valuation  allowance                  |       | —                                  |       | — |   | (1,698 | ) |
| Release of tax  reserve               |       | —                                  |       | (895 | ) | — |   |
| Foreign tax rate  differential        |       | (217                                    | )          | (80 | ) | — |   |
| Other                                 |       | 53                                      |       | (52 | ) | 20 |   |
|                                  |       | $                                       | 4,251      |   | $ | 171 |   | $ | (155 | ) |

 

The income tax expense for the year ended March 31,2006 reflects the release of $895,000 of tax reserves following the conclusionof an income tax audit by the Internal Revenue Service.

Deferredtax assets consist of the following:

| ** **                  | ** ** | **March 31,**      | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(In thousands)** | ** ** |
| **Deferred tax assets:**    |       |                    |       |   |   |
| Deferred revenue            |       | $                       | 775        |   | $ | 582 |   |
| Tax credits                 |       | 490                     |       | 637 |   |
| Property and equipment      |       | 360                     |       | 580 |   |
| Stock based compensation    |       | 51                      |       | — |   |
| Other reserves and accruals |       | 309                     |       | 226 |   |
|                        |       | $                       | 1,985      |   | $ | 2,025 |   |

 

The Company’s federal and state research tax creditcarryforwards for income tax purposes were approximately $0 and $743,000,respectively, as of March 31, 2007. State research tax creditscarryforward indefinitely.

U.S. income taxes and withholding taxes have not beenprovided on a cumulative total of $1.4 million of undistributed earnings forcertain non-U.S. subsidiaries. The Company currently intends to reinvest theseearnings in operations outside the U.S.

During the year ended March 31,2005, the Company determined that there was sufficient positive evidence,including a recent history of generating taxable income, to release the Company’sdeferred tax asset valuation allowance that was recorded as of March 31,2004. Accordingly, the Company released its deferred tax valuation allowance of$1,698,000 during the year ended March 31, 2005.

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE 6—BORROWINGS**

At March 31, 2007, the Company had a line ofcredit with Mega International Commercial Bank Co., Ltd., which expired onMay 9, 2007. The line of credit was not renewed. The line of credit providedfor borrowings of up to $4,000,000 which were collateralized by a certificateof deposit of $1,000,000, certain accounts receivable balances and finishedgoods inventory. Borrowing was limited to $1,000,000 plus 70% of eligibleUnited States accounts receivable balances and 35% of finished goods inventorywith a sublimit of $500,000 for inventory. The terms of the line of creditincluded various covenants, the more restrictive of which required the Companyto maintain a working capital ratio of not less than 1.5 to 1, a tangible networth, including redeemable convertible preferred stock, of not less than$15,000,000 and a debt to net worth ratio of less than 2 to 1. The Company’sagreement with Mega International Commercial Bank Co., Ltd. contained a negativecovenant, which precluded the Company from declaring dividends, other thandividends payable in stock, without the prior written consent of MegaInternational Commercial Bank Co., Ltd. The Company has been in compliancewith these covenants during the fiscal years ended March 31, 2007 and2006.

The first $1,000,000 ofborrowings bore interest at the bank’s reference rate (8.25% at March 31,2007). Borrowings in excess of $1,000,000 bore interest at the bank’s referencerate plus 1.00%. No amounts were outstanding under the line of credit at March 31,2006 or 2007.

**NOTE 7—COMMITMENTSAND CONTINGENCIES**

***Operating leases***

The Company leases office space and equipment undernoncancelable operating leases with various expiration dates through May 2010.Rent expense for the years ended March 31, 2007, 2006 and 2005 was$525,000, $537,000 and $481,000, respectively. The terms of the facility leaseprovide for rental payments on a graduated scale. The Company recognizes rentexpense on a straight-line basis over the lease period, and has accrued forrent expense incurred but not paid.

Futureminimum lease payments under noncancelable operating leases with remaininglease terms in excess of one year at March 31, 2007 are as follows:

| **Year Ending March 31,** | ** ** | ** **              | ** ** | **Operating  Leases** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **(In thousands)** | ** ** |
| 2008                                     |       |                    | $          | 731                   |       |   |
| 2009                                     |       |                    | 285        |                  |       |
| 2010                                     |       |                    | 282        |                  |       |
| 2011                                     |       |                    | 47         |                  |       |
| Thereafter                               |       |                    | —     |                  |       |
| Total                                    |       |                    | $          | 1,345                 |       |   |

 

***Royalty obligation***

The Company has licenseagreements to pay royalties on the sale of products using the licensedtechnology through fiscal year 2007. Royalty expense for the years ended March 31,2007, 2006 and 2005 was $121,000, $141,000 and $147,000, respectively and wasincluded within cost of revenues.

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Indemnification obligations***

The Company is a party to a variety of agreementspursuant to which it may be obligated to indemnify the other party with respectto certain matters. Typically, these obligations arise in the context ofcontracts entered into by the Company, under which the Company customarilyagrees to hold the other party harmless against losses arising from a breach ofrepresentations and covenants related to such matters as title to assets soldand certain intellectual property rights. In each of these circumstances,payment by the Company is conditioned on the other party making a claimpursuant to the procedures specified in the particular contract, whichprocedures typically allow the Company to challenge the other party’s claims.Further, the Company’s obligations under these agreements may be limited in termsof time and/or amount, and in some instances, the Company may have recourseagainst third parties for certain payments made by it under these agreements.

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

***Product warranties***

The Company warrants itsproducts to be free of defects generally for a period of three years. TheCompany estimates its warranty costs based on historical warranty claimexperience and includes such costs in cost of revenues. Warranty costs were notsignificant for the years ended March 31, 2007, 2006 or 2005.

***Legal Proceedings***

From time to time, theCompany may be involved in litigation relating to claims arising out ofday-to-day operations. See Note 13 for a description of certain pendinglitigation.

**NOTE 8—REDEEMABLECONVERTIBLE PREFERRED STOCK**

Redeemableconvertible preferred stock at March 31, 2007 and 2006 consisted of thefollowing:

| ** **    | ** ** | **Shares  Issued and  Outstanding**              | ** ** | **Liquidation  Amount** | ** ** |
|---------------|------------|-------------------------------------------------------|------------|-------------------------|------------|
| ** **    | ** ** | **(In thousands, except  share data)** | ** ** |
| Series A |       | 4,350,000                                             |       |                    | $          | 870 |   |   |
| Series B |       | 7,260,000                                             |       |                    | 2,722      |   |   |
| Series C |       | 253,500                                               |       |                    | 254        |   |   |
| Series D |       | 3,136,668                                             |       |                    | 4,705      |   |   |
| Series E |       | 120,000                                               |       |                    | 456        |   |   |
|          |       | 15,120,168                                            |       |                    | $          | 9,007 |   |   |

 

65

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The holders of redeemableconvertible preferred stock have various rights and preferences as follows:

***Voting***

The holders of any series of redeemable convertiblepreferred stock will have the same voting rights as a holder of the commonstock.

In every vote for theelection of directors, each holder of shares of redeemable convertiblepreferred stock shall be entitled to the number of votes equal to the number ofwhole shares of common stock into which such shares of redeemable convertiblepreferred stock could be converted pursuant to conversion at the record datefor the determination of the stockholders entitled to vote in the election or,if no such record date is established, the date such vote is taken or anywritten consent of stockholders is solicited.

***Dividends***

Holders of Series A,B, C, D and E redeemable convertible preferred stock are entitled to receivenoncumulative dividends at the per annum rate of $0.02, $0.0375, $0.10, $0.15and $0.38 per share, respectively, when and if declared by the Board ofDirectors, prior to and in preference of any distribution to common stockholders.No dividends on redeemable convertible preferred stock or common stock havebeen declared by the Board of Directors.

***Liquidation***

In the event of a liquidation, dissolution or windingup of the Company, including a merger or consolidation in which itsstockholders do not retain a majority of the voting power in the survivingcorporation, or a sale of substantially all assets, the assets of the Companylegally available for distribution shall be distributed to the holders of Series A,B, C, D and E redeemable convertible preferred stock in an amount per shareequal to $0.20, $0.375, $1.00, $1.50 and $3.80, respectively, plus all declaredbut unpaid dividends of such shares. Then, prior and in preference to anyfurther distribution to the holders of redeemable convertible preferred stock,each holder of common stock shall be entitled to receive a maximum of $0.02 pershare for each share of common stock then held. Any remaining available assetsshall be distributed among the holders of the common stock and the redeemableconvertible preferred stock in proportion to the shares of common stock held bythem and the shares of common stock, which they then have the right to acquireupon conversion of shares of redeemable convertible preferred stock then held bythem.

Should the Company’slegally available assets be insufficient to satisfy the liquidationpreferences, the funds will be distributed among the then outstanding holdersof Series A, B, C, D and E redeemable convertible preferred stock, on anequal priority and *pari passu*basis according to their liquidation preferences.

***Conversion***

Each share of Series A,B, C, D and E redeemable convertible preferred stock shall be convertible, atthe option of the holder, according to a conversion ratio of 1 to 1, subject toadjustment for dilution, into the Company’s common stock. Each share of Series A,B, C, D and E redeemable convertible preferred stock automatically convertsinto fully paid nonassessable shares of common stock into which such shares areconvertible at the then effective conversion ratio immediately prior to theclosing of a firm commitment underwritten public offering pursuant to aneffective registration statement filed under the 

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

SecuritiesAct of 1933 covering the offer and sale of common stock for the account of theCompany, other than a registration relating solely to a transaction under Rule 145under the Act or to an employee benefit plan of the Company, in which theaggregate public offering price (before deduction of underwriters discounts andcommission) equals or exceeds $10,000,000. Conversion shall be conditioned uponthe closing with the underwriter of the sale of securities pursuant to suchoffering.  On April 3, 2007, allshares of redeemable convertible preferred stock were converted into commonstock immediately prior to the closing of the initial public offering of the Company’s common stock.

**NOTE 9—COMMON STOCK**

The Company’s Certificateof Incorporation, as amended, authorizes the Company to issue 150,000,000shares of $0.001 par value common stock.

**NOTE 10—STOCKOPTION PLANS**

In 1997, the Company adopted the 1997 Stock Plan (the “1997Plan”). The 1997 Plan provides for the granting of stock options and stockpurchase rights to employees and consultants of the Company. Options grantedunder the 1997 Plan may be either incentive stock options (“ISOs”) ornonstatutory stock options (“NSOs”). ISOs may be granted only to Companyemployees (including officers and directors who are also employees). NSOs maybe granted to Company employees and consultants. The Company has reserved8,450,000 shares of common stock for issuance under the 1997 Plan.

In February 2001, the Company adopted the 2000Stock Option Plan (the “2000 Plan”). The 2000 Plan provides for the granting ofstock options and stock purchase rights to employees, consultants and directorsof the Company. Options granted under the 2000 Plan may be either ISOs or NSOs.In December 2006, the Company’s board of directors authorized anadditional 500,000 shares of the Company’s common stock to be reserved forissuance under the 2000 Plan. As of March 31, 2007, the Company hadreserved 3,500,000 shares of common stock for issuance under the 2000 Plan.

In February 2001, the Company elected toterminate the 1997 Plan. The termination of the 1997 Plan included theprovisions that no further options shall be granted under the 1997 Plan.However, the outstanding options and the shares issued upon exercise of theoptions granted under the 1997 Plan shall continue to be governed by the termsand conditions of the 1997 Plan. All 2,748,298 shares not granted as of theadoption of the 2000 Plan were cancelled.

Options under both the 1997 and 2000 Plans may begranted for periods of up to ten years, however in the case of ISOs granted toan optionee who, at the time the option is granted, owns stock representingmore than 10% of the voting power of all classes of stock of the Company, theterm of the option shall be 5 years from the date of grant. The exerciseprice of an ISO and NSO shall not be less than 100% and 85% of the estimatedfair value of the shares as determined by the board of directors on the date ofgrant, respectively, however the exercise price of an ISO and NSO granted to a10% or greater stockholder shall not be less than 110% of the estimated fairvalue of the shares on the date of grant, respectively. To date, the initialoptions granted to each person generally vest 25% on the first anniversary andsubsequent anniversaries of the date of grant.

Stock purchase rights under the 1997 and 2000 Plansmay be granted to employees and consultants and gives the grantee the right topurchase common stock at a certain price within a limited period of time. Onexercise of a stock purchase right, the Company receives a right to repurchasethe common stock at the original purchase price, which expires over a vestingperiod of usually four years.

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

On April 7, 2004, the Company’s board ofdirectors authorized the adoption of the 2004 Equity Incentive Plan (the “2004Plan”). The maximum aggregate number of shares of stock that may be issuedunder the 2004 Plan was 3,000,000. This amount automatically increased onApril 1, 2006 and each subsequent anniversary through 2014, by an amountequal to the lesser of (a) five percent (5%) of the number of shares ofstock issued and outstanding on the immediately preceding March 31, or(b) 1,500,000 shares. The 2004 Plan provided for the grant of stockoptions, stock appreciation rights, performance awards and deferredcompensation awards. Options granted under the 2004 Plan may be either ISOs, asdefined under Section 422 of the Internal Revenue Code of 1986, or NSOs.There was no activity under the 2004 Plan in the year ended March 31,2007. In December 2006, the Company’s board of directors terminated the2004 Plan.

On April 7, 2004, the Company’s board ofdirectors authorized the adoption of the 2004 Employee Stock Purchase Plan (the“2004 Purchase Plan”). The maximum aggregate number of shares of stock that maybe issued under the Purchase Plan is 500,000. In addition, the 2004 PurchasePlan provided for an automatic annual increase in the number of sharesavailable for issuance under the plan on April 1 of each year beginning in2006 and continuing through 2014 equal to the smallest of (1) one percentof our then outstanding shares of common stock on the immediately precedingMarch 1, (2) 250,000 shares or (3) a number of shares as our boardmay determine. The 2004 Purchase Plan was intended to qualify as an “employeestock purchase plan” under Section 423 of the Internal Revenue Code of1986 with the purpose of providing employees with an opportunity to purchasethe Company’s common stock through accumulated payroll deductions. There was noactivity under the 2004 Purchase Plan in the year ended March 31, 2007. InDecember 2006, the Company’s board of directors terminated the 2004Purchase Plan.

In January 2007 the Company’s board of directorsapproved an equity incentive plan, (the “Equity Plan”), which was subsequentlyapproved by the Company’s stockholders in March 2007. A total of 3,000,000shares of common stock were authorized and reserved for issuance under theEquity Plan. This reserve will automatically increase on April 1, 2008 andeach subsequent anniversary through 2017, by an amount equal to the smaller of(a) five percent (5%) of the number of shares of stock issued andoutstanding on the immediately preceding March 31, or (b) a lesseramount determined by the board of directors. Appropriate adjustments will bemade in the number of authorized shares and other numerical limits in theEquity Plan and in outstanding awards to prevent dilution or enlargement ofparticipants’ rights in the event of a stock split or other change in ourcapital structure. Shares subject to awards which expire or are cancelled orforfeited will again become available for issuance under the Equity Plan. Theshares available will not be reduced by awards settled in cash or by shareswithheld to satisfy tax withholding obligations. Only the net number of sharesissued upon the exercise of stock appreciation rights or options exercised bymeans of a net exercise or by tender of previously owned shares will bededucted from the shares available under the Equity Plan. All 535,597 sharesnot granted under the 2000 Plan were cancelled upon adoption of the Equity Planin March 2007 by the Company’s stockholders.

Awards may be granted under the Equity Plan to theCompany’s employees, including officers, directors, or consultants or those ofany present or future parent or subsidiary corporation or other affiliatedentity. While we may grant incentive stock options only to employees, we maygrant nonstatutory stock options, stock appreciation rights, restricted stockpurchase rights or bonuses, restricted stock units, performance shares,performance units and cash-based awards or other stock-based awards toany eligible participant. Non-employee director awards will be granted only tomembers of the Company’s board of directors who, at the time of grant, are notemployees. Deferred compensation awards may be granted only to officers,directors and select members of management or highly compensated employees.

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Only members of the board of directors who are notemployees at the time of grant are eligible to participate in the nonemployeedirector awards component of the Equity Plan. The board or the compensationcommittee shall set the amount and type of nonemployee director awards to beawarded on a periodic, non-discriminatory basis. Nonemployee director awardsmay be granted in the form of nonstatutory stock options, stock appreciationrights, restricted stock awards and restricted stock unit awards. Subject toadjustment for changes in our capital structure, no nonemployee director may beawarded, in any fiscal year, one or more nonemployee director awards for morethan 2,000 shares. However, the annual limit may be increased by thefollowing additions: (i) an additional 10,000 shares in the fiscalyear in which the nonemployee director is first appointed or elected to theboard, (ii) an additional 2,000 shares in any fiscal year in whichthe nonemployee director is serving as the chairman or lead director of theboard, (iii) an additional 1,000 shares in any fiscal year for eachcommittee of the board on which the nonemployee director is then serving otherthan as chairman of the committee, and (iv) an additional2,000 shares in any fiscal year for each committee of the board on whichthe nonemployee director is then serving as chairman of the committee.

In the event of a change in control as described inthe Equity Plan, the acquiring or successor entity may assume or continue allor any awards outstanding under the Equity Plan or substitute substantiallyequivalent awards. Any awards which are not assumed or continued in connectionwith a change in control or exercised or settled prior to the change in controlwill terminate effective as of the time of the change in control. Theadministrator may provide for the acceleration of vesting of any or alloutstanding awards upon such terms and to such extent as it determines, exceptthat the vesting of all nonemployee director awards will automatically beaccelerated in full. The Equity Plan also authorizes the administrator, in itsdiscretion and without the consent of any participant, to cancel each or anyoutstanding award denominated in shares upon a change in control in exchangefor a payment to the participant with respect to each vested share subject tothe cancelled award of an amount equal to the excess of the consideration to bepaid per share of common stock in the change in control transaction over theexercise price per share, if any, under the award.

In January 2007 the board of directors approvedthe 2007 Employee Stock Purchase Plan (the “2007 Purchase Plan”) which was subsequently approved by theCompany’s stockholders in March 2007. As of March 31, 2007, the boardof directors had not implemented the 2007 Purchase Plan. A total of 500,000shares of the Company’s common stock was authorized and reserved for sale underthe 2007 Purchase Plan. In addition, the 2007 Purchase Plan provides for anautomatic annual increase in the number of shares available for issuance underthe plan on April 1 of each year beginning in 2008 and continuing throughand including April 1, 2017 equal to the lesser of (1) one percent(1%) of our then issued and outstanding shares of common stock on theimmediately preceding March 31, (2) 250,000 shares or (3) anumber of shares as the board of directors may determine. Appropriateadjustments will be made in the number of authorized shares and in outstandingpurchase rights to prevent dilution or enlargement of participants’ rights inthe event of a stock split or other change in our capital structure. Sharessubject to purchase rights which expire or are canceled will again becomeavailable for issuance under the 2007 Purchase Plan.

Once implemented, the Company’s employees and employeesof any parent or subsidiary corporation designated by the administrator will beeligible to participate in the 2007 Purchase Plan if they are customarilyemployed by us for more than 20 hours per week and more than 5 monthsin any calendar year. However, an employee may not be granted a right topurchase stock under the 2007 Purchase Plan if: (1) the employeeimmediately after such grant would own stock possessing 5% or more of the total

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

combined voting power orvalue of all classes of our capital stock or of any parent or subsidiarycorporation, or (2) the employee’s rights to purchase stock under all ofour employee stock purchase plans would accrue at a rate that exceeds $25,000in value for each calendar year of participation in such plans.

The 2007 Purchase Plan is designed to be implementedthrough a series of sequential offering periods, generally six (6) monthsin duration beginning on the first trading day on or after May 1 and November 1of each year. The administrator is authorized to establish additional oralternative sequential or overlapping offering periods and offering periodshaving a different duration or different starting or ending dates, providedthat no offering period may have a duration exceeding 27 months.

Amounts accumulated for each participant under the2007 Purchase Plan are used to purchase shares of the Company’s common stock atthe end of each offering period at a price generally equal to 85% of the lowerof the fair market value of our common stock at the beginning of an offeringperiod or at the end of the offering period. Prior to commencement of anoffering period, the administrator is authorized to reduce, but not increase,this purchase price discount for that offering period, or, under circumstancesdescribed in the 2007 Purchase Plan, during that offering period. The maximumnumber of shares a participant may purchase in any six-month offering period isthe lesser of (i) that number of shares determined by multiplying (x) 1,000shares by (y) the number of months (rounded to the nearest whole month) inthe offering period and rounding to the nearest whole share or (ii) thatnumber of whole shares determined by dividing (x) the product of $2,083.33and the number of months (rounded to the nearest whole month) in the offeringperiod and rounding to the nearest whole dollar by (y) the fair marketvalue of a share of our common stock at the beginning of the offering period.Prior to the beginning of any offering period, the administrator may alter themaximum number of shares that may be purchased by any participant during theoffering period or specify a maximum aggregate number of shares that may bepurchased by all participants in the offering period. If insufficient sharesremain available under the plan to permit all participants to purchase thenumber of shares to which they would otherwise be entitled, the administratorwill make a pro rata allocation of the available shares. Any amounts withheldfrom participants’ compensation in excess of the amounts used to purchase shareswill be refunded, without interest.

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In theevent of a change in control, an acquiring or successor corporation may assumeour rights and obligations under the 2007 Purchase Plan. If the acquiring orsuccessor corporation does not assume such rights and obligations, then thepurchase date of the offering periods then in progress will be accelerated to adate prior to the change in control.

| ** **                           | ** ** | **Shares  Available  for Grant** | ** ** | **Number of  Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Intrinsic  Value** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------|------------|
| Balance at  March 31, 2004      |       | 4,127,839                             |       |                                     | 3,511,263  |                                                             |       |                                   |       |                 |       |   | 2.63 |   |   |   |   |
| Granted                              |       | (103,400                              | )          |                                     | 103,400    |                                                             |       |                                   |       |                 |       |   | 4.25 |   |   |   |   |
| Exercised                            |       | —                                |       |                                     | (58,800    | )                                                                |       |                                   |       |                 |       |   | 0.85 |   |   | $ | 262,000 |   |
| Forfeited                            |       | 45,725                                |       |                                     | (49,750    | )                                                                |       |                                   |       |                 |       |   | 3.23 |   |   |   |   |
| Balance at  March 31, 2005      |       | 4,070,164                             |       |                                     | 3,506,113  |                                                             |       |                                   |       |                 |       |   | 2.70 |   |   |   |   |
| Granted                              |       | (130,400                              | )          |                                     | 130,400    |                                                             |       |                                   |       |                 |       |   | 4.50 |   |   |   |   |
| Exercised                            |       | —                                |       |                                     | (35,936    | )                                                                |       |                                   |       |                 |       |   | 1.27 |   |   | 106,000 |   |
| Forfeited                            |       | 84,414                                |       |                                     | (97,614    | )                                                                |       |                                   |       |                 |       |   | 3.43 |   |   |   |   |
| Balance at  March 31, 2006      |       | 4,024,178                             |       |                                     | 3,502,963  |                                                             |       |                                   |       |                 |       |   | 2.76 |   |   |   |   |
| Options reserved                     |       | 3,500,000                             |       |                                     | —     |                                                             |       |                                   |       |                 |       |   | — |   |   |   |   |
| Plans terminated                     |       | (3,535,597                            | )          |                                     | —     |                                                             |       |                                   |       |                 |       |   | — |   |   |   |   |
| Granted                              |       | (1,204,169                            | )          |                                     | 1,204,169  |                                                             |       |                                   |       |                 |       |   | 5.57 |   |   |   |   |
| Exercised                            |       | —                                |       |                                     | (179,125   | )                                                                |       |                                   |       |                 |       |   | 0.69 |   |   | 918,531 |   |
| Forfeited                            |       | 215,588                               |       |                                     | (215,588   | )                                                                |       |                                   |       |                 |       |   | 3.97 |   |   |   |   |
| Balance at  March 31, 2007      |       | 3,000,000                             |       |                                     | 4,312,419  |                                                             |       |                                   |       |                 |       |   | $ | 3.57 |   |   |   |   |
| Options vested  and exercisable      |       |                                  |       |                                     | 3,010,111  |                                                             |       |                                   | 4.36       |                 |       |   | $ | 2.84 |   |   | $ | 7,385,394 |   |
| Options vested and  expected to vest |       |                                  |       |                                     | 4,220,394  |                                                             |       |                                   | 5.74       |                 |       |   | $ | 3.53 |   |   | $ | 7,737,913 |   |

 

Theoptions outstanding and by exercise price at March 31, 2007 are asfollows:

| ** **              | ** ** | ** ** | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**           | ** ** |
|-------------------------|------------|------------|------------|------------------------------|------------|----------------------------------------|------------|
| **Exercise Price** | ** ** | ** ** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Number  Vested and  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.04                   |       |       | 25,000     |                         |       |                                   | $          | 0.04 |   |   |   | 0.61 |   |   | 25,000 |   |   | $ | 0.04 |   |   |
| $0.15                   |       |       | 455,500    |                         |       |                                   | $          | 0.15 |   |   |   | 2.12 |   |   | 455,500 |   |   | $ | 0.15 |   |   |
| $2.00                   |       |       | 777,927    |                         |       |                                   | $          | 2.00 |   |   |   | 3.03 |   |   | 777,927 |   |   | $ | 2.00 |   |   |
| $2.10                   |       |       | 680,842    |                         |       |                                   | $          | 2.10 |   |   |   | 6.29 |   |   | 641,163 |   |   | $ | 2.10 |   |   |
| $3.50-4.50              |       |       | 464,926    |                         |       |                                   | $          | 3.92 |   |   |   | 6.36 |   |   | 276,510 |   |   | $ | 3.87 |   |   |
| $4.70                   |       |       | 5,000      |                         |       |                                   | $          | 4.70 |   |   |   | 6.86 |   |   | 4,500 |   |   | $ | 4.70 |   |   |
| $5.40                   |       |       | 688,880    |                         |       |                                   | $          | 5.40 |   |   |   | 4.14 |   |   | 688,880 |   |   | $ | 5.40 |   |   |
| $5.50                   |       |       | 1,002,344  |                         |       |                                   | $          | 5.50 |   |   |   | 9.63 |   |   | 130,631 |   |   | $ | 5.50 |   |   |
| $5.75-6.00              |       |       | 178,000    |                         |       |                                   | $          | 5.78 |   |   |   | 9.16 |   |   | 10,000 |   |   | $ | 6.00 |   |   |
| $6.70                   |       |       | 34,000     |                         |       |                                   | $          | 6.70 |   |   |   | 9.78 |   |   | — |   |   | — |   |   |
|                    |       |       | 4,312,419  |                         |       |                                   |       |   |   |   |   |   |   | 3,010,111 |   |   |   |   |   |
|                         |            |            |            |                              |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Stock-based compensation***

TheCompany recognized $1,216,000, $95,000 and $119,000 of stock-based compensationexpense for the years ended March 31, 2007, 2006 and 2006, respectively,all relating to stock options, as follows:

| ** **                           | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(In thousands)**                 | ** ** |
| Cost of revenues                     |       | $                                       | 227        |   |   | $ | 13 |   |   | $ | 17 |   |
| Research and  development            |       | 515                                     |       |   | 70 |   |   | 87 |   |
| Selling, general  and administrative |       | 474                                     |       |   | 12 |   |   | 15 |   |
| Total                                |       | $                                       | 1,216      |   |   | $ | 95 |   |   | $ | 119 |   |

 

TheCompany recognized related income tax benefits of $51,000, $0 and $0 in theyears ended March 31, 2007, 2006 and 2005. There were no windfall taxbenefits realized from exercised stock options during the year ended March 31,2007. Compensation cost capitalized within inventory at March 31, 2007 wasinsignificant. As of March 31, 2007, the Company’s total unrecognizedcompensation cost was $2.8 million, which will be recognized over theweighted average period of 2.26 years. The Company calculated the fair value ofeach option grant in the periods presented using the Black-Scholes optionpricing model and the following weighted average assumptions:

| ** **                | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------|------------|-----------------------------------------|------------|
| ** **                | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free  interest rate  |       | 4.63  – 4.86%                      |       | 3.99 | % | 3.43 | % |
| Expected life (in  years) |       | 4.00                                    |       | 4.00 |   | 4.63 |   |
| Volatility                |       | 56 –  71%                          |       | 73 | % | 75 | % |
| Dividend yield            |       | 0%                                      |       | 0 | % | 0 | % |

 

The weighted average fair value of options granted duringthe years ended March 31, 2007, 2006 and 2005 was $3.08, $2.57 and $2.69,respectively.

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Hadcompensation cost for the Company’s stock-based compensation plans beendetermined based on the fair value at the grant dates for the awards under amethod prescribed by SFAS 123 and amended by SFAS 148 prior to theadoption of SFAS 123(R), the Company’s pro forma net income (loss) wouldhave been as follows:

| ** **                                                                                                                              | ** ** | **Year Ended March 31,**                              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                                                                                                                              | ** ** | **(In thousands, except  per share amounts)**    | ** ** |
| Net income, as  reported                                                                                                                |       |                                                                 | $          | 4,249 |   |   |   | $ | 4,780 |   |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                            |       |                                                                 | 95         |   |   |   | 119 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  method for all awards, net of related tax effects |       |                                                                 | (675       | ) |   |   | (1,154 | ) |   |
| Pro forma net  income                                                                                                                   |       |                                                                 | $          | 3,669 |   |   |   | $ | 3,745 |   |   |
| Basic net income  per share available to common stockholders:                                                                           |       |                                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                                             |       |                                                                 | $          | 0.54 |   |   |   | $ | 0.63 |   |   |
| Pro forma                                                                                                                               |       |                                                                 | $          | 0.45 |   |   |   | $ | 0.47 |   |   |
| Diluted net  income per share available to common stockholders:                                                                         |       |                                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                                             |       |                                                                 | $          | 0.19 |   |   |   | $ | 0.21 |   |   |
| Pro forma                                                                                                                               |       |                                                                 | $          | 0.16 |   |   |   | $ | 0.16 |   |   |

 

**NOTE 11—SEGMENT ANDGEOGRAPHIC INFORMATION**

The Company has adopted Statement of FinancialAccounting Standards No. 131 *Disclosureabout Segments of an Enterprise and Related Information*. Based onits operating management and financial reporting structure, the Company hasdetermined that it has one reportable business segment: the design, developmentand sale of integrated circuits.

Thefollowing is a summary of net revenue by geographic area based on the locationto which product is shipped:

| ** **        | ** ** | **Year Ended March 31,** | ** ** |
|-------------------|------------|-----------------------------------------|------------|
| ** **        | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **        | ** ** | **(In thousands)**                 | ** ** |
| United States     |       | $                                       | 29,730     |   | $ | 22,299 |   | $ | 21,998 |   |
| China             |       | 5,885                                   |       | 5,632 |   | 9,765 |   |
| Malaysia          |       | 10,579                                  |       | 9,305 |   | 8,759 |   |
| Rest of the world |       | 11,965                                  |       | 5,905 |   | 5,214 |   |
|              |       | $                                       | 58,159     |   | $ | 43,141 |   | $ | 45,736 |   |

 

All sales are denominated in United States dollars.

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**GSI TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thelocations and net book value of long-lived assets are as follows:

| ** **    | ** ** | **March 31,**      | ** ** |
|---------------|------------|-------------------------|------------|
| ** **    | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **    | ** ** | **(In thousands)** | ** ** |
| United States |       | $                       | 2,597      |   | $ | 1,006 |   |
| Taiwan        |       | 2,148                   |       | 1,200 |   |
|          |       | $                       | 4,745      |   | $ | 2,206 |   |

 

**NOTE 12—EMPLOYEEBENEFIT PLAN**

The Company provides adefined contribution retirement plan (the “Retirement Plan”), which qualifies underSection 408(k) of the Internal Revenue Code of 1996. The RetirementPlan covers essentially all United States employees. Eligible employees maymake contributions to the Retirement Plan up to 15% of their annualcompensation, but no greater than the annual IRS limitation for any plan year.The Retirement Plan does not provide for Company contributions.

**NOTE 13—PENDINGLITIGATION**

On October 23, 2006,the Company was served with a civil antitrust complaint filed by Reclaim Center, Inc.and other plaintiffs in the United States District Court for the NorthernDistrict of California against the Company and a number of other semiconductorcompanies. The complaint was filed on behalf of a purported class of indirectpurchasers of SRAM products throughout the United States. The complaint allegesthat the defendants conspired to raise the price of SRAM in violation of Section 1of the Sherman Act, the California Cartwright Act, and several other stateantitrust, unfair competition and consumer protection statutes. Shortlythereafter, a number of similar complaints were filed by other plaintiffs invarious jurisdictions on behalf of purported classes of both direct andindirect purchasers. The Company has been served in some but not all of thesesubsequent actions. Many of these cases have been transferred by the JudicialPanel on Multidistrict Litigation to the Northern District of California. TheCompany believes that it has meritorious defenses to the allegations in thecomplaints, and the Company intends to defend these lawsuits vigorously.However, the litigation is in the preliminary stage and the Company cannotpredict its outcome. The litigation process is inherently uncertain.Multidistrict antitrust litigation is particularly complex and can extend for aprotracted time which can substantially increase the cost of such litigation.The defense of these lawsuits is also expected to divert the efforts andattention of some of the Company’s key management and technical personnel. As aresult, the Company’s defense of this litigation, regardless of its eventualoutcome, will likely be costly and time consuming. Should the outcome of thelitigation be adverse to the Company, it could be required to pay significantmonetary damages which could adversely affect the Company’s business, financialcondition, operating results and cash flows.

**NOTE 14—SUBSEQUENTEVENTS**

On April 3, 2007, the Company closed the initialpublic offering of its common stock****pursuant to aregistration statement filed with the Securities and Exchange Commission on Form S-1that was declared effective on March 29, 2007. The Company issued6,131,111 shares of common stock and received proceeds of $30.2 million, net ofoffering expenses of $1.2 million. All shares of the Company’s redeemableconvertible preferred stock were converted into common stock immediately priorto the closing of the Company’s initial public offering.

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**Item 9.**                        *Changes in and Disagreements withAccountants on Accounting and Financial Disclosure*

None.

**Item 9A(T).**                               *Controls and Procedures*

***Management’s Evaluation ofDisclosure Controls and Procedures***

Based on their evaluationof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) asof March 31, 2007, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, has concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis report for the purpose of ensuring that the information required to bedisclosed by us in this report is made known to them by others on a timelybasis, and that the information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,in order to allow timely decisions regarding required disclosure, and that suchinformation is recorded, processed, summarized, and reported by us  within the time periods specified in the SEC’srules and instructions for Form 10-K.

***Changes in Internal Control over Financial Reporting***

There were no changes to internal control overfinancial reporting (as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934, as amended) during the quarter ended March 31,2007 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

Our management, including our Chief Executive Officerand Chief Financial Officer, does not expect that our disclosure controls andprocedures or our internal controls will prevent all error and all fraud. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute assurance that the objectives of the control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any within GSI Technology, have beendetected.

This Annual Report on Form 10-Kdoes not include a report of management’s assessment regarding internal controlover financial reporting or an attestation report of the Company’s independentregistered public accounting firm due to transition period provisionsestablished by rules of the SEC for newly public companies. Based onmanagement’s current assessment of the applicable rules and regulationsof  Section 404 of theSarbanes-Oxley Act, the Company expects that management  will provide an assessment of theeffectiveness of our internal control over financial reporting at the end offiscal 2008, and our independent registered public accounting firm will alsoreport on the effectiveness of internal control over financial reporting. Weare in the process of documenting the systems and processes underlying ourinternal control over financial reporting and are beginning our evaluationand  developing our test plans requiredfor management to make this assessment and for its independent auditors toprovide its attestation report. We have not completed this process or itsassessment, and this process will require significant amounts of managementtime and resources. In the course of evaluation and testing, management mayidentify deficiencies that will need to be addressed and remediated.

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

None.

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**PART III**

The SEC allows us toinclude information required in this report by referring to other documents orreports we have already filed or will soon be filing. This is called “incorporationby reference.”  We intend to file ourdefinitive proxy statement for our 2007 annual meeting of stockholders (the “ProxyStatement”) pursuant to Regulation 14A not later than 120 days after the end ofthe fiscal year covered by this report, and certain information therein isincorporated in this report by reference.

**Item 10.**                 *Directors, Executive Officers andCorporate Governance*

Theinformation required by this item with respect to executive officers is setforth in Part I of this Annual Report on Form 10-K and theremaining information required by this item is incorporated by reference fromthe sections entitled “Election of Directors,” “Section 16(a) BeneficialOwnership Reporting Compliance,” and “Corporate Governance” to be included inthe Proxy Statement.

**Item 11.**                 *Executive Compensation*

Theinformation required by this item is incorporated by reference from the sectionentitled “Executive Compensation” to be included in the Proxy Statement.

**Item 12.**                 *Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters*

Theinformation required by this item is incorporated by reference from the sectionentitled “Principal Stockholders and Stock Ownership by Management” to beincluded in the Proxy Statement.

**Item 13.**                 *Certain Relationships and RelatedTransactions, and Director Independence*

Theinformation required by this item is incorporated by reference from the sectionentitled “Related Person Transactions” and “Corporate Governance—Director Independence” to be included in the ProxyStatement for its 2007 annual stockholders’ meeting.

**Item 14.**                 *Principal Accounting Fees andServices*

Theinformation required by this item is incorporated by reference from the sectionentitled “Ratification of Appointment of Independent Auditors” to be includedin the Proxy Statement.

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**PART IV**

**Item 15.**                 *Exhibits, Financial StatementSchedules*

(a)   Thefollowing documents are filed as part of this Form:

1.      *Financial Statements*

|                                                          | ** ** | **Page** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm | ** ** | 48       | ** ** |
| Consolidated Balance Sheets                              | ** ** | 49       | ** ** |
| Consolidated Statements of Operations                    | ** ** | 50       | ** ** |
| Consolidated Statements of Stockholders’ Equity     | ** ** | 51       | ** ** |
| Consolidated Statements of Cash Flows                    | ** ** | 52       | ** ** |
| Notes to Consolidated Financial Statements               | ** ** | 53       | ** ** |

 

2.      *Financial Statement Schedules*

Schedule II - Valuation and Qualifying Accounts

Schedules not listed above have been omitted becausethe information required to be set forth therein is not applicable or is shownin the consolidated financial statements or notes herein.

3.      *Exhibits:*

Thefollowing exhibits are filed herewith:

| Exhibit  Number | ** ** | **Name of Document**                                                                                                                                                                                                                                                                          |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Restated Certificate of  Incorporation of Registrant (Incorporated by reference to  identically-numbered exhibit to Registrant’s Registration Statement on  Form S-1 (File No. 333-139885) filed on  February 16, 2007)                                                   |
| 3.2             |       | Bylaws of Registrant (Incorporated  by reference to identically-numbered exhibit to Registrant’s Registration  Statement on Form S-1 (File No. 333-139885) filed on  February 16, 2007)                                                                                   |
| 10.1            |       | Form of Indemnification  Agreement between Registrant and Registrant’s directors and officers (Incorporated  by reference to identically-numbered exhibit to Registrant’s Registration  Statement on Form S-1 (File No. 333-139885) filed on  January 10, 2007) |
| 10.2            |       | 1997 Stock Plan and form of  Stock Option Agreement (Incorporated by reference to  identically-numbered exhibit to Registrant’s Registration Statement on  Form S-1 (File No. 333-139885) filed on  February 16, 2007)                                                    |
| 10.3            |       | 2000 Stock Option Plan and form  of Stock Option Agreement (Incorporated by reference to  identically-numbered exhibit to Registrant’s Registration Statement on  Form S-1 (File No. 333-139885) filed on  February 16, 2007)                                             |
| 10.4            |       | 2007 Equity Incentive Plan (Incorporated  by reference to identically-numbered exhibit to Registrant’s Registration  Statement on Form S-1 (File No. 333-139885) filed on  March 12, 2007)                                                                                |
| 10.5            |       | 2007 Employee Stock Purchase  Plan and form of Subscription Agreement (Incorporated by reference to  identically-numbered exhibit to Registrant’s Registration Statement on  Form S-1 (File No. 333-139885) filed on  February 16, 2007)                                  |
| 10.6            |       | Building Office Lease for 2360  Owen Street, Santa Clara, California 95054, as amended (Incorporated  by reference to identically-numbered exhibit to Registrant’s Registration  Statement on Form S-1 (File No. 333-139885) filed on  January 10, 2007)                  |

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| 10.7  |   | Building Office Lease for  No. 1, 6th Floor, 30 Taiyuan Street, Chupei City, Taiwan (Incorporated  by reference to identically-numbered exhibit to Registrant’s Registration  Statement on Form S-1 (File No. 333-139885) filed on  February 16, 2007) |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Form of Notice of Grant of Stock Option (U.S.  Participant) (Incorporated by reference to Exhibit 99.1 to Registrant’s  Current Report on Form 8-K filed on June 4, 2007)                                                                                        |
| 10.9  |   | Form of Notice of Grant of Stock Option  (Non-U.S. Participant) (Incorporated by reference to Exhibit 99.2 to  Registrant’s Current Report on Form 8-K filed on June 4,  2007)                                                                                   |
| 10.10 |   | Form of Stock Option Agreement (U.S.  Participant) (Incorporated by reference to Exhibit 99.3 to Registrant’s  Current Report on Form 8-K filed on June 4, 2007)                                                                                                 |
| 10.11 |   | Form of Stock Option Agreement (Non-U.S.  Participant) (Incorporated by reference to Exhibit 99.4 to Registrant’s  Current Report on Form 8-K filed on June 4, 2007)                                                                                             |
| 21.1  |   | List of Subsidiaries                                                                                                                                                                                                                                                                      |
| 31.1  |   | Certification of Lee-Lean Shu, President, Chief  Executive Officer, and Director, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                        |
| 31.2  |   | Certification of Douglas Schirle, Chief Executive  Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                               |
| 32.1  |   | Certification of Lee-Lean Shu, President, Chief  Executive Officer, and Director, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                        |
| 32.2  |   | Certification of Douglas Schirle, Chief Financial  Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                               |

 

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**SIGNATURES**

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

Date: June 20, 2007

|        |   | GSI TECHNOLOGY, INC. |
|--------|--------|---------------------------|
|   |   | By:                       |   | /s/  DOUGLAS M. SCHIRLE |
|   |   | * *                  |   | Douglas M.  Schirle*Chief Financial Officer* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Lee-Lean Shu and RobertYau, jointly and severally, his attorneys-in-fact, each with the power ofsubstitution, for him in any and all capacities, to sign any amendments to thisAnnual Report on Form 10-K and to file the same, with exhibitsthereto and other documents in connection therewith, with the Securities andExchange Commission, hereby ratifying and confirming all that each of saidattorneys-in-fact, or his substitute or substitutes, may do or cause to be doneby virtue thereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporton Form 10-K has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated. 

|                        | **Signature** | ** **                                           | ** ** | ** **    | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------|---------------|------------------------------------------------------|------------|---------------|-----------|------------|------------|------------|----------|------------|
| /s/ LEE-LEAN SHU       |          | President, Chief  Executive Officer and Chairman     |       | June 20, 2007 |
| Lee-Lean  Shu          | * *      | *(Principal Executive Officer)*                      |       |          |
| /s/ DOUGLAS M. SCHIRLE |          | Chief Financial  Officer                             |       | June 20, 2007 |
| Douglas  M. Schirle    | * *      | *(Principal Financial and Accounting Officer)*       |       |          |
| /s/ ROBERT YAU         |          | Vice President,  Engineering, Secretary and Director |       | June 20, 2007 |
| Robert  Yau            |          |                                                 |       |          |
| /s/ HSIANG-WEN CHEN    |          | Director                                             |       | June 20, 2007 |
| Hsiang-Wen  Chen       |          |                                                 |       |          |
| /s/ RUEY L. LU         |          | Director                                             |       | June 20, 2007 |
| Ruey  L. Lu            |          |                                                 |       |          |
| /s/ JING RONG TANG     |          | Director                                             |       | June 20, 2007 |
| Jing Rong Tang         |          |                                                 |       |          |

 

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**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS**

| **Description**                                   | ** ** | ** **              | ** ** | **Balance at   Beginning of   Period** | ** ** | **Charges to Cost   and Expenses** | ** ** | **Deductions** | ** ** | **Balance at End   of Period** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **(In thousands)** | ** ** |
| Year ended  March 31, 2007                   |       |                    |       |                                                       |       |                                                   |       |           |       |                                               |       |   |   |   |   |   |   |
| Allowance for sales returns and doubtful accounts |       |                    | $          | 213                                                        |       |                                                   |       | $              | 101        |                                               |       |   | $ | 206 |   |   |   | $ | 108 |   |   |
| Year ended  March 31, 2006                   |       |                    |       |                                                       |       |                                                   |       |           |       |                                               |       |   |   |   |   |   |   |
| Allowance for sales returns and doubtful accounts |       |                    | $          | 150                                                        |       |                                                   |       | $              | 276        |                                               |       |   | $ | 213 |   |   |   | $ | 213 |   |   |
| Year ended  March 31, 2005                   |       |                    |       |                                                       |       |                                                   |       |           |       |                                               |       |   |   |   |   |   |   |
| Allowance for sales returns and doubtful accounts |       |                    | $          | 167                                                        |       |                                                   |       | $              | 149        |                                               |       |   | $ | 166 |   |   |   | $ | 150 |   |   |
| Income tax  valuation allowance                   |       |                    | $          | 1,698                                                      |       |                                                   |       | $              | —     |                                               |       |   | $ | 1,698 |   |   |   | $ | — |   |   |

 

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