UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, ~~2008~~2009

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

For the Transition Period from to

Commission File Number 000-50553

LOGO

ENTORIAN TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

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

~~8900~~4030 ~~Shoal~~West ~~Creek~~Braker ~~Blvd.~~Lane, Austin, TX ~~78757~~78759

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:

(512) ~~454~~334-~~9531~~0111

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


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

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

None.

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨

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


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer ¨		Smaller reporting company x

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

The aggregate market value of voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold as of June 30, ~~2008~~2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $83,~~107~~484,~~566~~100 (assuming, for this purpose, that directors, executive officers and the investment funds affiliated with Austin Ventures, L.P. are deemed affiliates).

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of February 2726, ~~2009~~2010, was 463,~~898~~874,~~084~~579.

Documents Incorporated by Reference

Portions of the Proxy Statement for the registrant’s ~~2009~~2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	1410
Item 1B.	Unresolved Staff Comments	2822
Item 2.	Properties	2822
Item 3.	Legal Proceedings	2922
Item 4.	~~Submission~~(Removed ofand ~~Matters to a Vote of Security Holders~~Reserved)	2922
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3023
Item 6.	Selected Financial Data	3225
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3326
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	4841
Item 8.	Financial Statements and Supplementary Data	4942
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	8678
Item 9A.	Controls and Procedures	8678
Item 9B.	Other Information	8779
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	8880
Item 11.	Executive Compensation	8880
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	8880
Item 13.	Certain Relationships and Related Transactions, and Director Independence	8880
Item 14.	Principal Accountant Fees and Services	8880
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	8981

CAUTIONARY STATEMENT

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

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

PART I

ITEM 1.

BUSINESS

Entorian Technologies Inc. was originally formed by two investment funds affiliated with Austin Ventures, L.P. in May 2003 under the name Staktek Holdings, Inc. for the purpose of acquiring Staktek Corporation, which was incorporated in Texas in June 1990. In August 2003, we acquired by merger Staktek Corporation, which survives as our wholly owned subsidiary. In February 2008, we changed our name to Entorian Technologies Inc.

Until July 2008, we focused exclusively on providing advanced module and system-level products for high-reliability and high-performance markets by offering stacking services, as well as memory module services, as explained in more detail below. ~~Historically~~Through June 30, 2008, we reported our revenue under one segment, called our Memory Solutions business.

On July 14, 2008, we acquired Augmentix Corporation (Augmentix). Augmentix primarily re-engineers and “ruggedizes” certain Dell® products to provide solutions with the latest technologies, ~~high~~ high performance levels, enhanced functionality and reliability, and the potential for a low total cost of ownership for mission-critical, rugged computing solutions. As a result of this acquisition, we ~~are~~reported ~~now reporting~~ our revenue under two segments, Memory Solutions and Rugged Technology Solutions.

OnWith ~~December 17~~our acquisition of Augmentix, we shifted our focus away from commodity component markets towards vertical computing segments. During the fourth quarter of 2008, we announced our plan to close manufacturing activities of our Memory Solutions business in the first quarter of 2009. We ~~will~~continued ~~continue~~ to license our extensive stacking patent portfolio, but ~~have~~ transferred our memory and stacking customers and certain manufacturing assets to third parties. We took this action because it became challenging to maintain a long-term profitable outlook for this part of our business. ~~With our acquisition of Augmentix, we decided to shift our focus away from commodity component markets towards vertical computing segments.~~

Specifically, with respect to our stacking business, we transferred manufacturing to one of our licensees, SMART Modular Technologies, Inc. (SMART), in the first quarter of 2009. We manufactured stacks during the first quarter of 2009, and ~~expect~~closed ~~to close~~ our manufacturing facility located in Reynosa, Mexico by the end of the first quarter of 2009. With respect to our memory module business, we transferred certain assets to TriCor Technologies, Inc. in January 2009.

~~With~~This ~~respect~~Item 1 addresses to our ~~memory module~~ business, as we ~~transferred~~operated ~~certain~~it ~~assets~~in to2009 ~~TriCor~~under ~~Technologies,~~our ~~Inc.~~“Rugged inTechnology ~~January~~Solutions ~~2009.~~business,” ~~TriCor~~as ~~Technologies~~well ~~will provide~~as ~~memory~~a ~~module~~summary ~~quotes~~of ~~and~~our ~~arrange~~ongoing ~~for~~licensing ~~product~~business. ~~delivery,~~Following asthese ~~well~~two assections, ~~handle~~we ~~our~~have ~~warranty~~addressed ~~returns~~other ~~and~~elements ~~provide~~of ~~failure~~our ~~analysis~~business ~~support~~on a combined basis.

We have divided this Item 1 into our business as we operated it in 2008, entitled “Memory Solutions Business,” and our business as we anticipate operating it in 2009, entitled “Rugged Technology Solutions Business.” Following these two sections, we have addressed other elements of our business on a combined basis.

In addition, the terms “Entorian,” “we,” “us” and “our” refer to Entorian Technologies Inc. and all of its subsidiaries that are consolidated in conformity with United States generally accepted accounting principles.

Memory Solutions Business

Overview

as well as JEDEC-standard, registered dual in-line memory modules (R-DIMMs), fully buffered dual in-line memory modules (FB-DIMMs) and small outline dual in-line memory modules (SO-DIMMs), with the characteristics of high-density and thermal efficiencies. With an IP portfolio of more than 200 patents and patent applications pending, in 2008, we offered flexibility for customers, including outsourced manufacturing, technology licensing and custom engineering. Headquartered in Austin, Texas, we operated two ISO-certified manufacturing facilities in 2008 in Irvine, California and Reynosa, Mexico. During the second quarter of 2008, we terminated manufacturing in Irvine, California, and as set forth above, we expect to terminate manufacturing in Reynosa, Mexico during the first quarter of 2009.

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

During 2008, our customers could license our technologies for their in-house stacking of memory units, outsource their manufacturing needs to us, buy memory units from one of our licensees, such as Samsung Electronics Co., Ltd. (Samsung), SMART and Toshiba Corporation (Toshiba), or optimize their needs through a combination of these approaches. In 2009, our customers can continue to license our technologies for their in-house stacking of memory units, as well as buy memory units from one of our licensees, such as Samsung, SMART and Toshiba.

We did not have long-term contracts with any of our manufacturing services customers. Sales of our memory products were made under short-term, cancelable purchase orders that were typically received and fulfilled in the same quarter. As a result, our ability to predict future sales in any given period was limited and subject to change based on demand for a specific OEM’s systems that incorporate our memory products and an OEM’s supply-chain decisions.

Our Technologies

We designed our memory solutions to be more easily accepted by system OEMs by utilizing industry-standard parts to cost-effectively provide next-generation memory capacity with better economics, form-factor characteristics and superior thermal management design features. Although our designs are capable of supporting all major types of commercially available packaged memory, including DRAM, Flash memory and static random access memory (SRAM), historically we focused our development of Stakpak technologies on stacking DRAM chips in leaded TSOPs and in non-leaded BGA packages. In addition, we focused our development of FlashStak technologies on stacking NAND Flash chips in TSOP packages. With the acquisition of Southland Microsystems, Inc. (Southland) in August 2007, we expanded our product offerings to include custom and JEDEC-standard modules: R-DIMMs, FB-DIMMs and SO-DIMMs.

Performance Stakpak®. Our Performance Stakpak utilizes a patented copper interconnect technology that provides a structure and an electrical and thermal path for standard-packaged DRAM chips. The Performance Stakpak uses primarily TSOPs in two-, three- or four-high stacked configurations. The interconnect system acts

as a heat sink and heat spreader to reduce heat build-up by collecting the thermal energy and conducting it from the center of the stack to the sides, where it can be dissipated from the package. This design allows the Performance Stakpak to achieve superior heat dissipation and lower die temperatures than an unstacked TSOP.

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

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

ArctiCore Module Technologies. ArctiCore modules are DIMMs targeted at servers, storage devices and laptops. ArctiCore utilizes a double-sided, multi-layered flexible circuit folded around a rigid aluminum core to significantly increase the area available for mounting devices. Simultaneously, ArctiCore enhances thermal management, improves reliability and may offer a thinner overall profile compared to current standard FB-DIMMs.

Custom or JEDEC-Standard Modules. With the acquisition of Southland, we expanded our business into custom and JEDEC-standard DRAM modules: R-DIMMs, FB-DIMMs and SO-DIMMs. The combination of our capabilities with Southland’s capabilities enabled high-density, small-profile and thermally-enhanced memory modules that were not possible using conventional designs. In addition, we applied our electrical and mechanical technologies to develop custom memory sub-system solutions according to unique customer specifications.

Our Customers

Manufacturing Solutions

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

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

For our manufacturing services customers, we typically received the silicon on a consignment basis and provided a quick turnaround service. Under this business model, we avoided taking price risk on the memory

devices. Some of our customers placed non-binding blanket purchase orders up to three months in advance to cover shipments for the relevant period. These purchase orders served as forecasts for pricing, administrative and general scheduling purposes and were not binding orders. In some instances, purchase orders from customers were received no more than a day in advance or in the same shipment as the consigned DRAM chips that were supplied to us. We had no long-term purchase agreements with any of our customers.

Licensing Business

Through our flexible business model, our customers could, and can continue to, license our proprietary technologies. To date, we have entered into license agreements with Qimonda A.G., Samsung, SMART, Southland (which we acquired in August 2007) and Toshiba. Under these license arrangements, Samsung and Qimonda are licensed to manufacture and sell memory modules containing stacked chips incorporating our leaded-package stacking technologies and intellectual property, SMART is licensed to manufacture and sell our ArctiCore technologies as well as our Performance and High Performance Stakpak and FlashStak products, Southland was licensed to manufacture and sell certain of our ArctiCore technologies, and Toshiba is licensed to manufacture and sell our NAND Flash-memory FlashStak technologies.

Our Sales and Marketing

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

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

We generated new business primarily by expanding our relationships and working closely with OEMs to design products that satisfied their systems’ memory needs. OEMs determined the technical specifications and controlled the selection of vendors and contract manufacturers or memory manufacturers that would assemble and deliver the memory components.

In addition to the OEMs, we also marketed and sold to the semiconductor manufacturers and memory module manufacturers, since they are the ultimate supplier of the memory products to the OEMs. Memory module manufacturers were also an important channel for our technologies to smaller OEMs that we could not reach directly in an effective manner.

Our Suppliers

Customers that outsourced stacking manufacturing services to us generally supplied to us the memory on a consignment basis. Once we received the memory, we assembled it in our manufacturing facility and then shipped the fully assembled memory products back to them. Under this consignment model, we were not required to carry an inventory of memory for these customers, reducing our inventory costs and minimizing inventory risk associated with pricing, volumes and potential obsolescence. While we benefitted from these

minimized risks, if our customers were unable to obtain sufficient DRAM due to limited availability, they were unable to consign it to us for our services. With respect to our memory module business, we carried an inventory of memory for these customers.

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

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

Our Manufacturing

Our sophisticated manufacturing processes combined proprietary assembly equipment with standard, back-end automation in state-of-the-art manufacturing facilities. We continually strived to increase our degree of automation, overall efficiency and production yields of our manufacturing processes.

For the year ended December 31, 2008, we manufactured all of our Stakpak memory products at our 45,000-square-foot manufacturing facility in Reynosa, Mexico.

On August 31, 2007, pursuant to our acquisition of Southland, we added 20,000 square feet of leased manufacturing space in Irvine, California, where we manufactured memory modules until we moved this production to Reynosa, Mexico, beginning in the second quarter of 2008.

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

Our Research and Development

The market for memory is subject to rapid technological changes, product obsolescence, frequent new product introductions and enhancements, changes in end-user requirements and evolving industry standards. During 2008, our research and development efforts were focused on advancing thermal, mechanical, material and electrical designs for the Stakpak technologies, as well as for memory modules and other forms of storage sub-system products.

Our Intellectual Property

Our manufacturing business depended, and our ongoing licensing business depends, in large part on our ability to protect our proprietary intellectual property and technologies. We do not consider our business materially dependent upon any one patent, although taken as a whole, our rights and the products made and sold under our patents were the most significant element of our business in 2008. In addition to patents, we also rely on trade secrets and trademark laws and contractual provisions to protect our intellectual property. We enter into confidentiality agreements with our employees, consultants, service providers, business partners and customers and have processes and controls in place to protect and manage access to, and distribution of, our proprietary and trade secret information.

As of January 31, 2009, our Memory Solutions Business had 125 issued patents and 98 pending patent applications. The patents primarily relate to our stacking solutions and help us protect our market position. These patents expire from time to time over the next 15 years. We may be required to spend significant resources to monitor and protect our intellectual property rights.

Our Competition

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

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

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

Most of our customers, including HP, Micron, Samsung and SMART, also were competitors of ours, and had the ability to manufacture competitive products at lower costs. Our competitors also sold bundled arrangements offering a more complete or cost-effective product despite the technical merits or advantages of our services or technologies. We also faced competition from customers that continually evaluated our capabilities against the merits of manufacturing products internally.

Our Regulatory Environment

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

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

Rugged Technology Solutions Business

Overview

Through Augmentix Corporation, ~~one~~a ~~of our~~ wholly owned ~~subsidiaries~~subsidiary, we develop innovative, highly differentiated and leveraged solutions for aDell ~~large OEM customer~~Inc. (Dell), enabling us to address targeted vertical markets representing incremental growth opportunities. Our rugged notebook solutions, which we sell to Dell as part of an engineering and manufacturing relationship, redefine the value customers should expect from military standard (MIL-STD 810) rugged devices.

representing incremental growth opportunities. Our rugged notebook solutions, which we sell to this large OEM as part of an engineering and manufacturing relationship, redefine the value customers should expect from military standard (MIL-STD 810F) rugged devices.

We also re-engineer and ruggedize Dell PowerEdge^™ servers to provide leveraged solutions that are setting new standards for rugged servers with the latest technologies, extreme performance levels and enhanced functionality and reliability.

Our ~~third~~business ~~product~~model ~~line,~~allows ~~the~~us ~~Server Availability Management Processor (A+SAMP™), is a self-contained, single board embedded computer that offers~~to ~~enhanced~~competitively ~~availability~~challenge ~~and~~traditional ~~manageability~~original ofdevelopment ~~our~~manufacturers ~~A+ rugged servers. A+SAMP Lite is a derivative embedded computer that is integrated into a PBX voice over internet protocol~~ (~~VOIP~~ODMs) ~~telephone system~~ by aproviding ~~major~~meaningful ~~OEM~~benefits ~~customer~~to ~~and~~customers ~~provides~~through ~~remote~~the ~~system management~~delivery ~~and~~of ~~control~~highly ~~capabilities~~leveraged, ~~to maximize system uptime or availability.~~ cost-effective

~~Our~~3 business model allows us to competitively challenge traditional original development manufacturers (ODMs) by providing meaningful benefits to customers through the delivery of highly leveraged, cost-effective and differentiated “turnkey” vertical market solutions. Leveraging the core electronics, software, sales and services of Dell, Inc. (Dell), with our rugged and functionality innovations, customers enjoy extensive benefits, including advanced performance, expanded functionality and a common IT platform. This commonality translates into more efficient, cost-effective IT system deployment, management and maintenance, enabling the potential for lower product lifecycle costs.

and differentiated “turnkey” vertical market solutions. Leveraging the core electronics, software, sales and services of Dell, with our rugged and functionality innovations, customers enjoy extensive benefits, including advanced performance, expanded functionality and a common IT platform. This commonality translates into more efficient, cost-effective IT system deployment, management and maintenance, enabling the potential for lower product lifecycle costs.

Our Business Model and Technologies

Collaboratively with Dell, we identify market opportunities that are currently not being served and then develop a focused solution that targets a defined audience. By leveraging Dell’s core electronics, software elements, sales and customer service, we are able to focus our research, development and delivery on key enabling innovations that allow our customers to address new vertical markets that are accretive to their existing business. By combining Dell’s proven core system elements with our ruggedization technologies and solution elements, customers realize meaningful benefits in the form of advanced performance and functionality, and commonality with their mainstream products, all of which translates into the potential for a lower total cost of ownership. In addition, the benefits of our model also include leveraging Dell’s worldwide distribution channels, government contracts and sales and marketing efforts.

Through this business model, we provide measurable cost-effective benefits in the form of (i) full-service development, testing and certifications, (ii) engineering and development of rugged and functionality-enhanced innovations, (iii) market specific industrial designs, (iv) qualified sub-assembly manufacturing, (v) shortened time to market, and (vi) marketing and sales launch and sustaining field support as subject matter experts.

Dell Latitude™ XFR. We engineer and ~~produce~~have produced Dell’s rugged XFR notebooks. The XFR has been designed and independently tested to military standards (MIL-STD 810F), IEC internal standard for protection provided by enclosures (IEC60529), UL standards for use in hazardous material conditions (UL1604) and other emission, immunity and electrostatic discharge control (ESD) requirements. The XFR is available with a standard, optically enhanced 14.1” WXGA LCD or with an integrated touch screen. Our QuadCool™ thermal management system protects core system electronics via a sealed thermal transfer bay, and enables the reliable use of high performance Intel® mobile processors and chipsets in extreme temperature conditions. Our exoskeleton and thermo-elastomer system provides superior protection against drops, shocks and vibration conditions. Our shock isolation and dampening technology protects key system components while exposed to similar conditions. DirectVue™ is an advanced optical technology that provides superior LCD viewability in outdoor (sunlight) conditions and impact protection. Our ingress protection system provides protection from the ingress of blowing rain and dust. Collectively, our innovative designs support reliable operation of the XFR in challenging

9Dell Latitude E6400 XFR Fully Rugged Laptop with Ballistic Armor. The E6400 XFR has been designed and independently tested to military standards (MIL-STD 810F), IEC internal standard for protection provided by enclosures (IEC60529), UL standards for use in hazardous material conditions (UL1604) and other emission, immunity and electrostatic discharge control (ESD) requirements. The XFR is available with a standard, optically enhanced 14.1” WXGA LCD or with an integrated touch screen. Our QuadCool™ thermal management system protects core system electronics via a sealed thermal transfer bay, and enables the reliable use of high performance Intel® mobile processors and chipsets in extreme temperature conditions. Our exoskeleton and thermo-elastomer system provides superior protection against drops, shocks and vibration conditions. Our shock isolation and dampening technology protects key system components while exposed to similar conditions. DirectVue™ is an advanced optical technology that provides superior LCD viewability in outdoor (sunlight) conditions and impact protection. Our ingress protection system provides protection from the ingress of blowing rain and dust. Collectively, our innovative designs support reliable operation of the XFR in challenging environmental conditions and provide the potential for enhanced system uptime and availability.

Dell Latitude XT2 XFR—Rugged Convertible Tablet PC with Multi-Touch Technology. The Latitude XT2 XFR is Dell’s third rugged notebook system and is based on the Latitude^™ XT2. It is the industry’s first rugged tablet PC featuring capacitive multi-touch technology, which allows the user to use natural gestures such as scrolling, panning, rotating or zooming. Latitude XT2 XFR is also the smallest 12.1” convertible tablet PC available with many options for outstanding usability and user productivity. Real world rugged, tested and third-party certified to MIL-STD 810G, IP54, and UL1604 standards, the Latitude XT2 XFR can be equipped with wireless LAN, mobile broadband, GPS, and camera to get essential information. The XT2 XFR provides all of the features and benefits of the Dell Latitude XT2 in a MIL-STD rugged design. The XT2 XFR combines critical solution elements and ergonomic mobility all in a cost-effective solution that is ideal for vertical applications, such as field service, field sales, industrial manufacturing, as well as first responders, federal and other government applications. The XT2 XFR appeals to customers that require a combination of convertible flexibility, MIL-STD ruggedness, mobility, Dell commonality, and solution elements at a value-based price point.

~~environmental conditions and provide the potential for enhanced system uptime and availability.~~ Customers benefit from the combination of Dell’s industry-leading platform, and our proven ruggedization technologies:

•

Dell commonality with mainstream commercial notebooks—efficient, IT deployment, management and maintenance resulting in the potential for lower total cost of ownership in addition to award-winning expanded support and service programs;

•

expanded functionality;

• ~~Tier~~tier 1 quality and parts consistency; and

•

advanced performance in highly secure and rugged computing systems.

Rugged Augmentix A+ Servers. We re-engineer and ruggedize Dell PowerEdge™ servers for customers that demand greater durability and ~~heighted~~heightened server management in rack dense and transit case applications. The A+R200 and A+1950 rugged servers are designed and independently tested to select military standards (810F), and safety standards for use in mission-critical applications. Our servers are housed in dense, re-enforced chassis that have been depth-optimized (shortened) to fit into many military rack and transit case deployments. Our multi-channel forced convection cooling system, floating shock isolation storage carriers and vibration dampening compression layers, and our contamination filtration system support reliable operation in extreme temperature, humidity, shock, vibration and altitude conditions. Customers get advanced tier 1 performance and manageability in a Dell-based platform, along with MIL-STD ruggedization, to address the expanding needs of mission critical military applications. In addition, based on our leveraged model, we provide the potential for a lower total cost of ownership over the product lifecycle.

A+ Server Availability Management Processor System (A+SAMP, A+SAMP Lite). Our A+SAMP is a single-board embedded computer that resides within our servers and provides extended levels of monitoring, reporting and remote recovery routines from system hardware and operating system failures. The A+ SAMP continuously monitors and controls a server without assistance from the host system processor, effectively providing “lights out” management in the event the server is inactive or has a failure. In the event the A+SAMP cannot restore operation of the server via pre-scripted recovery routines, it can be programmed to alert a service center for follow-up activities. The A+SAMP Lite is a derivative of the A+SAMP and has been designed for an OEM customer as an integrated management element of its VOIP PBX system. Customer benefits include the potential for enhanced uptime or system availability and the potential for lower on-site service and maintenance costs.

Our Customers

Rugged Notebook Solutions

Our rugged notebook solutions are sold exclusively to Dell, as set forth in a contract that requires we sell only to Dell unless certain minimum levels of sales are not achieved. Dell markets and sells the XFR systems in North America and Europe through its commercial business units covering military, public safety, health care, education and a range of industrial markets.

Rugged Server Solutions & ~~Integrated A+ SAMP~~

Our rugged servers are sold directly to end users and through indirect channel partners. We have dedicated sales resources that support both delivery methods. We also sell through prime military contractors, systems integrators and resellers, in addition to sales facilitated through Dell’s software and peripherals group.

The majority of our notebook and server solutions are ultimately sold to the U.S. military and other federal organizations.

A+SAMP Lite

The A+SAMP Lite was developed for a leading telecom company that integrates this single-board embedded computer into its VOIP PBX telephone systems, which are then sold to customers on a global basis.

Our Sales and Marketing

~~Our~~For our rugged notebooks, our sales and marketing strategy has been focused on providing dedicated planning and tactical support through the product lifecycle. Working closely with Dell, we have developed a collaborative methodology that includes:

•

market and customer research that feeds concept development;

•

product definition and target market validation;

•

product launch, training and education tools and programs; and

•

field sales engagement supporting Dell’s teams.

The value we deliver to Dell is based on an in-depth understanding of the markets, customers and solution elements for the “turnkey” vertical market solutions we provide. We generate new business opportunities by working closely with Dell at both the strategic and tactical level. We continue to leverage successful project wins and deployments within our primary vertical markets, while developing sales and marketing programs for expansion ~~into additional segments.~~

working closely with Dell at both the strategic and tactical level. We continue to leverage successful project wins and deployments within our primary vertical markets, while developing sales and marketing programs for expansion into additional segments.

For our rugged servers, our dedicated field sales and technical resources work closely with prime military contract holders, systems integrators and directly with customers across virtually all of the primary branches of the military. We leverage existing end user and channel relationships to target expansion within the various military branches. Based on successful deployments within the military market, and the delivery of a reliable rugged solution and supporting services, reference accounts and referrals generate the majority of our new opportunities.

Our Growth Strategy

Our vision is to be the ~~leading~~ ~~provider~~most ofinnovative, ~~turnkey~~ vertical, ~~market~~ computing ~~solutions~~solution toprovider ~~large~~for ~~OEM~~mission-critical ~~customers~~environments. We intend to continue to define and develop vertically ~~orientated~~oriented solutions for defined target markets, and develop innovative OEM-leveraged solutions that provide incremental growth and profitability opportunities for our customers. With respect to our current rugged notebook solutions, we believe there are measurable expansion opportunities into new geographical regions and additional vertical markets, in addition to deeper penetration into the U.S federal market. With respect to new vertical market solutions, we believe the demand for additional rugged form factors and platforms will accelerate as the general workforce, as well as federal and industrial personnel, become more mobile.

Current OEM rugged notebook solutions: in addition to deeper penetration into the U.S federal market, we believe there are measurable expansion opportunities into new geographical regions and additional vertical markets.

Additional OEM vertical market solutions: as the general workforce, as well as federal and industrial personnel, becomes more mobile, we believe the demand for additional rugged form factors or platforms will keep pace. Working closely with Dell, we will continue to deliver a comprehensive portfolio of vertical market solutions.

Our Suppliers

In order to produce our rugged notebook and server solutions, we leverage select components and materials from Dell. This includes elements such as main logic boards, memory, base LCDs, and power supplies, among other components and materials. We leverage the logistics and supply chain so that we have continuity of supply. Additional elements, such as chassis, thermal systems, optical enhancements, and other rugged elements are procured from contracted vendors.

~~Supply~~During October 2008, ~~chain~~we ~~and~~entered ~~manufacturing~~into ~~services~~a ~~for~~minimum purchase agreement with one of our vendors. The minimum purchase terms stipulate the purchase of $0.2 million by March 31, 2009, an additional $0.3 million by September 30, ~~A+SAMP~~2009 and ~~embedded~~an ~~computers~~additional ~~are~~$0.5 ~~provided~~million by March 31, 2010. During December 2009, we entered into an amendment related to this agreement, which amended the remaining minimum purchase terms to stipulate the purchase of an additional $1.3 million of product by aJune 1, ~~high-volume~~2010. As of December 31, ~~tier-one~~2009, ~~contract~~we ~~manufacturing~~had ~~company~~fulfilled the minimum purchase requirement within the agreed-upon time frame.

During October 2008, we entered into a minimum purchase agreement with one of our vendors. The minimum purchase terms stipulate the purchase of $0.2 million by March 31, 2009, an additional $0.3 million by

September 30, 2009 and an additional $0.5 million by March 31, 2010. As of December 31, 2008, we had not purchased any products under this agreement, however, we expect to fulfill the minimum purchase requirement within the agreed-upon time frame.

Our Manufacturing

For our OEM-produced rugged notebook solutions, sub-assemblies are manufactured, tested and quality checked in ~~Austin~~ Juarez, ~~Texas~~Mexico by an ISO-certified (9001:9002) contract manufacturer. ~~Final products are assembled, tested and quality checked at one of Dell’s manufacturing facilities.~~

Our Research and Development

As we continue to define new vertical market opportunities and innovative solutions for Dell’s customers, we plan to continue to develop differentiated technologies that support our growing portfolio. By leveraging Dell’s core technologies, we are able to focus research and development on meaningful innovations for the target market audience. Focused activities include rugged chassis material and construction, thermal management, shock isolation and dampening, ingress protection, LCD optimization and data protection. Additional research and development activities are centered on functionality enhancements and enabling solution elements that are desired by the target market customers.

We believe that to maximize potential market penetration and to grow, we must continue to invest in research and development, with a continued focus on meaningful technology innovations that support highly differentiated and targeted vertical market solutions.

Research and development expense for the year ended December 31, 2009 was $8.4 million, or 18.7% of total revenue, which reflected an increase of $1.0 million, or 13.5%, compared with research and development expense of $7.4 million, or 13.3% of total revenue for the year ended December 31, 2008. For the years ended December 31, 2009 and 2008, research and development expense included stock-based compensation expense of approximately $0.3 million and $0.4 million, respectively. The increase in research and development expense during 2009, relative to 2008, was primarily due to the addition of development costs associated with our rugged technology products as a result of our acquisition or Augmentix in July 2008, partially offset by our decision to exit manufacturing in our memory segment.

Our Intellectual Property

As of January 31, ~~2009~~2010, our Rugged Technology Solutions business had ~~one~~three issued ~~patent~~ patents and 1413 pending patent applications. The ~~patent~~patents and applications primarily relate to various ruggedization methods to improve our products. ~~We may be required to spend significant resources to monitor and protect our intellectual property rights.~~

Our Competition

Today, we are the only ODM supplier developing and producing rugged notebooks for Dell. In the future, we could face competition for Dell’s business from traditional contract manufacturers. However, we believe that by providing highly differentiated and innovative, leveraged “turnkey” vertical market solutions that are supported by integrated sales and marketing programs, we create meaningful benefits to Dell.

Our largest competitor in the rugged notebook market is Panasonic Corporation (Panasonic), which has over 50% of the total market share. Panasonic offers the ~~CF-~~Toughbook line, including the Toughbook 30 and the Toughbook 19, which ~~competes~~compete with the Latitude E6400 XFR and the Latitude XT2 XFR. Both of the Dell’s Latitude ~~XFR~~XFRs ~~provides~~provide customers with meaningful benefits over Panasonic’s ~~CF-30~~Toughbooks, including (i) commonality (for example image, drivers, and BIOS) with Dell’s mainstream notebooks that simplifies IT management and provides the potential for a lower total cost of ownership, (ii) better overall performance package based on standard voltage Intel mobile processors and chipsets, (iii) bigger, wide-aspect 14.1” WXGA LCD with DirectVue that offers enhanced clarity and contrast in outdoor (sunlight) conditions, and (iv) better standard support and service offerings with a broader set of IT deployment, management and lifecycle management tools and programs. Today, both products offer a similar degree of ruggedization based on independent military (MIL-STD), IEC (IP) and UL1604 testing. Panasonic will continue to represent a competitive threat, given its size, resources, length of time selling its rugged products, as well as other factors.

Today, we are the only primary supplier of rugged servers based on Dell’s PowerEdge server platforms. There are a number of “white box vendors” and systems integrators that serve the federal and industrial markets that develop rugged servers. Typically, these rugged systems are custom developed to meet specific contract or customer requirements, which are defined in requests for proposals or technical program specification documents. For programs where our A+ servers meet the prescribed specifications, we provide measurable benefits based on Dell commonality and our ruggedization technologies, chassis “right-sizing” and delivery cycles. Also, our leveraged model allows us to provide cost-effective solutions for many federal customers. In addition, for larger volume opportunities, we can provide a degree of customization to meet these specifications. However, for typical or average volume program opportunities where we don’t meet the exacting specifications, we have difficulty matching the flexibility of many of the current competitors.

127

~~that~~Memory ~~develop~~Solutions ~~rugged~~Business servers. Typically, these rugged systems are custom developed to meet specific contract or customer requirements, which are defined in requests for proposals or technical program specification documents. For programs where our A+ servers meet the prescribed specifications, we provide measurable benefits based on Dell commonality and our ruggedization technologies, chassis “right-sizing” and delivery cycles. Also, our leveraged model allows us to provide cost-effective solutions for many federal customers. In addition, for larger volume opportunities, we can provide a degree of customization to meet these specifications. However, for typical or average volume program opportunities where we don’t meet the exacting specifications, we have difficulty matching the flexibility of many of the current competitors.

Overview

In 2008, we were a provider of advanced electronic systems and sub-systems for enterprise, consumer and other high-growth markets. Our thin, small outline package (TSOP) and ball grid array (BGA) memory stacking solutions increased operational performance by doubling, tripling or quadrupling the amount of memory in the same physical footprint as required by standard packaging technologies. Our ArctiCore^® technology is a module technology using a double-sided, multi-layer flexible circuit folded around an aluminum core and was designed for superior thermal, mechanical and electrical performance. Our other memory module technologies enable custom, as well as JEDEC-standard, registered dual in-line memory modules (R-DIMMs), fully buffered dual in-line memory modules (FB-DIMMs) and small outline dual in-line memory modules (SO-DIMMs), with the characteristics of high-density and thermal efficiencies. With an IP portfolio of approximately 200 patents and patent applications pending, in 2008, we offered flexibility for customers, including outsourced manufacturing, technology licensing and custom engineering. Headquartered in Austin, Texas, we operated two ISO-certified manufacturing facilities in 2008 in Irvine, California and Reynosa, Mexico. During the second quarter of 2008, we terminated manufacturing in Irvine, California, and in the first quarter of 2009, we terminated manufacturing in Reynosa, Mexico and shut down this business

We continue to license our intellectual property. As of January 31, 2010, our Memory Solutions business had 149 issued patents and 41 pending patent applications. These patents expire from time to time over the next 15 years.

We have two ongoing license agreements, one with Samsung Electronics Co., Ltd. (Samsung) and one with SMART. Under these license arrangements, Samsung is licensed to manufacture and sell memory modules containing stacked chips incorporating our leaded-package stacking technologies and intellectual property, and SMART is licensed to manufacture and sell our ArctiCore technologies as well as our Performance and High Performance Stakpak and FlashStak products. Samsung has stated that it is not currently using our technologies, so it is not paying us royalties.

Effective October 30, 2009, we entered into an agreement with IPotential, LLC (IPotential), regarding the sale of the memory patent portfolio for our memory solutions technologies. IPotential has agreed to act as our exclusive representative in connection with the sale, and we have agreed to pay IPotential a commission in connection with this sale.

Combined businesses

Our Employees

As of February 2726, ~~2009~~2010, we had ~~158~~47 full-time employees.

By region, 70 and 88 of our employees are located in the United States and in Mexico, respectively. As of February 27, 2009, 63% of our employees in Mexico were represented by a labor organization that has entered into a labor contract with us. We are not party to any collective bargaining agreements with any of our employees in the United States. We have never had a work stoppage, and we believe our relations with our employees are good.

Available Information

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

~~The~~8 ~~NASDAQ Stock Market~~

On July 21, 2008, we received a letter from The NASDAQ Stock Market notifying us that for the 30 consecutive business days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share requirement for continued inclusion on The NASDAQ Global Market pursuant to NASDAQ Marketplace Rule 4450(a)(5).

In accordance with NASDAQ Marketplace Rule 4450(e)(2), we had 180 calendar days from the date of the NASDAQ letter, or until January 20, 2009, to regain compliance. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days. NASDAQ may, in its discretion, require us to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining that we have demonstrated an ability to maintain long-term compliance. If we do not regain compliance, NASDAQ will notify us of its determination to delist our common stock, which decision we can appeal to a NASDAQ Listings Qualification Panel.

However, effective October 17, 2008, NASDAQ suspended compliance with the minimum bid price rule, and as a result, we now have until July 20, 2009, to comply with this requirement. If we are not able to comply, we may request stockholder approval to effect a reverse stock split, with the intent to comply with NASDAQ’s requirements and remain listed.

Stock Split

Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock.

The objective of the reverse stock split was to regain compliance with NASDAQ’s $1 per share minimum bid rule. The total number of shares of common stock outstanding (excluding treasury shares) was reduced from approximately 47 million shares to approximately 4 million shares. The number of common shares related to the company’s convertible notes and stock options has been proportionately adjusted to reflect the reverse split.

Under the terms of the reverse split, stockholders holding 12 or more shares of Entorian common stock at the close of business September 23, 2009 received one new Entorian share for every 12 shares held. Stockholders holding fewer than 12 shares received cash consideration in lieu of fractional shares.

Delisting and Deregistration

On March 1, 2010, we received a letter from The NASDAQ Stock Market notifying us that for the 30 consecutive business days preceding the date of the letter, our listed securities did not meet the minimum market value of publicly held shares required for continued inclusion on The NASDAQ Global Market. On March 10, 2010, we submitted a formal notice to NASDAQ of our decision to voluntary delist our common stock from the NASDAQ Global Market and our intent to file a Form 25 with the SEC and NASDAQ to delist our common stock on or about March 22, 2010, with the delisting taking effect no earlier than ten days thereafter. We filed a Form 25 on March 22, 2010, and we expect that the last day of trading of our common stock on the NASDAQ Global Market will be on March 31, 2010. After filing the Form 25, we also intend to terminate the registration of our common stock and suspend our reporting obligations under the Securities Exchange Act of 1934 (the Exchange Act) by filing a Form 15 with the SEC on or about April 2, 2010. We anticipate that our common stock will be quoted on the Pink Sheets^®, an electronic quotation service for over-the-counter securities, and we intend to continue to provide information to our stockholders and to take such actions within our control to enable our common stock to be quoted in the Pink Sheets so that our stockholders will have a place to trade their shares. There is no guarantee, however, that a broker will continue to make a market in our common stock, that we will be able to take the actions required to enable our shares to be quoted in the Pink Sheets, or that trading of our common stock will continue on the Pink Sheets or otherwise. See Note 26, “Subsequent Events,” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information regarding the delisting of our common stock from the NASDAQ Global Market and deregistering our common stock under the Exchange Act.

Convertible Notes

In July 2008, we entered into senior secured convertible notes (the Notes) in the amount of approximately $10.7 million with an annual interest rate of 6% with certain stockholders of Augmentix when we acquired Augmentix. The note holders included Austin Ventures VIII (one of our affiliates), Centennial Ventures VII, Centennial Entrepreneurs VII, G-51 Capital Fund III, G-51 Capital Affiliates Fund III, Comerica Incorporated and Square One Bank. In June 2009, we finalized a working capital adjustment, which resulted in an adjustment to the working capital in our favor of approximately $0.6 million. The convertible notes were reduced from approximately $10.7 million to approximately $10.1 million. Interest payments were due each January 31 and July 30, with the principal due on December 31, 2010. The former Augmentix stockholders had the right to convert the principal and any unpaid interest into our common stock at a conversion price of $30.00 at any time prior to the earlier of (i) December 31, 2010, (ii) a change of control of Entorian or (iii) the redemption of all of the outstanding principal amount of the notes. At any time subsequent to the issuance of the convertible notes, we had the right to redeem the notes for the redemption amount, which was equal to the outstanding principal balance plus accrued interest, with at least 30 days prior written notice.

Effective December 10, 2009, we entered into an agreement with all of the holders of the Notes to pay 80% of the principal amount of the face amount of each note, plus accrued interest through the payment date, in

exchange for a full release from the notes. We paid an aggregate of approximately $8.3 million, including interest, to these holders on December 10, 2009 and recorded a gain on the debt extinguishment of approximately $2.0 million. We have no other long-term debt.

Liquidity

We incurred negative cash flows from operations in 2009 and 2008. In order to improve profitability and enhance cash flow, we shifted our focus away from commodity component markets towards vertical computing segments. In 2009, our combined cash plus investments position decreased by an average of approximately $3 million per quarter, which will not be sustainable in future periods. We have undertaken, and will continue to undertake, cost reductions to reduce our operating expenses, including deregistering our shares of common stock, although we cannot provide assurance that we will be able to reduce our operating expenses to a sufficient degree to become profitable. Our ability to reduce, or eliminate, the decline in cash and investments is highly dependent on our success in achieving these operating expense reductions and on increasing revenue through the continued customer acceptance of our rugged solutions.

On March 9, 2010, we received $6.3 million in tax refunds from the United States Treasury, primarily as a result of tax carryback claims, and expect to receive an additional $0.9 million during the remainder of 2010.

Dell Relationship

We are dependent upon an exclusive contract with Dell for revenue generated from the sale of our ruggedized notebook products, which represents substantially all of our revenue, and in the event of any adverse change to our relationship with Dell, our business, financial condition and results of operations could be adversely affected.

Currently, Dell is our only customer for our rugged notebooks. Revenue from Dell represented a substantial percentage of our total revenue in 2009. The initial term of our contract with Dell ends in the third quarter of 2010, although the contract automatically renews unless either party terminates it at least 180 days before the end of the applicable term. If Dell reduces or discontinues its business with us, our business, financial condition and results of operations could be adversely affected.

In addition, we heavily rely on the Dell sales force to sell our ruggedized notebook products and the Dell service organization to provide support to us. If we experience issues regarding insufficient training or lack of sales efforts by the Dell sales force, the decline in sales of our ruggedized notebook products could have a material and adverse effect on our operating results.

ITEM 1A.

RISK FACTORS

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

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

We incurred negative cash flows from operations in 2009 and 2008. In 2009, our cash plus investments position decreased by an average of approximately $3 million per quarter. We may not be able to increase revenue or generate gross profits or net income. Our revenue and operating results ~~are~~have fluctuated over the past several quarters and are likely to ~~fluctuate~~continue to do so, causing our stock price to fluctuate. If our revenue or operating results ~~fall below the expectations of market analysts or investors~~decline, the market price of our common stock could decline substantially.

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

•

the timing and volume of sales of our products;

•

market demand for, and changes in the average sales prices of, our products and technologies;

•

defects in our products, exposing us to product liability claims and product recalls, safety alerts or advisory notices;

•

a shortage of critical parts, which may negatively impact our ability to fulfill customer orders;

•

fluctuating demand for, and life cycles of, our products;

•

changes in our relationship with Dell, our largest customer with which we have an exclusive sales and marketing agreement regarding certain ruggedized computer notebook products;

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inconsistency in forecasts provided to us by Dell, resulting in increased inventory exposure as we build to the current Dell forecast;

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decreases in military spending and the budgets of federal, state and local agencies, impacting sales of our ruggedized products;

• the failure of our ruggedized products to meet the military specification MIL-STD-~~810F~~810, which is the required specification for products to be considered rugged;

•

operational risks from our reliance on suppliers, subcontractors and third-party manufacturers for the production of ruggedized products;

•

changes in the level of our operating expenses;

•

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

• our ability to ~~manufacture~~have manufactured and ~~ship~~shipped products within a particular reporting period;

•

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

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

• changes in our royalties caused by changes in demand for products incorporating semiconductors that use our licensed technologies;

•

changes in our products and technologies;

•

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

•

the timing of the introduction by others of competing, replacement or substitute products and technologies;

•

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

•

general economic conditions that may affect demand for our products.

~~The~~We ~~recent~~are ~~financial~~dependent ~~crisis~~upon ~~could~~an ~~negatively~~exclusive ~~affect~~contract with Dell for revenue generated from the sale of our ~~business~~ruggedized notebook products, ~~results~~which represents substantially all of ~~operations~~our revenue, and in the event of any adverse change to our relationship with Dell, our business, financial condition and results of operations could be adversely affected.

~~The~~Presently, ~~recent~~Dell ~~financial~~is ~~crisis~~our ~~affecting~~only ~~the~~customer ~~financial~~for ~~markets~~our ~~and~~rugged ~~banking~~notebooks. ~~industry~~Revenue ~~has~~from ~~resulted~~Dell inrepresented a ~~tightening~~substantial inpercentage ~~the credit markets; a low level~~ of ~~liquidity~~ inour ~~many~~total ~~financial~~revenue ~~markets; and extreme volatility~~ in ~~credit, fixed income and equity markets~~ 2009. ~~This~~The ~~situation~~initial ~~could~~term ~~affect the budgeting and purchasing behavior~~ of our ~~customers.~~contract Ifwith ~~economic~~Dell ~~growth~~ends ~~is slowed or uncertain, many customers may delay or reduce technology purchases. This could result~~ in ~~reductions~~the inthird ~~sales~~quarter of ~~our products and services~~2010, ~~longer~~although ~~sales~~the ~~cycles,~~contract ~~slower~~automatically ~~adoption~~renews ofunless ~~new~~either ~~technologies~~party ~~and~~terminates ~~increased~~it ~~price~~at ~~competition.~~least In180 ~~addition,~~days ~~there~~before ~~could~~the beend ~~a number~~ of ~~follow-on consequences from~~ the ~~current~~applicable ~~situation~~term. onIf ~~our~~Dell ~~business,~~reduces ~~including insolvency of key suppliers, resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/~~or ~~customer insolvencies; increased expense~~discontinues orits ~~inability~~business towith ~~obtain~~us, ~~short-term financing to fund~~ our ~~operations~~business, iffinancial ~~necessary;~~condition ~~among~~and ~~other issues. These consequences could negatively affect our business,~~ results of operations ~~and~~could ~~financial~~be ~~condition~~adversely affected.

We11 are dependent upon an exclusive contract with Dell for revenue generated from the sale of our ruggedized notebook products, which represents a significant portion of our revenue, and in the event of any adverse change to our relationship with Dell, our business, financial condition and results of operations could be adversely affected.

Presently,Table Dell is our only customer for our rugged notebooks. Revenue from Dell is expected to represent a substantial percentage of our total revenue in 2009. If Dell reduces or discontinues its business with us, our business, financial condition and results of operations could be adversely affected. Contents

In addition, we heavily rely on the Dell sales force to sell our ruggedized notebook products and the Dell service organization to provide support to us. If we experience issues regarding insufficient training or lack of sales efforts by the Dell sales force, the decline of sales of our ruggedized notebook products could have a material and adverse effect on our operating results.

A substantial percentage of our total revenue depends on the sale of ruggedized notebook products, and as a result, any significant reduction of sales of these products could materially and adversely affect our operating results.

Because our revenue is derived substantially from sales of our ruggedized notebook products, we are highly dependent upon the continued market acceptance of these products. Continued market acceptance of our ruggedized notebook products is critical to our future success. Any significant reduction of sales of these products could materially and adversely affect our business.

We are dependent on a limited number of suppliers for our ruggedized products, and the loss of these suppliers and our inability to procure new suppliers at comparative costs could have a material and adverse effect on our business, financial condition and results of operations.

We purchase notebooks and components from a limited number of suppliers. Dell is the sole supplier of many of the components that are used in our ruggedized laptop computers. While we believe that alternative sources are available, contractual obligations to Dell preclude our ability to secure new suppliers. The loss of our supplier could cause a disruption in the availability of these products. In addition, we have a limited number of suppliers for other components, and a disruption in the supply of these components may also cause a disruption in the availability of these components and a delay in manufacturing, which could have a material adverse effect on our business.

15Our cash position has decreased, and if it continues to decrease, it could have a material and adverse effect on our business, financial condition and results of operations.

~~Table~~It is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to acquire other businesses, products or technologies. We could try to raise these funds by borrowing money or selling more stock to the public or to selected investors. In addition, while we may not need additional funds, we may elect to sell additional equity securities or obtain credit facilities for other reasons. However, we cannot assure that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing more equity or by issuing convertible debt securities, the ownership percentages of ~~Contents~~existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

We depend on third parties to manufacture our ruggedized products, subjecting us to certain operational risks.

We currently depend on third-party manufacturers to manufacture our ruggedized products and ruggedized products under development, and this reliance subjects us to significant operational risks, any of which could impair our ability to deliver products to our customers should they occur. Our reliance involves a number of risks, including:

•

reduced management and control of component purchases;

•

reduced control over delivery schedule and quality assurance;

•

reduced control over manufacturing yields;

•

lack of adequate capacity during periods of excess demand;

•

limited warranties on products supplied to us;

•

potential increases in prices;

•

interruption of supplies as a result of fire, natural calamity, strike or other significant events; and

•

misappropriation of our intellectual property.

We rely on sales forecasts provided by Dell, subjecting us to certain inventory risks.

We rely on sales forecasts provided by Dell on a monthly basis. We build our rugged notebooks to these forecasts as they are provided to us, which may result in increased inventory exposure in the event Dell reduces its forecast after we have procured materials. Any such reduced forecast by Dell could have a material and adverse effect on our operating results. Additionally, the lead time to procure and ship materials may exceed the period covered by forecasts. In those circumstances, we estimate our inventory requirements, but if our estimates are inaccurate, we will bear the cost of holding the inventory or may incur additional costs to acquire additional inventory on an expedited basis.

Our relationship with a third-party manufacturer presents certain risks to us that could negatively affect our business, results of operations and financial condition.

We have an arrangement with a manufacturer in which this third party purchases and takes title of certain inventory relating to certain of our products upon shipment from the original manufacturers of such inventory. This third party recovers the cost of inventory upon the sale of finished goods to us. This program offers us several advantages; however, this arrangement also results in concentrated credit and inventory risk for us. A large percentage of our accounts receivable balance at the end of the year was with this third party. In addition, by transferring inventory to this third party, the financial failure of this third party could freeze this inventory, preventing us from accessing it and using it for our products. As our sales increase, these amounts will increase.

Budget constraints of the U.S. military, federal, state and local governments could negatively impact sales of our ruggedized products, which could materially and adversely affect our operating results.

We market to the various branches of the U.S. military ~~forces~~ as potential customers of our ruggedized products, as well as other state and local governments. Any decrease in spending by these agencies or a change in the current political situation or overall market conditions may negatively impact sales of our ruggedized products, which could materially and adversely affect our operating results.

In the event of a failure of our ruggedized products to meet the military specification MIL-STD-~~810F~~810, our business, financial condition and results of operations could be adversely affected.

Our products are ruggedized to meet (and in some cases, exceed) the military specifications MIL-STD-~~810F~~810. Created by the U.S. government, the MIL-STD-~~810F~~810 specifications cover a broad range of tests that measure the durability of equipment used under harsh conditions. A failure to meet this standard would result in our products not qualifying as “rugged” products, which could have a material and adverse effect on our operating results. In addition, this standard could change, third-party components could fail to meet the required specifications, or a third-party manufacturer could fail to produce our products according to the required specifications, each of which could also have a material and adverse effect on our operating results.

Some of our suppliers and subcontractors do not have long operating histories or significant financial strength.

Some of the suppliers and subcontractors with which we engage to provide services to us are small companies without a long operating history or significant financial strength. We have selected these third parties because of their flexibility in dealing with our schedules, their prices and expertise, among other factors, but they

1613

may not have the reliability or financial position of larger, more well-established suppliers and subcontractors. As a result, we face increased risks in dealing with these third parties in terms of their financial position, ability to continue operations and meet their commitments and quality control, among other issues, which could materially and adversely affect our operating results.

We depend on key Dell personnel, and in the event of changes to these Dell personnel, our business could be harmed.

We believe our future success will depend in large part upon our relationships with key Dell personnel, who have been, and continue to be, instrumental to us in a variety of ways, including selecting us on an exclusive basis, as well as developing, marketing and selling our ruggedized notebook products. If any of these key personnel leave their current positions with Dell, this could jeopardize our future relationship with Dell, as well as delay the development and introduction of, and negatively impact our ability to sell, our ruggedized notebook products.

We partially rely on Dell to purchase products from ~~our~~ inventory ~~hub~~hubs so that we can receive payment for our products. If Dell does not take possession of these products, we will not be paid, which could materially and adversely affect our business, financial condition and results of operations.

We stock certain of our products in ahubs ~~hub~~ based on a forecast from Dell, from which Dell purchases products and pays us after taking possession. ~~This arrangement allows us to receive payment for these products on a regular basis, so that we can pay our suppliers on a timely basis without significant exposure to our working capital.~~ If we stock ~~our~~these ~~hub~~hubs but Dell does not purchase our products, this could result in an increase in our inventory levels, as well as an increase in our working capital exposure, since we ~~will~~ beare required to pay our suppliers prior to receiving payment from Dell. This ~~change~~ could materially and adversely affect our business, financial condition and results of operations. In the future, our supply chain with Dell may change, which could impact our inventory levels, our working capital exposure, as well as our cash position.

In the event of product failures, Dell could terminate our relationship and we could be subject to increased warranty costs, as well as additional costs, all of which could have a material adverse effect on our results of operations and financial condition.

We warrant products for periods up to 37 months following the manufacture of our products. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs increase, our warranty costs to support the products in the field could increase, which could have a material and adverse effect on our results of operations and financial condition. In addition, our agreement with Dell requires that we pay for all costs that Dell incurs (whether or not the warranty continues to apply) with respect to defects in the design, manufacturing process or material of a product that constitute an epidemic failure, which term is defined as a specific defect found in 0.5% of a type of product delivered during any one-month period. In the event of an epidemic failure and we are held responsible for all costs that Dell incurs in repairing or replacing the products in question, it could have a material advance effect on our results of operations and financial condition. Finally, in the event of excessive product failure rates, Dell could terminate its contract with us, which would also have a material and adverse effect on our results of operations and financial condition.

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

With the exception of our exclusive sales and marketing contract between Augmentix and Dell, we do not have long-term purchase agreements with customers. Because our expense levels are based in part on our expectations as to future revenue and to a large extent are fixed in the short term, we likely will be unable to adjust spending on a timely basis to compensate for any unexpected shortfall in revenue. Accordingly, any significant shortfall of revenue in relation to our expectations could hurt our operating results and depress our stock price.

In14 2008, we depended on a limited number of key customers for a substantial portion of our revenue, which number of customers we expect will be smaller in 2009, and the loss of, or a significant reduction in orders from, a key customer could significantly reduce our revenue.

Our five largest customers accounted for 74% of our total revenue in 2008, 75% of our total revenue in 2007 and 89% of our total revenue in 2006. In particular, Dell, SMART and Micron accounted for 36%, 15% and 9% respectively, of our total revenue in 2008. SMART and Micron are customers from our Memory Solutions segment. In 2009, with the termination of our manufacturing services of our Memory Solutions business, we will have fewer customers than in 2008.

We expect that sales of our products to a limited number of customers will continue to represent a majority of our revenue in the foreseeable future. The loss of, or a significant reduction in purchases by, any of our major customers could harm our business, financial condition and results of operations.

~~The~~We ~~NASDAQ~~are ~~Stock~~delisting ~~Market~~our ~~notified~~common usstock ~~that~~from ~~the~~NASDAQ ~~bid~~and ~~price~~deregistering of our common stock ~~had closed below the~~with ~~per-share~~the ~~requirement for continued inclusion on NASDAQ~~SEC, which could result in ~~delisting~~a decline in our ~~securities,~~stock price and ~~which~~ could limit investors’ ability to trade in our securities.

On ~~July~~March 2110, ~~2008~~2010, we ~~received~~submitted a ~~letter~~formal notice to NASDAQ of our decision to voluntary delist our common stock from ~~The~~the NASDAQ ~~Stock~~Global Market ~~notifying~~and usour ~~that~~intent ~~for~~to file a Form 25 with the 30SEC ~~consecutive~~and ~~business~~NASDAQ to delist our common stock on or about March 22, 2010, with the delisting taking effect no earlier than ten days ~~preceding~~thereafter. We filed a Form 25 on March Dra22, 2010, and we expect that the ~~date~~last day of trading of our common stock on the NASDAQ Global Market will be on ~~letter~~March 31, 2010. After filing the ~~bid~~Form ~~price~~25, we also intend to terminate the registration of our common stock ~~had~~and ~~closed~~suspend ~~below~~our reporting obligations under the $1Exchange Act by filing a Form 15 with the SEC on or about April 2, 2010.00 ~~per~~We anticipate ~~share~~that ~~requirement~~our ~~for~~common ~~continued~~stock ~~inclusion~~will be quoted on ~~The~~the ~~NASDAQ~~Pink ~~Global~~Sheets, ~~Market~~an ~~pursuant~~electronic quotation service for over-the-counter securities, and we intend to ~~NASDAQ~~continue ~~Marketplace~~to ~~Rule~~provide ~~4450(~~information to our stockholders and to take such actions within our control to enable our common stock to be quoted in the Pink Sheets so that our stockholders will have a~~)(5)~~ place to trade their shares. There is no guarantee, however, that a broker will continue to make a market in our common stock, that we will be able to take the actions required to enable our shares to be quoted in the Pink Sheets, or that trading of our common stock will continue on the Pink Sheets or otherwise.

InWe ~~accordance~~expect ~~with~~the ~~NASDAQ~~deregistration ~~Marketplace~~of ~~Rule~~our ~~4450(e)(2),~~common westock ~~had~~will ~~180~~become ~~calendar~~effective ~~days~~on ~~from the date of the NASDAQ letter,~~ or ~~until~~about ~~January~~July 201, ~~2009, to regain compliance~~2010. To ~~regain compliance~~However, ~~the~~our ~~closing~~reporting ~~bid~~obligations ~~price~~to offile ~~our~~certain ~~common~~reports ~~stock~~with ~~must~~the ~~meet~~SEC, orincluding ~~exceed~~Forms ~~$1.00~~10-Q ~~per~~and ~~share~~8-K, will ~~for~~be aimmediately ~~minimum~~suspended ofupon ~~ten~~filing ~~consecutive~~the ~~business~~Form ~~days~~15. ~~NASDAQ~~ ~~may,~~Other infiling ~~its~~requirements ~~discretion,~~will ~~require~~terminate usupon toeffectiveness ~~maintain a bid price~~ of ~~at least $1~~deregistration.00 ~~per~~Our ~~share~~stock ~~for~~price ahas ~~period~~declined insince ~~excess~~we ofannounced ~~ten~~our ~~consecutive~~intent ~~business~~to ~~days,~~delist ~~but~~and ~~generally no more than 20 consecutive business days~~deregister, ~~before~~and ~~determining~~our ~~that~~stock weprice ~~have~~may continue ~~demonstrated an ability~~ to ~~maintain long-term compliance~~decline. If weIn ~~do not regain compliance~~addition, ~~NASDAQ~~the ~~will~~ability ~~notify us~~ of ~~its~~stockholders ~~determination~~ to ~~delist~~trade our ~~common~~shares ~~stock,~~may ~~which decision we can appeal to a NASDAQ Listings Qualification Panel~~decrease.

~~However,~~We ~~effective~~must ~~October 17,~~successfully complete ~~2008,~~our ~~NASDAQ~~recent ~~suspended~~ERP ~~compliance with the minimum bid price rule~~implementation, ~~and~~ as awell ~~result,~~as wemaintain ~~now~~our ~~have~~information ~~until~~technology ~~July 20, 2009, to comply with this requirement~~systems. ~~If we are not able to comply, we may request stockholder approval to effect a reverse stock split, with the intent to comply with NASDAQ’s requirements and remain listed.~~

IfDuring ~~our~~the ~~common~~second quarter ~~stock~~of is2009, ~~delisted~~we byimplemented ~~NASDAQ~~a new ERP system. This implementation subjects us to inherent costs and risks associated with replacing and changing our legacy system, ~~the~~including ~~trading~~our ~~market~~ability ~~for~~to fulfill customer orders, potential disruption of our internal ~~common~~control ~~stock~~structure, ~~would~~substantial ~~likely~~capital beexpenditures, ~~adversely~~additional ~~affected~~administration expenses, asdemands ~~price~~on ~~quotations~~management time and other risks of delays or difficulties in transitioning to the new system. Our ERP implementation may not beresult asin productivity ~~readily~~improvements ~~obtainable~~at a level that outweighs the costs of implementation, ~~which~~or ~~would~~at ~~likely~~all. ~~have~~In addition, the implementation of a ~~material~~new ~~adverse~~technology system may cause disruptions in our business operations. Our ability to mitigate existing and future ~~effect~~disruptions oncould ~~the~~negatively ~~market~~affect ~~price~~our business, results of ~~our~~operations ~~common~~and ~~stock~~financial condition.

We ~~face~~may ~~several~~not ~~issues~~be inable ~~connection~~to sell ~~with shutting down~~ our manufacturing facility in Reynosa, Mexico, which could adversely affect our financial condition and results of operations.

We ~~are~~leased ~~closing down~~ our manufacturing facility in Reynosa, Mexico, and have listed the facility for sale ~~or lease~~. There are many legal and regulatory issues we face, and regulations with which we must comply, as a result of our decision to close this facility. In addition, we may not be able to sell ~~or lease~~ our facility ~~in a timely manner~~. If we encounter regulatory or other issues, or if we are unable to sell ~~or lease~~ our facility ~~in a timely manner~~, our financial condition and results of operations could be adversely affected.

If we fail to protect our proprietary rights, our customers or our competitors might gain access to our technologies, which could adversely affect our ability to sell our products, to license our memory solutions, to compete successfully in our markets, as well as result in refunds we are required to pay to Dell and other customers and harm our operating results.

We believe that the strength of our intellectual property rights is, and will continue to be, critical to the success of our business. If any of our key patents or other intellectual property rights are invalidated or deemed unenforceable, if a court limits the scope of the claims in any of our key patents or other intellectual property rights, if we fail to protect our intellectual property or unknowingly develop products based on the intellectual property of third parties, our business could be adversely affected. We indemnify Dell and other customers for patent infringement, so in the event an infringement claim is made with respect to the notebooks we sell to Dell or other products sold to customers, if we cannot defend against the claim made, we may have to refund to Dell and other customers the purchase price of the products sold, as well as defend against the infringement claim. In addition, if we do not protect our proprietary rights, the likelihood that companies will continue to license our memory solutions could be significantly reduced. If we fail to obtain patents or if the patents issued to us do not cover all of the claims we asserted in our patent applications, others could use portions of our intellectual property without the payment of license fees and royalties. The results of the factors set forth above could significantly harm our business, financial condition and results of operations.

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

• prevent challenges to, or the invalidation or circumvention of, our existing patents;

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

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

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

• provide adequate protection for our intellectual property rights;

• prevent disputes with third parties regarding ownership of our intellectual property rights;

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

• result in valid patents, including international patents, from any of our pending applications.

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

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

Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition.

In July 2008, we issued an aggregate principal amount of approximately $10,700,000 in convertible notes (the “Notes”) due in 2010. The level of our indebtedness, among other things, could:

• require us to dedicate a portion of our expected cash flow or our existing cash to service our indebtedness, which would reduce the amount of our cash available for other purposes, including working capital, capital expenditures and research and development expenditures;

• make it difficult for us to incur additional debt or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions or general corporate purposes;

• limit our flexibility in planning for or reacting to changes in our business;

• limit our ability to sell ourselves or engage in other strategic transactions;

• make us more vulnerable in the event of a downturn in our business; or

• place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.

If we experience a decline in revenue due to any of the factors described in this section entitled “Risk Factors,” or otherwise, we could have difficulty paying amounts due on our indebtedness. Although the Notes

mature in 2010, the holders of the Notes may require us to repurchase their Notes prior to maturity under certain circumstances, including specified fundamental changes such as the sale of a majority of the voting power of the Company. If we are unable to generate sufficient cash flow or are otherwise unable to make required payments, or if we fail to comply with the various requirements of the Notes, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under any other indebtedness that we may have outstanding at such time. Any default under our indebtedness could have a material adverse effect on our business, operating results and financial condition.

Conversion of the Notes would dilute the ownership interests of existing stockholders.

The former Augmentix stockholders have the right to convert the principal and any unpaid interest into our common stock at a conversion price of $2.50 at any time prior to the earlier of (i) December 31, 2010, (ii) a change of control of the Company or (iii) the redemption of all of the outstanding principal amount of the Notes. The conversion of some or all of the Notes will dilute the ownership interest of our existing stockholders. Any sales in the public market of the common stock issuable upon conversion could adversely affect prevailing market prices of our common stock.

If our product failure rates increase, Dell could terminate our relationship and we could be subject to increased warranty costs, both of which could have a material adverse effect on our results of operations and financial condition.

We repair or replace products that have been authorized for repair or replacement by our customers. We utilize a third-party service provider to perform a full range of service and support options, ranging from telephone, email, online, on-site, return-to-depot and customer replaceable units (parts). We warrant products for periods ranging from 12 to 37 months following the sale of our products. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs increase, our warranty costs to support the products in the field could increase, which could have a material and adverse effect on our results of operations and financial condition. In addition, Dell could terminate its contract with us, which would also have a material and adverse effect on our results of operations and financial condition.

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

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

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

Until our acquisition of Augmentix, we derived nearly all of our revenue from sales or licenses of our Stakpak and memory module solutions. We terminated our memory solutions manufacturing business and now are focusing on our Rugged Technology Solutions business, which derives nearly all of its revenue from sales to Dell. We expect these sales to continue to account for a substantial portion of our total revenue in the near term. Continued market acceptance of our products is critical to our future success. As a result, our business, financial condition and results of operations could be adversely affected by:

•

any decline in demand for our products;

•

failure of our products and technologies to achieve continued market acceptance;

•

the introduction of products and technologies that can serve as a substitute for, replacement of or represent an improvement over, our products and technologies;

•

technological innovations that we are unable to address with our products and technologies; and

•

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

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

We may experience substantial period-to-period fluctuations in our future revenue and operating results due to a decline in the average selling prices for our products. From time to time, we reduce the average unit price of our products in anticipation of future competitive pricing pressures, declining component prices, introductions of new products by us and other factors. To improve our gross margins, we will need to develop and introduce new products and technologies on a timely basis and continually reduce our costs. Our failure to do so could cause our revenue and gross margins to decline.

It is difficult for us to verify royalty amounts owed to us under our license agreements, and licensees may report errors in their reports after they have paid us, which may cause us to lose revenue.

The standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technologies and report this data to us on a periodic basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming and potentially detrimental to our ongoing business relationship with our licensees. As a result, to date, we have primarily relied on the accuracy of the reports themselves without independently verifying the information in them. Our failure to audit our licensees’ books and records may result in us receiving less royalty revenue than we are entitled to under the terms of our license agreements. In addition, a licensee may report errors in reporting after the licensee has paid us royalties, which is the action Samsung has taken with royalties it has paid us from the fourth quarter of 2005 and ending in the first quarter of 2008. If we are required to refund royalties paid in earlier quarters, a refund could adversely affect our business, financial condition, results of operations and cash position.

If our products include defective parts, we may be subject to product liability or other claims.

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

The viability of our ODM business model could be threatened if we are unable to control costs.

Dell expects us to deliver products and new designs within certain cost parameters, and our ability to pass unexpected design or manufacturing costs on to Dell is limited. We also experience pressure to reduce our margins. Accordingly, if we are unable to design or procure ruggedized notebook products efficiently, our business model could be unprofitable.

If the supply of materials used to manufacture our products is interrupted, our financial condition and results of operations could be adversely affected.

In order to have our ruggedized products manufactured, we require components, such as, but not limited to, main logic boards, memory, base LCDs, power supplies, chassis, thermal systems, optical enhancements, and other rugged elements. We typically procure these materials from limited sources. Shortages in some of these materials may occur from time to time, and have occurred in the past. In addition to shortages, we could experience quality problems with these materials. If our supply of materials is interrupted for any reason, or our manufacturing turnaround times are extended, our financial condition and results of operations could be adversely affected.

We are vulnerable to increases in shipping costs, which could have an adverse impact on our gross profit margin.

Presently, our supply chain configuration requires us to bear the expense of transporting the components of our rugged notebook products ~~over~~up to 10,000 miles before our manufacturing process is complete and the products are made available to our primary customer. Historically, we have ~~almost~~heavily ~~exclusively~~ relied on air transportation to ship our products due to the need to deliver products in a timely manner.

If the cost of ~~air~~ transportation increases in the future, or we are unable to decrease our reliance on ~~air~~ transportation and decrease the distances we must transport products, we could face a decline in our gross profit margins.

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

Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of customers than we have. Some of these companies are ~~better positioned to influence industry acceptance of a particular industry standard or competing technology than we are. These companies may also be able to~~ devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products or technologies at a lower price. They also may be able to adopt more aggressive pricing policies than we can adopt.

better positioned to influence industry acceptance of a particular industry standard or competing technology than we are. These companies may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products or technologies at a lower price. They also may be able to adopt more aggressive pricing policies than we can adopt.

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

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

As part of our growth and product diversification strategy, we will evaluate opportunities to acquire other businesses, intellectual property or or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities. For example, on August 31, 2007, we acquired Southland Micro Systems, a provider of memory products and services for leading OEMs, and on July 14, 2008, we acquired Augmentix, a provider of mission-critical mobile and server computing solutions for use in demanding environments. Acquisitions entail a number of risks that could materially and adversely affect our business and operating results, including:

breadth of our markets or enhance our technical capabilities. For example, on August 31, 2007, we acquired Southland, a provider of memory products and services for leading OEMs, and on July 14, 2008, we acquired Augmentix, a provider of mission-critical mobile and server computing solutions for use in demanding environments. Acquisitions entail a number of risks that could materially and adversely affect our business and operating results, including:

•

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

•

the risk of diverting management’s time and attention from the normal daily operations of the business;

•

insufficient revenue to offset increased expenses associated with acquisitions;

•

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

•

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

•

the potential loss of key employees of the acquired company; and

•

the potential need to amortize intangible assets.

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

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

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

•

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

•

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

•

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

•

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

•

contractual, intellectual property or employment issues;

•

potential loss of key employees of purchased organizations; and

•

potential litigation arising from the acquired company’s operations before the acquisition.

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

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

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

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

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

• our ability to secure broad patent coverage for our technologies and enter into license agreements with potential licensees; and

• the ability of our licensees to develop and commercialize successful products that incorporate our technologies.

Although we have engaged in discussions with potential licensees for our technologies, we historically have not devoted significant resources to licensing our technologies. Currently we have five licensees, although only one of which is currently paying us royalties of a material amount. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:

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

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

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

• our licensees’ ability to design and assemble memory modules and other system parts that utilize our technologies in components qualified for use by OEMs;

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

• actions by our licensees that could severely harm our ability to use our proprietary rights;

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

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

• the cyclicality of supply and demand for products using our licensed technologies; and

• competition we may face with respect to our licensees competing with our services business.

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

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

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

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

Our marketing and sales efforts may be unsuccessful.

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

We have intangible assets that may become impaired, which could significantly affect our results of operations in the period recognized.

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

If we experience credit losses or other collections issues, our business, financial condition and results of operations could suffer.

We have not historically recorded a bad debt allowance or established reserves for our accounts receivable because we did not have significant credit losses or other collections issues during the periods for which financial information is presented. However, we now have a bad debt allowance due to the bankruptcy of a large customer. Although we do not believe that we will incur any ~~additional~~ material credit losses in the foreseeable future, if we were to do so, our financial condition and results of operations could be harmed.

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

Our future growth and success ~~will~~could be based in large part on our ability to reduce our dependence on Dell by ~~increasing revenue associated with our other products and by~~ developing ~~other~~ new technologies and enhancements that can achieve market acceptance in a timely and cost-effective manner. Successful development and introduction of new technologies on a timely basis require that we:

•

identify and adjust to changing requirements of customers;

•

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

•

maintain effective marketing strategies;

•

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

•

successfully develop our relationships with existing and potential customers.

Funds associated with our auction rate securities may not be accessible in the short term, and we may be required to adjust the carrying value of these securities through an impairment charge.

As discussed in Note 6 to the Consolidated Financial Statements included in this Annual Report on Form 10-K, our investment securities consist of auction rate securities (ARS), which are not currently liquid or readily available to convert to cash. We do not believe that the current liquidity issues related to our ARS will impact our ability to fund our ongoing business operations. However, we will not be able to access these funds until a future auction for these ARS is successful or until we sell the securities in a secondary market, which currently is not active. During October 2008, we accepted an offer provided to us by the investment firm through which we hold our ARS to sell our ARS to them at par value at any time over a two-year period, beginning June 30, 2010 and ending July 2, 2012.

The failure of any bank in which we deposit our funds could impair our operations.

~~We have approximately $24.6 million in cash, cash equivalents, investments and long-term investments with major financial institutions.~~ The ~~current~~ banking crisis may place our deposits with our banks at risk and the FDIC deposit insurance will not be sufficient to cover any potential loss arising from a bank failure. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash, cash equivalents and investments could impair our operations.

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

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

•

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

•

any determinations with respect to mergers or other business combinations;

•

our acquisition or disposition of assets; and

•

our corporate finance activities.

In addition, to the extent that Austin Ventures continues to beneficially own a significant portion of our outstanding common stock, although less than a majority, it will continue to have a significant influence over all matters submitted to our stockholders and to exercise significant control over our business policies and affairs. Under our certificate of incorporation, as amended, if Austin Ventures ceases to own at least 30% of our outstanding common stock, the approval of the holders of at least two-thirds of our common stock will be required for stockholders to amend our certificate of incorporation or bylaws, to increase or decrease the authorized number of shares of our capital stock or to remove a director. Furthermore, concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. This significant concentration of share ownership may also adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in a company that is controlled by a small number of stockholders. Austin Ventures is not prohibited from selling a controlling interest in us to any third party, or from selling its shares at any time, which could adversely affect our stock price.

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

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

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

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

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

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

We believe that the strength of our intellectual property rights is, and will continue to be, important to our business. If any of our key patents or other intellectual property rights are invalidated or deemed unenforceable, if a court limits the scope of the claims in any of our key patents or other intellectual property rights, if we fail to protect our intellectual property or unknowingly develop products based on the intellectual property of third parties, our business could be adversely affected. We indemnify Dell and other customers for patent infringement, so in the event an infringement claim is made with respect to the notebooks we sell to Dell or other products sold to customers, if we cannot defend against the claim made, we may have to refund to Dell and other customers the purchase price of the products sold, as well as defend against the infringement claim. In addition, if we do not protect our proprietary rights, the likelihood that companies will continue to license our memory solutions could be significantly reduced. If we fail to obtain patents or if the patents issued to us do not cover all of the claims we asserted in our patent applications, others could use portions of our intellectual property without the payment of license fees and royalties. The results of the factors set forth above could significantly harm our business, financial condition and results of operations.

•

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

•

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

•

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

•

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

•

provide adequate protection for our intellectual property rights;

•

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

•

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

•

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

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

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

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

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

•

cease selling products that are claimed to be infringing a third party’s intellectual property;

•

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

•

redesign those products that are claimed to be infringing a third party’s intellectual property; or

•

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

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

~~Economic,~~It ~~political~~is ~~and~~difficult ~~other~~for ~~risks~~us ~~associated~~to ~~with~~verify ~~international~~royalty ~~sales~~amounts owed to us under our license agreements, and ~~operations~~licensees ~~could~~may ~~adversely~~report ~~affect~~errors ~~our~~in their reports after they have paid us, which may cause us to lose revenue.

~~Because~~The westandard ~~sell~~terms of our ~~services~~license ~~and~~agreements require ~~technologies~~our ~~worldwide,~~licensees ~~our~~to ~~business~~document isthe ~~subject~~manufacture toand ~~risks~~sale ~~associated~~of ~~with~~products ~~doing~~that ~~business~~incorporate ~~internationally.~~our ~~Our~~technologies ~~revenue originating~~and ~~outside~~report ~~the~~this ~~United~~data ~~States~~to asus on a ~~percentage~~periodic ofbasis. Although our ~~total~~standard ~~revenue~~license ~~was~~terms ~~18%~~give inus ~~2008,~~the ~~18%~~right into ~~2007~~audit books and ~~22%~~records inof ~~2006.~~our licensees ~~International~~to ~~turmoil,~~verify ~~exacerbated~~this byinformation, ~~the~~audits ~~war~~can inbe ~~Iraq~~expensive, ~~the~~time ~~escalating~~consuming ~~tensions~~and inpotentially ~~North~~detrimental ~~Korea~~to ~~and~~our ~~violence~~ongoing inbusiness ~~the~~relationship ~~Middle~~with ~~East, have~~our ~~contributed~~licensees. As a result, to andate, ~~uncertain~~we ~~political~~have ~~and~~primarily ~~economic~~relied ~~climate,~~on ~~both~~the inaccuracy of the ~~United~~reports themselves ~~States~~without ~~and~~independently ~~globally,~~verifying ~~which~~the ~~may~~information ~~affect~~in ~~our~~them. ~~ability~~Our failure to ~~generate~~audit ~~revenue~~our onlicensees’ abooks ~~predictable~~and ~~basis.~~records Inmay ~~addition,~~result ~~terrorist~~in ~~attacks~~us ~~and~~receiving ~~the~~less ~~threat~~royalty ofrevenue ~~future~~than ~~terrorist attacks~~we ~~both~~are ~~domestically~~entitled ~~and~~to ~~internationally~~under ~~have~~the ~~negatively~~terms ~~impacted~~of ~~the~~our ~~worldwide~~license ~~economy~~agreements. AsIn addition, wea ~~ship~~licensee ~~products~~may ~~both~~report errors in reporting after the ~~United~~licensee ~~States~~has ~~and~~paid ~~internationally~~us royalties, which is the ~~threat~~action ofSamsung ~~future~~has ~~terrorist~~taken ~~attacks~~with ~~may~~royalties ~~adversely~~it ~~affect~~has ~~our~~paid ~~business.~~us ~~These conditions~~from ~~make~~the itfourth ~~difficult~~quarter ~~for~~of us2005 and ~~for~~ending ~~our~~in ~~customers~~the tofirst ~~accurately~~quarter ~~forecast~~of ~~and~~2008. ~~plan~~If ~~future~~we ~~business~~are required ~~activities~~to ~~and~~refund ~~could~~royalties ~~have~~paid in earlier quarters, a ~~material~~refund ~~adverse~~could ~~effect~~adversely onaffect our business, financial condition, ~~and~~ results of operations and cash position.

A21 portion of our revenue is derived from customers based in Asia. The economies of Asia have been highly volatile and recessionary in the past, resulting in significant fluctuations in local currencies and other instabilities. Some countries in Asia have recently been affected by infectious diseases. These instabilities continue and may occur again in the future. Our exposure to the business risks presented by the economies of Asia will increase to the extent that we continue to expand our customer base and activities in that region. An outbreak of an infectious disease could result in reduced demand for products incorporating our technologies, extend the qualification periods for our technologies or otherwise adversely affect our business.

OurTable stockof price is likely to be volatile and could drop unexpectedly. Contents

Our stock price is volatile.

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

Our principal executive offices are located at ~~8900~~4030 ~~Shoal~~W. ~~Creek~~Braker ~~Boulevard~~Lane, ~~Suite 125,~~ Austin, Texas ~~78757~~78759. This facility consists of approximately 3710,~~000~~730 square feet of office space under lease through ~~December~~May 2010. ~~Augmentix~~We ~~leases~~also alease 10an approximately 21,~~730-~~000 square foot building at ~~4030~~8900 Shoal W.Creek ~~Braker Lane~~Boulevard, Austin, Texas ~~78759~~78757, through ~~May 31,~~December 2010, consisting of office and research and development space. We have listed this facility for sublease.

In January 2003, we commenced manufacturing operations at our facility in Reynosa, Mexico. This facility consists of approximately 45,000 square feet, which we own. During ~~the year ended December 31~~2009, ~~2008,~~ we ~~manufactured~~leased ~~all~~this manufacturing offacility ~~our~~and ~~Stakpak~~have ~~memory~~listed ~~products~~it atfor ~~this facility~~sale.

On August 31, 2007, pursuant to our acquisition of Southland, we leased an additional 33,000 square feet in Irvine, California, consisting of approximately 20,000 square feet of manufacturing and warehouse area from two former Entorian employees (former Southland principals). We manufactured memory modules at this facility until we moved this production to Reynosa, Mexico, beginning in the second quarter of 2008. In November 2008, we announced a settlement agreement with the selling stockholders of Southland, in which we were released from our lease obligations on the Irvine facility, among other matters as more fully described in Note 3 to the Consolidated Financial Statements included in this Annual Report.

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

ITEM 3.

LEGAL PROCEEDINGS

Currently, we are not involved in any material legal proceedings. However, from time to time, we may be subject to legal proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we operate, and non-contractual customer claims or requested concessions we may agree to in the interest of maintaining business relationships.

~~From~~ITEM ~~time~~4. toREMOVED ~~time,~~AND we may be subject to legal proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we operate, and non-contractual customer claims or requested concessions we may agree to in the interest of maintaining business relationships. RESERVED

~~ITEM~~22 ~~4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~

None.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been quoted on the NASDAQ National Market since February 6, 2004. We trade under the symbol ENTN. As of March 318, ~~2009~~2010, there were 7258 holders of record of our common stock.

Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock, which we accounted for retroactively and is reflected in our per share sales price presented below.

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

	High		Low
2007:
Quarter Ended March 31	$	5.49	$	3.21
Quarter Ended June 30	$	4.15	$	2.50
Quarter Ended September 30	$	4.10	$	2.70
Quarter Ended December 31	$	3.70	$	1.75
2008:
Quarter Ended March 31	$	224.0224	$	09.7724
Quarter Ended June 30	$	115.3284	$	09.7612
Quarter Ended September 30	$	011.9540	$	05.4652
Quarter Ended December 31	$	09.7836	$	01.1580
2009:
Quarter Ended March 31	$	4.80	$	1.32
Quarter Ended June 30	$	5.28	$	2.04
Quarter Ended September 30	$	6.48	$	2.40
Quarter Ended December 31	$	7.11	$	3.04

Dividends

We have not declared or paid cash dividends on our common stock.

At December 31, ~~2008~~2009 and ~~2007~~2008, we had 5.0 million authorized shares of $0.001 par value redeemable preferred stock, none of which was issued or outstanding.

3023

Equity Compensation Plan Information

We currently maintain two equity compensation plans: the 2003 Amended and Restated Stock Option Plan (Option Plan), providing for the issuance of common stock to our employees, directors and consultants, and the 2006 Equity-Based Compensation Plan (Equity-Based Plan), providing for the issuance of restricted stock, restricted stock units, stock appreciation rights, bonus stock and other types of equity to our employees, directors and consultants. Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock, which is reflected in our common share activity presented below. The following table provides information about ~~the~~our ~~Company’s~~ common stock that may be issued upon the exercise of options under ~~the~~our ~~Company’s 2003 Stock~~ Option Plan and upon the issuance of restricted stock units pursuant to the ~~2006~~ Equity-Based ~~Compensation~~ Plan as of December 31, ~~2008~~2009.

	A	B		C
Plan category	Number of securities tobe issued upon exerciseof outstanding options,warrants and rights	Weighted-averageexercise price ofoutstanding options,warrants and rights(1)		Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn A)
Equity compensation plans approved by security holders	10674,~~254,620~~616	$	118.7201	1255,~~053,343~~209
Equity compensation plans not approved by security holders	—		N/A	N/A
Total	10674,~~254,620~~616	$	118.7201	1255,~~053,343~~209

(1) Excludes restricted stock units (RSUs).

Issuer Purchases of Equity Securities

The following table provides information with respect to our purchases of our common stock during the quarter ended December 31, ~~2008~~2009:

Period	TotalNumberof SharesPurchased(1)	AveragePricePaid perShare(2)		Total Numberof SharesPurchased asPart of PubliclyAnnouncedPlans orPrograms	Maximum ApproximateDollar Value of Sharesthat May Yet BePurchased under thePlans or Programs
October	252,~~854~~646	$	05.4926	252,~~854~~646	Approx. $	6.87 million
November	112,~~552~~128	$	05.4820	112,~~552~~128	Approx. $	6.86 million
December	342,~~187~~028	$	04.2553	342,~~187~~028	Approx. $	6.86 million
Total	716,~~593~~802	$	05.3702	716,~~593~~802

(1)	On February 2, 2006, our Board of Directors renewed our existing $15.0 million stock repurchase program for up to $10.0 million to purchase shares of our common stock. On November 14, 2006, our Board of Directors authorized an additional $10.0 million to purchase shares of our common stock.

(2)	Excludes commissions paid.

3124

ITEM 6.

SELECTED FINANCIAL DATA

The selected financial data should be read in connection with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing in Item 8 of this Annual Report on Form 10-K. The ~~consolidated~~Consolidated ~~statement~~Statement of ~~operations~~Operations for the years ended December 31, ~~2006~~2007, ~~2007~~2008, and ~~2008~~2009 and the ~~consolidated~~Consolidated ~~balance~~Balance ~~sheet~~Sheet data as of December 31, ~~2007~~2008 and December 31, ~~2008~~2009 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The ~~consolidated~~Consolidated ~~statement~~Statement of ~~operations~~Operations for the years ended December 31, ~~2004~~2005 and ~~2005~~2006, and the Consolidated ~~consolidated~~Balance ~~balance~~Sheet ~~sheet~~ data as of December 31, ~~2004~~2005, December 31, ~~2005~~2006, and December 31, ~~2006~~2007 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in any future period. Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock, which is reflected in our common share activity presented below.

	Entorian Technologies Inc.
	Year Ended December 31,
(in thousands, except per share data)	~~2008~~2009			~~2007~~2008			~~2006~~2007			~~2005~~2006			~~2004~~2005
Consolidated Statement of Operations:
Total revenue	$	5545,~~871~~058		$	4055,~~870~~871		$	5540,~~556~~870		$	5255,~~526~~556		$	7352,~~626~~526
Gross profit (loss)	$	(36,~~440~~785	)	$	7(3,~~543~~440	)	$	207,~~686~~543		$	1120,~~771~~686		$	3111,~~136~~771
Income (loss) from operations	$	(44,155	)	$	(43,056	)	$	(3,565	)	$	(12,277	)	$	13,911
Loss from operations	$	(14,662	)	$	(44,155	)	$	(43,056	)	$	(3,565	)	$	(12,277	)
Net income (loss)	$	~~(42,587~~504	(1)	$	(3942,~~987~~587	) (2)	$	(~~454~~39,987	) (3)	$	(~~7,477~~454	)	$	(7,~~806~~477	)
Preferred stock dividends		—			—			—			—			(266	)
Income (loss) per share:
Income (loss) available to common stockholders	$	(42,587	)	$	(39,987	)	$	(454	)	$	(7,477	)	$	7,540
Basic	$	0.13		$	(10.92	)	$	(10.18	)	$	(0.11	)	$	(1.85	)
Earnings (loss) per share:
Diluted	$	0.13		$	(10.92	)	$	(10.18	)	$	(0.11	)	$	(1.85	)
Basic	$	(0.91	)	$	(0.85	)	$	(0.01	)	$	(0.15	)	$	0.16
Shares used in computing income (loss) per share:
Diluted	$	(0.91	)	$	(0.85	)	$	(0.01	)	$	(0.15	)	$	0.15
Basic		3,900			3,900			3,930			4,007			4,048
Shares used in computing earnings (loss) per share:
Diluted		3,923			3,900			3,930			4,007			4,048
Basic		46,799			47,156			48,080			48,579			47,234
	As of December 31,
Diluted		46,799			47,156			48,080			48,579			50,996
(in thousands)	2009			2008			2007			2006			2005
Consolidated Balance Sheet Data:
Working capital	$	24,957		$	23,027		$	66,335		$	84,530		$	79,515
Total assets	$	49,187		$	53,976		$	99,413		$	135,191		$	138,349
Long-term debt	$	—	(4)	$	10,652		$	—		$	—		$	—
Total stockholders’ equity	$	36,073		$	34,493		$	91,269		$	130,028		$	131,284

	Entorian Technologies Inc.
	As of December 31,
(in thousands)	2008		2007		2006		2005		2004
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	15,651	$	34,013	$	40,797	$	38,011	$	39,984
Working capital	$	23,027	$	66,335	$	84,530	$	79,515	$	82,011
Total assets	$	53,976	$	99,413	$	135,191	$	138,349	$	155,471
Long-term debt	$	10,652	$	—	$	—	$	—	$	—
Total stockholders’ equity	$	34,493	$	91,269	$	130,028	$	131,284	$	141,807

(1)	Includes gain on litigation settlement and gain on debt extinguishment of $7.7 million and $2.0 million, respectively.

32(2) Includes expense related to the impairment of goodwill, other intangible assets and property, plant and equipment of $9.0 million, $5.9 million and $3.0 million, respectively.

(3)	Includes expense related to the impairment of goodwill of $27.9 million.

(4)	During December 2009, we paid off our convertible notes.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

The following discussion should be read along with the audited consolidated condensed financial statements and notes included in Item 8 of this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts and projections, and the beliefs and assumptions of our management including, without limitation, our expectations and beliefs regarding the following: ~~closing our manufacturing facility at the end of the first quarter of 2009;~~ that there are measurable expansion opportunities into new geographical regions and additional vertical markets; the demand for additional rugged form factors or platforms will ~~keep~~ ~~pace~~accelerate ~~with~~as ~~increasingly rapid mobilization of~~ the general workforce as well as ~~military~~federal and industrial personnel, become more mobile; fulfilling our minimum purchase requirement within the agreed-upon time frame with respect to a minimum purchase agreement we entered into with one of of our suppliers; we must continue to invest in research and development to maximize potential market penetration and to grow; by providing highly differentiated and innovative, leveraged “turnkey” vertical market solutions that ~~deliver meaningful innovations and~~ are supported by integrated sales and marketing programs, we create ~~measurable~~meaningful ~~barriers~~benefits to Dell; that our common stock will continue to be quoted on the Pink Sheets; that we intend to continue to provide information to our stockholders and to take such actions within our control to enable our common stock to be quoted on the Pink Sheets; that deregistration of ~~entry~~our common stock will become effective on or about July 1, 2010; our current assets, including cash and cash equivalents, investments and expected cash flow, will be sufficient to ~~traditional~~fund ~~contract~~our ~~manufacturers~~operations and our anticipated additions to property, plant and equipment for at least the next 12 months; our future success will depend in large part upon our relationships with key Dell personnel; our sales to Dell will continue to account for a substantial portion of our total revenue in the near term; ~~the~~we ~~lack~~will ofnot ~~significant~~incur material credit losses ~~from~~in ~~our~~the ~~customers~~foreseeable future; our current assets, including cash, cash equivalents and investments, and expected cash flows from operating activities, will be sufficient to fund our operations in ~~2009~~2010; ~~our anticipated additions to property, plant and equipment and any share repurchases under our stock repurchase program for at least~~ the ~~next 12 months; the~~ current liquidity issues related to our auction rate securities will not impact our ability to fund our ongoing business operations; we will continue to receive interest payments as long as we hold the auction rate securities; our facilities are suitable and adequate to meet our current operating needs; a ten percent change in interest rates will not have a significant impact on our interest income; ~~our strong patent portfolio and intellectual property position will allow us to continue to expand our business;~~ the strength of our intellectual property rights is, and will continue to be, ~~critical~~important to ~~the success of~~ our business ~~and will allow us to compete favorably against our competition~~; our ~~intent to vigorously protect our intellectual property; our~~ revenue recognition with respect to Samsung’s claim has been appropriate; ~~incurring additional restructuring charges during the first quarter of 2009;~~ our future success will depend upon our ability to attract and retain personnel; our adoption of ~~SFAS~~ASU ~~157 for our non~~2010-~~financial~~06 ~~assets and liabilities~~ will not have a material impact on our financial position and results of operations; our amortization expense of $3.4 million in 2010; our exercise of our put option relating to our auction-rate securities in 2010; and the concentration of credit risk in our accounts receivable is substantially mitigated by the relatively short collection terms and the high level of credit worthiness of our customers. Words such as “we expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,” “might,” “could,” “intend,” variations of these types of words and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Overview

On July 14, 2008, we acquired Augmentix Corporation. Augmentix primarily re-engineers and “ruggedizes” certain Dell products to provide solutions with the latest technologies, high performance levels, enhanced functionality and reliability, and the potential for a low total cost of ownership for mission-critical, rugged computing solutions. As a result of this acquisition, we reported under two segments, Memory Solutions and Rugged Technology Solutions.

3326

During the fourth quarter of 2008, we announced our plan to close manufacturing activities ~~functionality~~of ~~and~~our ~~reliability~~Memory Solutions business in the first quarter of 2009. We continue to license our extensive stacking patent portfolio, but transferred our memory and ~~the~~stacking ~~potential~~customers ~~for~~and acertain ~~low~~manufacturing ~~total~~assets ~~cost~~to ofthird ~~ownership~~parties. ~~for~~Following ~~mission-critical~~our acquisition of Augmentix, ~~rugged~~we decided to shift our focus away from commodity component markets towards vertical computing ~~solutions~~segments. As a result of ~~this acquisition~~exiting the manufacturing activities of our memory business, which we ~~now~~completed ~~report~~during ~~under~~the ~~two~~first quarter ~~segments~~of 2009, ~~Memory~~we ~~Solutions~~now ~~and~~operate under only Rugged Technology Solutions.

OnWe ~~December 17,~~have ~~2008,~~an weIP ~~announced our~~portfolio ~~plan to close manufacturing activities~~ of ~~our~~approximately ~~Memory~~200 ~~Solutions~~patents and ~~business~~patent inapplications ~~the~~pending, ~~first~~many ~~quarter~~ of ~~2009.~~which Werelate ~~will continue~~ to ~~license~~ our ~~extensive~~now-closed ~~stacking patent portfolio, but have transferred our~~ memory ~~and stacking customers and certain manufacturing assets to third parties~~business. We ~~took~~are ~~this~~collecting ~~action~~royalties ~~because~~under itone ~~became~~license ~~challenging~~agreement towith ~~maintain~~respect ato ~~long-term~~our ~~profitable~~memory ~~outlook~~patents ~~for~~and ~~this~~are ~~part~~exploring ofother ~~our~~strategic ~~business.~~alternatives ~~With~~with ~~our~~respect ~~acquisition of Augmentix, we decided~~ to ~~shift our focus away from commodity~~these ~~component markets towards vertical computing segments~~patents.

~~Memory~~Through ~~Solutions~~Augmentix, we develop innovative, highly differentiated and leveraged solutions for Dell, enabling us to address targeted vertical markets representing incremental growth opportunities. Our rugged notebook solutions, which we sell to Dell as part of an engineering and manufacturing relationship, redefine the value customers should expect from military standard (MIL-STD 810) rugged devices.

In 2008, we were a provider of advanced electronic systems and sub-systems for enterprise, consumer and other high-growth markets. Our TSOP and BGA memory stacking solutions increase operational performance by doubling, tripling or quadrupling the amount of memory in the same physical footprint as required by standard packaging technologies. Our ArctiCore technology is a module technology using a double-sided, multi-layer flexible circuit folded around an aluminum core and is designed for superior thermal, mechanical and electrical performance. Our other memory module technologies enable custom, as well as JEDEC-standard R-DIMMs, FB-DIMMs and SO-DIMMs, with the characteristics of high-density and thermal efficiencies.

Through an acquisition and internal development efforts, we worked to diversify our products and markets. On August 31, 2007, we acquired Southland, a provider of memory products and services to OEMs located in Irvine, California. In the second quarter of 2008, we began to move manufacturing from Irvine to our facility in Reynosa, Mexico. In November 2008, we announced a settlement agreement with the selling stockholders of Southland, in which we were released from our lease obligations on the Irvine facility, among other matters as more fully described in Note 3 to the Consolidated Financial Statements included in this Annual Report.

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

During 2008, our customers could license our technologies for their in-house stacking of memory units, outsource their manufacturing needs to us, buy memory units from one of our licensees, such as Samsung, SMART and Toshiba, or optimize their needs through a combination of these approaches. In 2009, our customers can continue to license our technologies for their in-house stacking of memory units, as well as buy memory units from one of our licensees, such as Samsung, SMART, and Toshiba.

We have an IP portfolio of more than 200 patents and patent applications pending. Headquartered in Austin, Texas, in 2008, we operated two ISO-certified manufacturing facilities in Irvine, California and Reynosa, Mexico. During the second quarter of 2008, we terminated manufacturing in Irvine, California, and as set forth above, we expect to terminate manufacturing in Reynosa, Mexico during the first quarter of 2009.

Rugged Technology Solutions

Through Augmentix, we develop innovative, highly differentiated and leveraged solutions for a large OEM customer, enabling us to address targeted vertical markets representing incremental growth opportunities. Our rugged notebook solutions, which we sell to a large OEM as part of an engineering and manufacturing relationship, redefine the value customers should expect from military standard (MIL-STD 810F) rugged devices.

We also re-engineer and ruggedize Dell PowerEdge servers to provide leveraged solutions that are setting new standards for rugged servers with the latest technologies, extreme performance levels and enhanced functionality and reliability.

~~Our~~Stock ~~third~~Split product line, the A+SAMP, is a self-contained, single board embedded computer that offers enhanced availability and manageability of our A+ rugged servers. A+SAMP Lite is a derivative embedded computer that is integrated into a PBX VOIP telephone system by a major OEM customer and provides remote system management and control capabilities to maximize system uptime or availability.

Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock.

Delisting and Deregistration

On March 1, 2010, we received a letter from The NASDAQ Stock Market notifying us that for the 30 consecutive business days preceding the date of the letter, our listed securities did not meet the minimum market value of publicly held shares required for continued inclusion on The NASDAQ Global Market. On March 10, 2010, we submitted a formal notice to NASDAQ of our decision to voluntary delist our common stock from the NASDAQ Global Market and our intent to file a Form 25 with the SEC and NASDAQ to delist our common stock on or about March 22, 2010, with the delisting taking effect no earlier than ten days thereafter. We filed a Form 25 on March 22, 2010, and we expect that the last day of trading of our common stock on the NASDAQ Global Market will be on March 31, 2010. After filing the Form 25, we also intend to terminate the registration of our common stock and suspend our reporting obligations under the Exchange Act by filing a Form 15 with the SEC on or about April 2, 2010. We anticipate that our common stock will be quoted on the Pink Sheets, an electronic quotation service for over-the-counter securities, and we intend to continue to provide information to our stockholders and to take such actions within our control to enable our common stock to be quoted in the Pink Sheets so that our stockholders will have a place to trade their shares. There is no guarantee, however, that a broker will continue to make a market in our common stock, that we will be able to take the actions required to enable our shares to be quoted in the Pink Sheets, or that trading of our common stock will continue on the Pink Sheets or otherwise. See Note 26, “Subsequent Events,” to the Consolidated Financial Statements included in this

Annual Report on Form 10-K for additional information regarding the delisting of our common stock from the NASDAQ Global Market and deregistering our common stock under the Exchange Act.

Samsung Update

We have a license arrangement with Samsung, pursuant to which we have licensed certain technologies to Samsung, and Samsung provides to us quarterly reports of its license usage and pays corresponding royalty amounts in accordance with the terms of the agreement. We have primarily relied on these reports from Samsung and subsequent cash payment to record revenue from this license agreement.

During the second quarter of 2008, Samsung sent us a letter asserting that it made errors in the royalty reports that it previously delivered to us during the period beginning in the fourth quarter of 2005 and ending in the first quarter of 2008. Samsung stated that it believes that these errors resulted in an overpayment to us of an aggregate of approximately $2.9 million, and Samsung has requested that we refund this amount. Samsung paid to us a total of $14.2 million during this time period.

Because of information provided to us by Samsung regarding excessive yield loss and independent information we have obtained, we do not believe it would be appropriate to make any changes to our financial reports or book allowances related to this refund request, and we believe that our revenue recognition has been appropriate.

35Liquidity

We incurred negative cash flows from operations in 2009 and 2008. In order to improve profitability and enhance cash flow, we shifted our focus away from commodity component markets towards vertical computing segments. In 2009, our combined cash plus investments position decreased by an average of approximately $3 million per quarter, which will not be sustainable in future periods. We have undertaken, and will continue to undertake, cost reductions to reduce our operating expenses, including deregistering our shares of common stock, as set forth above, although we cannot provide assurance that we will be able to reduce our operating expenses to a sufficient degree to become profitable. Our ability to reduce, or eliminate, the decline in cash and investments is highly dependent on our success in achieving these operating expense reductions and on increasing revenue through the continued customer acceptance of our rugged solutions.

Dell Relationship

Results of Operations

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

	Year Ended December 31,
	2008		2007		2006
	2009		2008		2007
Revenue:
Product	9495.05	%	8494.40	%	7784.64	%
License	64.05		~~15.~~6		2215.46
Total revenue	100.0		100.0		100.0
Cost of revenue:
Product	9279.34		6992.13		5069.91
Amortization of acquisition intangibles	5.5		105.75		1110.97
Impairment of acquisition intangibles and fixed assets	~~8.4~~—		18.74		—1.7
Total cost of revenue	~~106~~84.29		81106.52		6281.85
Gross profit (loss)	(615.21	)	18(6.52	)	3718.25
Operating expenses:
Selling, general and administrative	2723.95		3927.09		2639.60
Research and development	1318.37		13.83		1413.8
Restructuring	54.69		05.86		0.78
Provision for doubtful accounts	10.16		01.1		—0.1
Amortization of acquisition intangibles	1.0.2		1.80		1.58
Impairment of acquisition intangibles	~~7.7~~—		—7.7		—
Goodwill impairment	16(0.23	)	6816.32		—68.3
Total operating expenses	7247.86		~~123~~72.8		43123.68
Loss from operations	(7932.05	)	(~~105~~79.30	)	(6105.43	)
Other income, net	121.35		71.53		57.45
Loss before income taxes	(7711.70	)	(9777.87	)	(197.08	)
Benefit for income taxes	(112.51	)	—(1.5	)	~~(0.2~~—	)
Net loss	(76.2	)%	(97.8	)%	(0.8	)%
Net income (loss)	1.1	%	(76.2	%)	(97.8	%)

Total Revenue

Total revenue for the year ended December 31, ~~2008~~2009 was $5545.91 million, compared to revenue of $4055.9 million and $5540.69 million for the years ended December 31, ~~2007~~2008 and ~~2006~~2007, respectively. Product revenue in ~~2008~~ 2009 was $5243.50 million, compared to $3452.5 million and $4334.15 million for ~~2007~~2008 and ~~2006~~2007, respectively. License revenue in ~~2008~~2009 was $32.41 million, compared to $63.4 million and $126.54 million for ~~2007~~2008 and ~~2006~~2007, respectively.

~~Memory Solutions total revenue decreased $9.1 million, from $40.9 million during 2007 to $31.8 million in 2008.~~ The decrease in our ~~Memory~~product ~~Solutions~~ revenue ~~was~~during ~~primarily~~2009, ~~due~~compared to ~~the~~2008, ~~decline in demand for our memory stacking products in both leaded-package and BGA stacks. This decline~~ was driven by ~~the~~our ~~shift~~decision ~~from DDR-1~~ to ~~DDR-2~~exit ~~technologies.~~memory ~~DDR-2~~manufacturing ~~devices~~during ~~are enclosed in BGA packages, and~~ the first ~~demand~~quarter ~~for stacks~~ of ~~this technology did not grow to offset the decline in leaded packages~~2009. The ~~demand~~decrease ~~for~~in ~~BGA~~revenue ~~stacks~~from ~~was~~memory ~~hindered~~products byfrom ~~the~~$28.4 ~~availability~~million ofin ~~other~~2008 ~~competitive~~to ~~solutions, including dual-die and planar technologies~~$3.4 ~~The~~million ~~decline~~ in ~~stacking~~ ~~product~~2009 ~~revenue~~ was partially offset by ~~the~~an increase in revenue generated from ~~our~~rugged ~~memory~~technology ~~module~~ products, offrom ~~which~~$24.1 wemillion ~~had~~in ~~only~~2008 ~~four~~to ~~months~~$39.6 ofmillion ~~revenue~~ in 2009 ~~2007,~~ as a result of ~~our~~the ~~Southland~~Augmentix acquisition atin ~~the~~July ~~end of August 2007~~2008.

36License revenue decreased $1.3 million during 2009, compared with 2008, which was mainly the result of decreased demand for stacked memory products.

The decrease in our product revenue during 2008, compared to 2007, was primarily due to the decline in demand for our memory stacking products in both leaded-package and BGA stacks. This decline was driven by

the shift from DDR-1 to DDR-2 technologies. DDR-2 devices are enclosed in BGA packages, and the demand for stacks of this technology did not grow to offset the decline in leaded packages. The demand for BGA stacks was hindered by the availability of other competitive solutions, including dual-die and planar technologies. The decline in stacking product revenue was partially offset by the increase in revenue generated from our memory module products, of which we had only four months of revenue in 2007, as a result of our Southland acquisition at the end of August 2007.

License revenue decreased $3.0 million during 2008, compared with 2007, which was mainly the result of decreased royalties from Samsung. The Samsung license is for our leaded-package technologies, which are being replaced over time by BGA technologies.

AsThe afollowing ~~result~~tables ofsummarize ~~the~~sales ~~Augmentix~~to ~~acquisition~~customers inthat ~~July~~represented ~~2008~~10% ~~and in accordance with Statement of Financial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information”~~or ~~(SFAS~~more ~~131), we added a second segment, Rugged Technology Solutions, during the third quarter~~ of ~~2008.~~consolidated ~~Revenue~~total ~~in this segment is primarily generated from the sale of ruggedized computer solutions. Our Rugged Technology Solutions~~ revenue ~~increased from~~for ~~$0 in 2007 to $24.1 million in 2008. This increase more than offset~~ the ~~$9.1~~periods ~~million~~indicated: ~~decline in Memory Solutions revenue.~~

Subsequent to the first quarter of 2009, we will only generate license revenue from our Memory Solutions segment in addition to the revenue generated from our Rugged Technology Solutions segment.


	Year Ended December 31,
	2009		2008		2007
Dell	77	%	36	%	*
SMART	*		15	%	19	%
Micron	*		*		34	%
Google	*		*		10	%

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

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

The following tables summarize sales to customers for products in our Memory Solutions and Rugged Technology Solutions segments that represented 10% or more of consolidated total revenue for the periods indicated:

	Year Ended December 31,
	2008		2007		2006
Dell	36	%	*		*
SMART	15	%	19	%	13	%
Micron	*		34	%	18	%
Google	*		10	%	*
Samsung	*		*		20	%
HP	*		*		20	%
Netlist	*		*		18	%

*	Amount does not equal or exceed 10% for the indicated period.

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

	December 31,
	2008		2007
	2009		2008
Dell	2054	%	*20	%
SMART	13	%	18	%
Virtex	41	%	*
Mitac	12	%	*
SMART	*		13	%
Google	*		30	%
Mitac	*		12	%
Micron	*		16	%

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

Gross Profit (Loss)

Gross ~~loss~~profit for the year ended December 31, ~~2008~~2009 was $36.48 million, or 615.21% of total revenue. This amount represents aan ~~decrease~~increase of $10.92 million, compared to gross ~~profit~~loss of $73.54 million, or 186.52% of total revenue, for the year ended December 31, ~~2007~~2008. The change in our gross ~~loss~~profit for the year ended December 31, ~~2008~~ 2009, as compared to a gross ~~profit~~loss for the year ended December 31, ~~2007~~2008, was primarily due to ~~(i) recording~~the anstrategic ~~impairment~~decision ~~charge related~~ to shift our ~~trade~~focus ~~name~~away ~~intangible~~from ~~asset,~~commodity ~~land~~component markets towards vertical computing segments. During 2008, ~~building~~we produced memory modules and ~~lab~~stacked ~~equipment~~memory ~~for~~in ~~approximately~~our $4facility in Reynosa, Mexico.5 ~~million~~As of December 31, 2008, we did not cover our manufacturing costs in that segment as a result of a ~~decline~~decrease in ~~revenue~~volume. ~~and~~By ~~negative~~exiting ~~cash~~manufacturing ~~flow~~in ~~related~~the ~~to our~~ Memory Solutions ~~business,~~segment ~~(ii) recording~~and focusing anon ~~additional reserve~~our ~~for~~Rugged ~~excess~~Technology ~~and~~segment, ~~obsolete~~we ~~inventory~~earned ofgross ~~approximately~~profit $2throughout 2009.0 ~~million~~In ~~related~~addition, toduring ~~our~~2008, ~~DIMM~~we ~~inventory~~recorded ~~and~~impairment ~~(iii) a~~charges ~~shift~~related ~~towards~~to ~~the~~our ~~sale~~tradename ofintangible ~~memory~~asset, ~~modules~~land, ~~which~~building ~~carry~~and alab ~~lower~~equipment ~~gross~~for ~~margin~~approximately ~~than~~$4.5 ~~our~~million, as ~~historical~~a ~~stacking~~result ~~products.~~of ~~The~~a ~~gross~~decline ~~margin on~~in ~~our~~revenue ~~stacking~~and ~~products~~negative ~~declined~~cash ~~due~~flow related to ~~lower~~our ~~license~~Memory ~~revenue~~Solutions ~~and~~business. ~~fixed~~Also, ~~costs~~during ~~being~~2008, ~~spread~~we ~~over~~recorded ~~lower~~an ~~volumes.~~additional ~~These~~reserve ~~declines~~for ~~were~~excess ~~partially~~and ~~offset~~obsolete byinventory ~~the~~of ~~gross~~approximately ~~profit~~$2.0 ~~generated~~million ~~from~~related to our ~~rugged~~DIMM ~~notebook and server products~~inventory.

Gross ~~profit~~loss for the year ended December 31, ~~2007~~2008 was $73.54 million, or 186.52% of total revenue. This amount represents a decrease of $1310.29 million, compared to gross profit of $~~20.~~7.5 million, or 3718.25% of total revenue, for ~~the year ended December 31, 2006. The reduction in our gross profit as a percentage of total revenue during 2007, compared to 2006, was primarily due to lower gross~~ margin on our product business resulting from fixed costs being spread over fewer units. Additionally, license revenue, for which there was no corresponding impact on our cost of revenue, declined by $6.1 million. The acquisition of Southland further contributed to the decline in gross margin as a percentage of total revenue due to higher material costs associated with the sale of memory modules relative to memory stacking.

the year ended December 31, 2007. The change in our gross loss for the year ended December 31, 2008, compared to a gross profit for the year ended December 31, 2007, was primarily due to (i) recording an impairment charge related to our trade name intangible asset, land, building and lab equipment for approximately $4.5 million, as a result of a decline in revenue and negative cash flow related to our Memory Solutions business, (ii) recording an additional reserve for excess and obsolete inventory of approximately $2.0 million related to our DIMM inventory and (iii) a shift towards the sale of memory modules, which carry a lower gross margin than our historical stacking products. The gross margin on our stacking products declined due to lower license revenue and fixed costs being spread over lower volumes. These declines were partially offset by the gross profit generated from our rugged notebook and server products.

Selling, General and Administrative Expenses

Selling, general and administrative expense for the year ended December 31, 2009 was $10.6 million, or 23.5% of total revenue. This amount reflected a decrease of $5.0 million, or 32.1%, compared to selling, general and administrative expense of $15.6 million, or 27.9% of total revenue, for the year ended December 31, 2008. For the years ended December 31, 2009 and 2008, selling, general and administrative expense included stock-based compensation expense of $0.9 million and $2.0 million, respectively. The decrease in selling, general and administrative expense during 2009, compared to 2008, was largely due to a legal settlement and acquisition related expenses incurred in 2008. In addition, the reduction was due to our strategic shift away from commodity component markets towards vertical computing systems and consolidating our general and administrative functions following our Augmentix acquisition. Furthermore, lower selling and stock-based compensation expenses in 2009 were partially offset by the reversal of the $1.1 million liability associated with the Southland earn-out consideration during 2008.

Selling, general and administrative expense for the year ended December 31, 2008 was $15.6 million, or 27.9% of total revenue. This amount reflected a decrease of $0.3 million, or 1.9%, compared to selling, general and administrative expense of $15.9 million, or 39.0% of total revenue, for the year ended December 31, 2007. For the years ended December 31, 2008 and 2007, selling, general and administrative expense included stock-based compensation expense of $2.0 million and $4.7 million, respectively. The decrease in selling, general and administrative expense during 2008, compared to 2007, was primarily due to lower stock-based compensation expense, partially offset by higher personnel-related costs associated with the acquisitions of Southland and Augmentix.

Selling, general and administrative expense for the year ended December 31, 2007 was $15.9 million, or 39.0% of total revenue. This amount reflected an increase of $1.1 million, or 7.4%, compared to selling, general and administrative expense of $14.8 million, or 26.6% of total revenue, for the year ended December 31, 2006. For the years ended December 31, 2007 and 2006, selling, general and administrative expense included stock-based compensation expense of $4.7 million and $4.6 million, respectively. The increase in selling, general and administrative expense during 2007, relative to 2006, was primarily due to increased personnel-related costs in connection with our acquisition of Southland.

Research and Development

Research and development expense for the year ended December 31, 2009 was $8.4 million, or 18.7% of total revenue, which reflected an increase of $1.0 million, or 13.5%, compared with research and development expense of $7.4 million, or 13.3% of total revenue for the year ended December 31, 2008. For the years ended December 31, 2009 and 2008, research and development expense included stock-based compensation expense of approximately $0.3 million and $0.4 million, respectively. The increase in research and development expense during 2009, relative to 2008, was primarily due to the addition of development costs associated with our rugged technology products as a result of our acquisition of Augmentix in July 2008, partially offset by our decision to exit manufacturing in our memory segment.

Research and development expense for the year ended December 31, 2008 was $7.4 million, or 13.3% of total revenue, which reflected an increase of $1.7 million, or 29.8%, compared with research and development expense of $5.7 million, or 13.8% of total revenue for the year ended December 31, 2007. For the years ended December 31, 2008 and 2007, research and development expense included stock-based compensation expense of approximately $0.4 million and $0.8 million, respectively. The increase in research and development expense during 2008, relative to 2007, was primarily due to the addition of research and development expense associated with the acquisition of Augmentix, partially offset by decreased personnel-related costs related to our traditional stacking business and lower stock-based compensation expense.

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

Restructuring Expense

During the second quarter of 2008, we recorded a restructuring charge of approximately $0.2 million due to a workforce reduction of approximately 60 positions as a result of transferring our Memory Solutions manufacturing operations in Irvine, California to Reynosa, Mexico. We completed this transition during the third quarter of 2008, resulting in an additional charge of approximately $0.2 million. During the fourth quarter of 2008, we recorded restructuring expense of $2.7 million due to a workforce reduction of approximately 180 positions as a result of our plan to close manufacturing activities of our Memory Solutions business. During the first quarter of 2009, we expect to incur an additional charge of approximately $2.0 million related to closing our manufacturing facility in Mexico, consisting of additional restructuring expense and closing costs.

During 2009, we recorded restructuring expense of $2.2 million as a result of the ~~year~~completion ~~ended~~of ~~December 31~~our plan to close manufacturing activities of our Memory Solutions business. This additional charge included approximately $1.8 million related to employee severance expenses, ~~2007~~$0.5 million provision related to certain fixed assets no longer used in manufacturing and $0.4 million related to exiting one of our facilities located in Austin, Texas. In addition, during 2009, we recorded ~~restructuring~~a ~~expense~~reduction in our facility accrual of approximately $0.32 million as a result of a change in our estimated future liability.

Provision for Doubtful Accounts

Provision for doubtful accounts expense for the year ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007 was $0.6 3 million, $~~43,000~~0.6 million and $043,000, respectively. The increase in our provision for doubtful accounts during 2008, compared to 2007, was primarily due to the bankruptcy of a large customer during 2008. We wrote off the associated receivable and allowance for doubtful accounts during the second quarter of 2009.

Goodwill Impairment

AsDuring ~~of October 1, 2008,~~ the goodwill remaining on the balance sheet was associated with our Rugged Technology Solutions segment. At that time we undertook our annual goodwill assessment and determined that no impairment of goodwill existed. However, during the fourth quarter of 2008, due to continued challenges presented by general economic conditions and our low market capitalization, we conducted a review to update the fair value of the Rugged Technology Solutions segment. As a result of that review, we recorded a non-cash charge of $4.0 million during the fourth quarter of 2008 for the impairment of the entire goodwill created by the Augmentix acquisition. The impairment charge ~~reflects~~reflected increased uncertainty in the business due to ~~recent~~ economic ~~developments~~conditions.

The decline in revenue and negative cash flow related to our DIMM business unit during the third quarter of 2008 was an indicator of potential goodwill impairment. Because of this decline, we completed an impairment analysis of this reporting unit. As a result of that review, we recorded a non-cash charge of $5.0 million during the third quarter of 2008 for the write off of the goodwill related to our DIMM business unit, which we established in connection with our Southland acquisition. The impairment charge reflected the changing business prospects for our DIMM business and declining demand for our products.

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

Critical estimates made in determining the fair value of our Memory Solutions segment included expected future cash flows from licensing agreements and product sales, customer turnover and future overhead expenses. Critical estimates made in determining the fair value of our Rugged Technology Solutions segment include future customer turnover and operating margins. Management’s best estimates of fair value are based upon assumptions we believed to be reasonable, but which are inherently uncertain and unpredictable.

Amortization and Impairment of Acquisition Intangibles and Fixed Assets

During the year ended December 31, ~~2008~~2009, we amortized $32.6 million of intangible assets resulting from the Staktek, ~~Southland~~ and Augmentix acquisitions, with $32.05 million allocated to cost of revenue and $0.61 million to operating expenses. In ~~2009~~2010, we expect to incur amortization expense of $23.64 million, with $13.4 million allocated to cost of revenue and $~~1.2~~0 ~~million~~ to operating expenses.

During the year ended December 31, 2008, we amortized $3.6 million of intangible assets resulting from the Staktek, Southland and Augmentix acquisitions, with $3.0 million allocated to cost of revenue and $0.6 million to operating expenses.

The acquisition intangibles were originally valued using a discounted cash flow methodology. As a result, the scheduled amortization expense will vary from year to year. For interim periods within each year, amortization expense is recorded on a straight-line basis.

In the fourth quarter of 2008, as a result of our decision to close our operations in Reynosa, Mexico, we reviewed the value of our land and building there. We estimated the cash flow that would result from the disposal of those assets and booked an impairment expense of $0.6 million in the fourth quarter of 2008.

As of September 30, 2008, as a result of a decline in revenue and negative cash flow related to our DIMM business unit, we impaired the ~~remaining~~ remaining residual value of our trade name intangible asset acquired through our Southland acquisition and we impaired the lab equipment for our DIMM business unit. As a result, we recorded a charge of approximately $3.9 million, which is included in ~~Impairment~~in impairment of acquisition intangibles and fixed assets in cost of revenue. In addition, we impaired the remaining residual value of our customer relationship and non-compete agreements acquired through our Southland acquisition as a result of the decline in revenue and negative cash flow related to our DIMM business unit and recorded a charge of approximately $4.3 million, which is included in ~~Impairment~~impairment of acquisition intangibles in operating expenses.

As of June 30, 2008, as a result of the anticipated reduction in the future cash flow from our license agreement with Samsung, we tested our customer relationship intangible asset for impairment. As a result of our review, we recorded an impairment charge of approximately $0.2 million, which is include in Impairment of acquisition intangibles and fixed assets in cost of revenue. The value was initially recorded based upon the projected discounted net cash flows attributable to this relationship.

During the year ended December 31, 2007, we amortized $5.8 million of intangible assets resulting from the Staktek and Southland acquisitions, with $5.1 million allocated to cost of revenue and $0.7 million to operating expenses.

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

~~Interest and~~ Other Income (Expense)

~~Interest~~Other ~~and other~~ income, net, for the ~~years~~year ended December 31, ~~2008~~2009 and ~~2007,~~2008 was $09.7 million and $30.17 million, respectively. The ~~decrease~~increase in ~~interest and~~ other income, net was mainly due to cash received of $7.7 million as a result of the class action antitrust litigation entitled In Re Dynamic Random Access Memory (DRAM) Antitrust Litigation in which we were a claimant. In addition, we recorded a gain of approximately $2.0 million as a result of our early payment of the convertible notes we issued in connection with the Augmentix acquisition. These increases were partially offset by reduced interest income due to a lower balance in our cash, cash equivalents and investments as a result of our Augmentix acquisition and a reduction in our rate of return. Also, during 2009 and 2008, we recorded approximately $0.6 million and $0.3 million, respectively, in interest expense related to our convertible notes and other financing charges.

40Other income, net, for the years ended December 31, 2008 and 2007 was $0.7 million and $3.1 million, respectively. The decrease in other income, net was mainly due to a lower balance in our cash, cash equivalents

~~cash, cash equivalents~~ and investments as a result of our Southland and Augmentix acquisitions and a reduction in our rate of return. Also, during 2008, we recorded approximately $0.3 million in ~~Interest~~interest expense related to our convertible notes that we issued in connection with our acquisition of Augmentix and other financing charges.

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

Benefit for Income Taxes

We recorded an income tax benefit of $05.84 million, $~~10,000 and $~~0.18 million and $10,000 in the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~ 2007, respectively. For the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007, our effective tax rate was 1110.92%, 01.09% and 220.30%, respectively. Management has determined that there is substantial doubt we will realize the benefit of our net deferred tax asset. As a result, we recorded a valuation allowance of approximately $2.3 million in 2009, $12.0 million in 2008 and approximately $5.1 million in 2007 against our net deferred tax assets. However, as a result of the Worker, Homeownership, and Business Assistance Act of 2009, we are allowed to carry back the net operating losses we realized in 2008 up to five years. This tax law change decreased the amount of deferred tax assets we consider to be unrecoverable and we recorded a reduction in our valuation allowance of $5.6 million in 2009. We received the amount related to this tax law change in 2010.

During ~~2008~~2009, the effective tax rate differed from the federal statutory rate of 35% due primarily to the ~~$12.0~~tax ~~million~~law change disclosed above, partially offset by a valuation allowance of $2.3 ~~During~~million. ~~2007,~~During 2008, the effective tax rate differed from the federal statutory rate of 35% due primarily to ~~recording~~ the ~~impairment of goodwill and the~~ $512.10 million valuation allowance. During ~~2006~~2007, the effective tax rate differed from the federal statutory rate of 35%, due primarily to recording the impairment ~~impact~~ of ~~certain~~goodwill ~~stock-based~~and ~~compensation~~the ~~expenses~~$5.1 ~~that~~million ~~were~~valuation ~~not tax deductible, in addition to other permanent items, including tax-exempt interest income~~allowance.

Quarterly Results of Operations

The following table presents unaudited results of operations for each of the quarters in the years ended December 31, ~~2008~~2009 and ~~2007~~2008. Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock, which is reflected in our common share activity presented below. You should read the following table in connection with the consolidated financial statements and related notes contained in Item 8 in this Annual Report on Form 10-K. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. This table includes all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

	Three Months Ended
(in thousands, except per sharedata)	Dec. 31,~~2008~~2009			Sep. 30,~~2008~~2009			Jun. 30,~~2008~~2009			Mar. 31,~~2008~~2009			Dec. 31,~~2007~~2008			Sep. 30,~~2007~~2008			Jun. 30,~~2007~~2008			Mar. 31,~~2007~~2008
Revenue:
Product	$	1911,~~855~~904		$	1711,~~750~~237		$	76,~~677~~928		$	712,~~212~~943		$	1119,~~088~~855		$	817,~~756~~750		$	7,~~464~~677		$	7,~~182~~212
License		28578			~~713~~551			~~1,236~~822			~~1,400~~96			~~1,923~~28			~~2,185~~713			~~775~~1,236			1,~~496~~400
Total revenue	$	1912,~~883~~482		$	1811,~~463~~788		$	87,~~913~~750		$	813,~~612~~039		$	1319,~~011~~883		$	1018,~~941~~463		$	8,~~239~~913		$	8,~~678~~612
Gross profit (loss)	$	~~986~~1,586		$	(31,~~305~~254	)	$	~~(232~~1,098	)	$	~~(889~~2,849	)	$	~~1,706~~986		$	(3,~~299~~305	)	$	~~1,407~~(232	)	$	~~1,130~~(889	)
Net loss	$	(13,132	) (1)	$	(19,590	) (2)	$	(4,003	)	$	(5,862	)	$	(31,686	) (3)	$	(1,257	)	$	(4,108	)	$	(2,936	)
Net income (loss)	$	12,523	(1)	$	(3,260	)	$	(3,739	)	$	(5,019	)	$	(13,132	) (2)	$	(19,590	) (3)	$	(4,003	)	$	(5,862	)
Loss per share:
Income (loss) per share:
Basic	$	(03.2822	)	$	(0.4284	)	$	(0.0996	)	$	(01.1328	)	$	(03.6836	)	$	(05.0302	)	$	(01.0903	)	$	(01.0651	)
Diluted	$	(03.2818	)	$	(0.4284	)	$	(0.0996	)	$	(01.1328	)	$	(03.6836	)	$	(05.0302	)	$	(01.0903	)	$	(01.0651	)
Shares used in computing loss per share:
Shares used in computing income (loss) per share:
Basic		463,~~844~~890			463,~~852~~897			463,~~763~~904			463,~~737~~908			463,~~810~~904			463,~~997~~904			473,~~380~~897			473,~~377~~895
Diluted		463,~~844~~937			463,~~852~~897			463,~~763~~904			463,~~737~~908			463,~~810~~904			463,~~997~~904			473,~~380~~897			473,~~377~~895

(1) Includes ~~expense~~gain ~~related~~on tolitigation ~~the~~settlement ~~impairment of goodwill~~ and ~~property,~~gain ~~plant~~on ~~and~~debt ~~equipment~~extinguishment of $47.07 million and $02.60 million, respectively.

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(2) Includes expense related to the impairment of goodwill, ~~other intangible assets~~ and property, plant and equipment of $54.0 million, ~~$5.9 million~~ and $20.46 million, respectively.

(3) Includes expense related to the impairment of goodwill, other intangible assets and property, plant and equipment of $275.0 million, $5.9 million and $2.4 million, respectively.

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

	Three Months Ended
	Dec. 31,2008		Sep. 30,2008		Jun. 30,2008		Mar. 31,2008		Dec. 31,2007		Sep. 30,2007		Jun. 30,2007		Mar. 31,2007
	Dec. 31,2009		Sep. 30,2009		Jun. 30,2009		Mar. 31,2009		Dec. 31,2008		Sep. 30,2008		Jun. 30,2008		Mar. 31,2008
Revenue:
Product	9995.94	%	9695.13	%	8689.14	%	8399.73	%	8599.29	%	8096.01	%	9086.61	%	8283.87	%
License	04.16	%	34.97	%	1310.96	%	160.37	%	140.81	%	203.09	%	913.49	%	1716.23	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit (loss)	512.07	%	~~(17~~10.96	)%	(214.62	)%	~~(10~~21.39	)%	135.10	%	30(17.29	%)	17(2.16	%)	13(10.03	%)
Net loss	(66.0	)%	(106.1	)%	(44.9	)%	(68.0	)%	(243.5	)%	(11.5	)%	(49.9	)%	(33.8	)%
Net income (loss)	100.3	%	(27.7	%)	(48.2	%)	(38.5	%)	(66.0	%)	(106.1	%)	(44.9	%)	(68.0	%)

Liquidity and Capital Resources

Our contractual obligations at December 31, ~~2008~~2009 for the next five years are summarized as follows (in thousands):

	Total		Less Than1 Year		1-3Years		3-5Years		More Than5 Years
Operating leases	$	~~989~~273	$	~~565~~261	$	~~424~~12	$	—	$	—
Capital leases		6233		2928		335		—		—
Purchase obligations		1,~~000~~305		~~750~~1,305		~~250~~—		—		—
Convertible notes payable		10,652		—		10,652		—		—
Total	$	1,611	$	1,594	$	17	$	—	$	—
Total	$	12,703	$	1,344	$	11,359	$	—	$	—

Operating lease obligations above included rent commitments at December 31, ~~2008~~2009 for our corporate office and research and production facilities located in Austin, Texas, which expire during 2010. In addition, on September 1, 2007, we entered into a lease agreement with an entity owned by two former Entorian employees (former Southland principals) to lease our Irvine facility for a term of three years. In November 2008, we entered into an agreement terminating our obligations with respect to this lease. The capital lease commitment at December 31, ~~2008~~2009 was for office equipment.

Purchase obligations included a purchase commitment at December 31, ~~2008~~2009 for the expected future costs to be incurred in the fulfillment of a minimum purchases contract with one of our vendors. During October 2008, we entered into a minimum purchase agreement with one of our vendors. The minimum purchase terms stipulate the purchase of $0.2 million of product by March 31, 2009, and additional $0.3 million by September 30, 2009, and an additional $0.5 million by March 31, 2010. During December 2009, we entered into an amendment related to this agreement, which amended the remaining minimum purchase terms to stipulate the purchase of an additional $1.3 million of product by June 1, 2010. As of December 31, ~~2008~~2009, we met our minimum purchase requirement for this time period and expect to fulfill the minimum purchase ~~requirement~~ requirement within the agreed-upon time frame.

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

AsIn connection with our acquisition of ~~December~~Augmentix, we issued approximately $10.7 million in convertible notes with an annual interest rate of 6% to certain stockholders of Augmentix. Effective June 313, ~~2008~~2009, we ~~had~~finalized nothe ~~material~~post-closing ~~future~~working ~~sales~~capital ~~commitments~~adjustment as set forth in the merger agreement. The result was an adjustment to ~~any~~the ofworking capital in our ~~customers~~favor of approximately $0.6 million. The convertible notes were reduced from approximately $10.7 million to approximately $10.1 million. During December 2009, in connection with an

As35 of December 31, 2008, we had working capital of $23.0 million, including $17.3 million of cash, cash equivalents and investments, compared to working capital of $66.3 million, including $61.9 million of cash, cash

~~equivalents~~agreement ~~and~~executed ~~investments~~with asthe ofconvertible ~~December 31~~note holders, ~~2007.~~we ~~The~~paid ~~decline~~off in our ~~working~~convertible ~~capital~~notes ~~was~~at ~~primarily~~a ~~due~~discount ~~to $22.3 million~~ of ~~cash~~20% ~~used~~plus inany ~~the~~unpaid ~~Augmentix acquisition~~interest, ~~net~~or ofapproximately ~~cash acquired, the reclassification of our ARS of~~ $68.73 million. toWe ~~long-term~~recorded ~~investments~~a ~~and~~gain ~~an increase in our net loss~~ of approximately $2.60 million. Inon ~~addition~~debt toextinguishment ~~our~~as ~~working~~a ~~capital,~~result weof ~~held~~paying ~~approximately~~off ~~$7.3~~these ~~million~~convertible ~~in long-term investments at December 31, 2008 and none at December 31, 2007~~notes.

As of December 31, ~~2007~~ 2009, we had ~~working~~no ~~capital of~~material ~~$66.3~~future ~~million,~~sales ~~including~~commitments ~~$61.9 million of cash, cash equivalents and investments, compared~~ to ~~working~~any ~~capital~~ of ~~$84.5 million, including $79.7 million of cash, cash equivalents and investments as of December 31, 2006. The decline in~~ our ~~working~~ ~~capital was primarily due to $20~~customers.9 ~~million of cash used in the Southland acquisition, net of cash acquired.~~

Our long-term investments consist of tax-exempt ARS, which have a long-term maturity with the interest rate being reset to the maximum rate according to the applicable investment offering document. During the first quarter of 2008, auctions for certain of these securities began to fail. As of December 31, ~~2008~~2009, we ~~held~~had ~~approximately~~working capital of $625.70 million, ofincluding ~~ARS~~$8.9 ~~The~~million ~~underlying collateral~~ of ~~our~~cash, ~~ARS~~cash ~~consists~~equivalents ~~primarily~~and ~~of student loans~~investments, ofcompared ~~which~~to ~~69%~~working ~~are~~capital ~~guaranteed by the federal government as part~~ of ~~the~~$23.0 ~~Federal Family~~million, ~~Education~~including ~~Loans Program (FFELP)~~$17.3 ~~The~~million ~~FFELP~~of ~~guarantees~~cash, ~~between~~cash ~~95%~~equivalents and ~~98%~~investments ofas ~~the par value~~ of ~~these~~December 31, ~~loans~~2008. ~~The~~In ~~remaining~~addition ~~31% of~~ to our ~~ARS~~working ~~are private loans~~capital, ofwe ~~which~~held ~~85% are insured. During 2008,~~ approximately $2.7.3 million ofin ~~our~~long-term ~~ARS~~investments ~~was called~~ at ~~par by the issuer. As of~~ December 31, 2008, ~~there~~and ~~was~~none ~~insufficient~~at ~~observable~~December 31, ~~ARS market information available to determine the fair value of these investments~~2009. ~~Therefore,~~The ~~our~~increase ~~ARS~~in ~~were valued based on a pricing model that included certain assumptions, such as~~ our ~~ARS~~working ~~maximum~~capital ~~interest~~was ~~rate,~~primarily ~~probability~~due ~~of passing auction, default probability and discount rate. During November 2008, we accepted an offer provided~~ to ~~us by~~ the ~~investment~~reclassification ~~firm~~of ~~through which we hold~~ our ~~ARS to sell our~~ auction rate securities to(ARS) ~~this~~and ~~firm~~related atput ~~par~~option ~~value~~of at$7.3 ~~any~~million ~~time~~to ~~over a two~~short-~~year~~term ~~period~~investments, ~~beginning~~the ~~June 30,~~increase ~~2010~~in ~~and~~our ~~ending~~income ~~July 2,~~tax ~~2012.~~receivable ~~The~~by ~~agreement~~$5.7 ~~also~~million ~~provides~~due ~~access~~ to ~~loans~~a upchange toin ~~100% of~~ the ~~par~~tax ~~value~~law ~~for~~in ~~investment~~November ~~grade~~2009, ~~companies and~~a up$6.9 tomillion ~~75%~~increase ofin ~~the~~accounts ~~par~~receivables ~~value~~and ~~for~~a ~~companies~~$3.5 million ~~that~~increase ~~are~~in ~~not investment grade until June 30, 2010~~inventory. InThese ~~connection~~increases ~~with~~were ~~this~~partially ~~settlement,~~offset weby ~~recorded~~ a ~~put~~decrease ~~option~~ of ~~approximately~~ $013.78 million ~~related~~in tocash ~~our~~and ~~ARS.~~an ~~See~~increase ~~Note~~of $6,.3 ~~“Investments,” for~~million ~~additional~~in ~~information~~accounts payable.

~~Net~~As ~~cash~~of ~~used in operating activities was $12.4 million for the year ended~~ December 31, 2008, ~~and resulted~~we ~~primarily~~had ~~from~~working ~~our~~capital ~~net loss~~ of $4223.60 million, ~~adjusted by non-cash expenses~~ including ~~the goodwill impairment of~~ $917.03 million of cash, ~~the~~cash ~~intangible~~equivalents and ~~fixed~~investments, ~~assets~~compared ~~impairments~~to working capital of $966.03 million, ~~depreciation~~including ~~and amortization of intangibles of~~ $761.39 million ~~and stock-based compensation expense~~ of ~~$2.7~~cash, ~~million. Net~~ cash ~~provided~~equivalents byand ~~operating~~investments ~~activities~~as ~~was~~of ~~$8.9 million for the year ended~~ December 31, 2007,. ~~and~~The ~~resulted~~decline ~~primarily~~in ~~from~~ our ~~net~~working ~~loss~~capital ~~adjusted~~was byprimarily ~~non-cash~~due ~~expenses~~to ~~including the goodwill impairment of~~ $2722.93 million ~~and~~of ~~the~~cash ~~change~~used in ~~accounts~~the ~~receivable~~Augmentix ~~and~~acquisition, ~~inventories.~~net ~~Net~~of cash ~~provided~~acquired, bythe ~~operating~~reclassification ~~activities~~of ~~was~~our ARS of $146.7 million ~~for~~to ~~the~~long-term ~~year~~investments ~~ended December 31, 2006,~~ and ~~resulted~~an ~~primarily~~increase ~~from~~in our net loss ~~adjusted~~of ~~by non-cash~~approximately ~~expenses~~$2.6 ~~and~~million. ~~the~~In ~~change~~addition into ~~income~~our ~~taxes~~working ~~receivable/payable~~capital, ~~partially~~we ~~offset~~held byapproximately ~~the~~$7.3 ~~change~~million in ~~inventories.~~long-term ~~The~~investments ~~net~~at ~~impact~~December 31, ~~of the~~ 2008 ~~Augmentix acquisition is accounted for under investing~~ and ~~financing~~none ~~activities. See Note 3,~~at ~~“Acquisitions”~~December 31, ~~of the Notes to the Consolidated Financial Statements included elsewhere in this report for a detail of the balances acquired~~2007.

~~Net~~As ~~cash~~of ~~provided~~December 31, by2008, ~~investing~~our ~~activities~~long-term ~~was~~investments $4consisted of tax-exempt ARS, which have a long-term maturity with the interest rate being reset to the maximum rate according to the applicable investment offering document.1 ~~million~~During the first quarter of 2008, auctions for ~~the~~certain ~~year~~of ~~ended~~these securities began to fail. As of December 31, ~~2008~~ 2009, ~~compared~~we toheld approximately $116.05 million ~~for~~of ~~2007~~ARS. ~~Investing~~The ~~activities~~underlying ~~during~~collateral ~~2008~~of ~~consisted~~our ARS consists primarily of ~~$18~~student loans, of which 67% are guaranteed by the federal government as part of the Federal Family Education Loans Program (FFELP).7 ~~million~~The inFFELP ~~proceeds~~guarantees ~~from~~between 95% and 98% of the ~~sale~~par value of ~~investments,~~these ~~net~~loans. The remaining 33% of ~~purchases~~our ARS are private loans, ~~partially~~of ~~offset~~which by85% are insured. During 2009, approximately $120.54 million of ~~cash~~our ~~used~~ARS ~~for~~was called at par by the ~~Augmentix~~issuer. ~~acquisition~~As ~~related~~of December 31, 2009, there was insufficient observable ARS market information available to determine the ~~minority~~fair value of these investments. Therefore, our ARS were valued based on a pricing model that included certain assumptions, such as our ARS maximum interest rate, ~~net~~probability of ~~cash~~passing ~~acquired~~auction, default probability and ~~additions~~discount torate. ~~property~~During November 2008, ~~plant~~we ~~and~~accepted ~~equipment~~an ofoffer ~~$1.8 million.~~provided ~~Net~~to ~~cash~~us ~~used~~by inthe ~~investing~~investment ~~activities~~firm ~~was~~through ~~$11.0~~which ~~million~~we ~~for~~hold ~~the~~our ARS to sell our auction rate securities to this firm, at par value, at any time over a two-year ~~ended~~period, ~~December~~beginning June 3130, ~~2007,~~2010 ~~compared~~and toending $5July 2, 2012.0 ~~million~~The ~~for~~agreement ~~2006.~~also ~~Investing~~provides ~~activities~~access ~~during~~to ~~2007~~loans ~~consisted~~of ~~primarily~~75% of the ~~acquisition~~market value of ~~Southland,~~our ~~net~~ARS ofuntil ~~cash acquired~~June 30, ~~of $20~~2010.9 ~~million~~In connection with this settlement, ~~partially~~we recorded ~~offset~~a bygain of approximately $100.87 million in ~~proceeds~~other ~~from~~expense related to the ~~sale~~change in fair value of ~~investment~~our ~~securities~~put option. At December 31, ~~net~~2009, ofwe ~~investment~~recorded ~~purchases.~~our ~~Investing~~ARS ~~activities~~and ~~during~~put ~~2006~~option ~~consisted~~as ~~primarily~~short-term ofinvestments ~~$3.3~~based ~~million~~on ~~for~~our intent to sell them to the investment ~~purchase~~firm ofon ~~investments~~June 30, ~~net of~~2010. ~~proceeds~~See ~~from~~Note 6, “Investments,” to the ~~sale~~Consolidated ofFinancial ~~investments~~Statements ~~and~~included ~~additions~~in tothis ~~property,~~Annual ~~plant~~Report ~~and~~on ~~equipment~~Form of10-K ~~$1.5~~for ~~million~~additional information.

43Net cash used in operating activities was $6.7 million for the year ended December 31, 2009, and resulted primarily from the increase of $10.4 million in accounts receivable and inventory, the increase in income tax receivable of $5.7 million as a result of the carry back of our net operating losses realized in 2008 and the gain on debt extinguishment of $2.0 million, partially offset by the change in accounts payable of $6.3 million and non-cash expenses including depreciation and amortization of intangibles of $4.5 million and stock-based compensation expense of $1.2 million. Net cash used in operating activities was $12.4 million for the year ended December 31, 2008, and resulted primarily from our net loss of $42.6 million adjusted by non-cash expenses including the goodwill impairment of $9.0 million, the intangible and fixed assets impairments of $9.0 million,

~~Net~~ depreciation ~~cash~~and ~~used~~amortization inof ~~financing~~intangibles ~~activities~~of ~~during the year ended December 31, 2008 was~~ $107.03 million~~, primarily~~ ~~due~~and tostock-based ~~the~~compensation ~~Augmentix~~expense ~~acquisition related to the return~~ of ~~capital to the common control owner of~~ $92.87 million. Net cash ~~used~~provided inby ~~financing~~operating activities ~~during~~was $8.9 million for the year ended December 31, 2007, ~~was~~and ~~$4.6~~resulted ~~million,~~ primarily ~~due~~from ~~to the purchase of~~ our ~~common~~net ~~stock~~loss asadjusted ~~part~~by ~~of our stock repurchase program for $4.9 million. Net~~ non-cash ~~used~~expenses inincluding ~~financing activities during~~ the ~~year~~goodwill ~~ended~~impairment ~~December 31,~~of ~~2006 was~~ $627.9 million, ~~primarily~~and ~~due to~~ the ~~purchase~~change ofin ~~our~~accounts ~~common~~receivable ~~stock~~and ~~as part of our stock repurchase program for $8~~inventories.1 ~~million,~~The ~~partially~~net ~~offset~~impact ~~by the proceeds~~ of ~~$0.9 million received from~~ the ~~issuance~~2008 ofAugmentix ~~our~~acquisition is ~~common~~accounted ~~stock~~for under ~~our~~investing ~~employee~~and ~~stock~~financing ~~plans~~activities.

~~Effective~~Net cash provided by investing activities was $1.1 million for the year ended December ~~July~~31, 112009, compared to $4.1 million for the year ended December 31, 2008. Investing activities during 2009 primarily consisted of $2.0 million in proceeds from the sale of investment securities and additions to property, plant asand ~~part~~equipment, net of ~~our~~proceeds ~~acquisition~~from asset sales, of $0.6 million. Net cash provided by investing activities was $4.1 million for the year ended December 31, 2008, compared to $11.0 million for 2007. Investing activities during 2008 primarily consisted of $18.7 million in proceeds from the sale of investments, net of purchases, partially offset by $12.5 million of cash used for the Augmentix acquisition related to the minority interest, wenet ~~terminated~~of ~~our~~cash ~~unsecured~~acquired, ~~revolving~~and ~~loan~~additions ~~agreement~~to property, ~~with~~plant ~~Guaranty~~and ~~Bank~~equipment of $1.8 million. Investing activities during 2007 primarily consisted of the acquisition of Southland, net of cash acquired, of $20.9 million, partially offset by $10.8 million in proceeds from the sale of investment securities, net of investment purchases.

WeNet ~~incurred negative~~ cash ~~flows~~used ~~from operations~~ in ~~2008. In~~financing ~~order~~activities toduring ~~improve~~the ~~profitability~~year ~~and~~ended ~~enhance cash flow~~December 31, ~~we decided to shift~~2009 ~~our~~was ~~focus away from commodity component markets towards vertical computing segments~~$8. As2 ~~a result~~million, onprimarily ~~December 17,~~due ~~2008, we announced our plan~~ to ~~terminate~~the ~~manufacturing~~repayment of ~~our Memory Solutions business in~~ the ~~first~~convertible ~~quarter~~notes ~~of 2009. We will continue~~ to ~~license~~Austin ~~our~~Ventures ~~extensive stacking patent portfolio, but have transferred our memory~~ and ~~stacking~~the ~~customers~~minority ~~and~~holder ~~certain manufacturing assets to third parties. Based on these changes~~ in ~~our~~connection ~~business~~with ~~operations,~~the weAugmentix ~~believe~~acquisition ~~that~~for ~~our current~~$5.1 ~~assets,~~million ~~including cash~~ and ~~cash~~$2.9 ~~equivalents~~million, ~~investments~~respectively. ~~and~~Net ~~expected~~ cash ~~flow~~used ~~from~~in ~~operations,~~financing ~~will~~activities during bethe ~~sufficient~~year toended ~~fund our operations~~December 31, ~~our~~2008 ~~anticipated~~was ~~additions~~$10.0 ~~to property~~million, ~~plant~~primarily ~~and~~due ~~equipment,~~to ~~interest payments and any share repurchases under our stock repurchase program for at least~~ the ~~next~~Augmentix 12acquisition ~~months.~~related ~~However, it is possible that we may need or elect~~ to ~~raise additional funds to fund our activities beyond~~ the ~~next~~return ~~year~~of orcapital to ~~acquire~~Austin ~~other~~Ventures ~~businesses,~~of ~~products~~$9.8 ~~or technologies~~million. WeNet ~~could~~cash ~~raise~~used ~~these~~in ~~funds~~financing byactivities ~~borrowing~~during ~~money or selling more stock to~~ the ~~public~~year orended December 31, to2007 ~~selected~~was ~~investors~~$4.6 ~~In addition~~million, ~~while~~primarily wedue ~~may not need additional funds, we may elect~~ to sell additional equity securities or obtain credit facilities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing more equity or convertible debt securities, the ~~ownership percentages~~purchase of ~~existing~~our ~~stockholders~~common ~~would~~stock beas ~~reduced.~~part ~~In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those~~ of ~~the~~our ~~holders~~stock ofrepurchase ~~our~~program ~~common~~for ~~stock~~$4.9 million.

During the first quarter of 2009, a financial institution issued a letter of credit to one of our suppliers, which guarantees up to $0.5 million of our outstanding account balance to this supplier. As a result of this agreement, we are required to maintain a compensating balance of $0.5 million on deposit with the financial institution for a term of 12 months ending on February 26, 2010. As of December 31, 2009, we had this required amount on deposit.

We incurred negative cash flows from operations in 2009 and 2008. In order to improve profitability and enhance cash flow, we shifted our focus away from commodity component markets towards vertical computing segments. During the fourth quarter of 2008, we announced our plan to terminate manufacturing of our Memory Solutions business in the first quarter of 2009. We continued to receive royalties with respect to our stacking patent portfolio but transferred our memory and stacking customers and certain manufacturing assets to third parties. In 2009, our combined cash plus investments position decreased by an average of approximately $3 million per quarter, which will not be sustainable in future periods. We have undertaken, and will continue to undertake, cost reductions to reduce our operating expenses.

During December 2009, we received $7.7 million in connection with our status as a claimant in the In Re Dynamic Random Access Memory (DRAM) Antitrust Litigation. Also, we expect to receive tax refunds of approximately $7.2 million at such time as our revised returns and carry back claims can be approved by the IRS, which we currently expected to occur in 2010. On March 9, 2010, we received $6.3 million in tax refunds from the United States Treasury, primarily as a result of the tax carryback claims, and expect to receive an additional $0.9 million during the remainder of 2010. Based on these changes in our business operations and he receipt of these two payments, we believe that our current assets, including cash and cash equivalents, investments and expected cash flow, will be sufficient to fund our operations and our anticipated additions to property, plant and equipment for at least the next 12 months.

It is possible that we may need or elect to raise additional funds to fund our operations beyond the next year or to acquire other businesses, products or technologies. We could try to raise these funds by borrowing money

or selling more stock to the public or to selected investors. In addition, while we may not need additional funds, we may elect to sell additional equity securities or obtain credit facilities for other reasons. However, we cannot assure that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing more equity or by issuing convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Manufacturing Relationship

In addition, we have an arrangement with a third-party manufacturer, which purchases and takes title of certain inventory relating to certain of our products upon shipment from the original manufacturers of such inventory. This manufacturer recovers the cost of inventory upon the sale of finished goods to us. This program offers us several advantages; however, this arrangement also results in concentrated credit and inventory risk for us. As of December 31, 2009, our accounts receivable reflected amounts owed to us of $5.0 million related to the transfer of inventory to such third-party manufacturer. Our liability to our vendors for the production of finished goods and inventory delivered by the manufacturer relating to certain of our products was approximately $4.1 million.

Related-Party Transactions

Revenue

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

Lease Agreement

In connection with our Southland acquisition, on September 1, 2007, we entered into a lease agreement with an entity owned by two former Entorian employees (former Southland principals) to lease our Irvine facility for a term of three years.

As a result of the relocation of our manufacturing operations from Irvine, California to Reynosa, Mexico and our plan to sublease the Irvine facility, we determined the useful life of the leasehold improvements related to our Irvine facility did not extend beyond June 30, 2008. As a result of our review, we accelerated the depreciation associated with our Irvine leasehold improvements, resulting in an additional depreciation charge of approximately $0.6 million, or $0.01 per share, during 2008.

On November 3, 2008, we entered into a settlement agreement with these employees and agreed to pay 35% of our remaining two-year lease obligation on the building, or approximately $0.3 million, in exchange for a release from this lease. In addition, we incurred approximately $0.4 million and $0.2 million in operating expense related to this lease during 2008 and 2007, respectively.

Augmentix Acquisition

Our acquisition of Augmentix was a transaction between commonly controlled entities, as our majority owner, Austin Ventures, also owned approximately 55% of the outstanding equity securities of Augmentix (on an as-converted to common stock basis). As a result of the acquisition, Austin Ventures received approximately $15.5 million in cash and notes receivable. This amount does not correspond to the ownership split between Austin Ventures and minority shareholders, primarily due to the accrued dividends due to the preferred holders upon completion of the acquisition. During December 2009, we paid off our convertible notes at a discount of 20% plus any unpaid interest, See Note 12, “Convertible Notes Payable,” to the Consolidated Financial Statements for additional information regarding the convertible notes issued.

Critical Accounting Estimates

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

Revenue Recognition and Presentation. ~~Our~~We ~~Memory~~purchase ~~Solutions~~certain ~~business~~inventory ~~engages~~for inresale ~~transactions where we sell consigned inventory~~ to ~~third~~our ~~parties~~manufacturing ~~and where we provide licensees with inventory~~partners. We evaluate these transactions and determine if the costs and revenue should be presented on a gross or net basis. In making this determination, we primarily consider ~~the following~~if: (1) we ~~are~~did not ~~adding~~add value to the inventory through our manufacturing processes, (2) we dodid not take risk of ownership of the inventory and (3) our net revenue from the transaction is predefined. In situations where these conditions ~~are~~were met, we net the expense of the components against the revenue from the transaction. ~~For the year ended December 31, 2008 we recorded approximately $0.7 million in consigned inventory sales, net of cost.~~

WeRoyalty ~~recognize~~revenue ~~initial~~from ~~nonrefundable~~our license ~~fees~~agreements ~~when~~is ~~(1) we~~recognized ~~enter~~in ~~into a legally binding arrangement with a customer for~~ the ~~license,~~quarter ~~(2) we~~in ~~deliver~~which the products, (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties and (4) collection is reasonably assured. We may provide training and/or other assistance to our licensees ~~under~~report ~~the~~royalties ~~terms~~to ~~of the license agreement~~us. ~~The amount of training~~

44Deferred Revenue. Our agreement with Dell related to sales of a specific product line allows for price reductions, issued as rebates, as certain volume levels of shipments are reached. The per-unit price of lower-quantity tiers is variable above a certain minimum price, since the price can be retroactively adjusted downward if certain volume levels are satisfied. Pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, we consider these pricing changes as a right of return and defer the amount of rebate that could occur until the end of the period when the actual volume levels are reasonably estimable. We estimate the amount of sales based on experience as well as forecasts provided by Dell. Revenue above the fixed minimum price is deferred until the actual volume levels are achieved. The estimate is revised each reporting period and is ultimately adjusted to actual at the end of the year.

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

Goodwill was our only intangible asset that was not amortized. We evaluated goodwill annually for impairment as of October 1 and periodically when indicators of impairment existed. The goodwill impairment test required judgment regarding the determination of fair value of our reporting units, and the determination of fair value of our assets and liabilities. A reporting unit is defined as a component of an entity for which the operating results are regularly reviewed by management and discrete financial information is available. We periodically assessed our goodwill for indications of impairment on a reporting unit level.

Inventory and Inventory Reserves. We value our inventory at standard cost and review our inventory for quantities in excess of production requirements and for obsolescence. We maintain a reserve for excess, slow

ormoving ~~assistance provided is limited~~ and ~~incidental~~obsolete toinventory, ~~the~~as ~~licensed~~well ~~technology.~~as Infor ~~instances~~inventory ~~where~~with ~~training~~a orcarrying ~~other~~value ~~assistance~~in isexcess ~~provided~~of ~~under~~its ~~the~~market ~~terms~~value. ofWe ~~a license~~review ~~agreement,~~inventory ~~the~~on ~~estimated~~hand ~~fair~~quarterly ~~value~~and ofrecord ~~such~~a ~~services~~provision isfor ~~deferred~~lower ~~until~~of ~~these~~cost ~~services~~or market, ~~are~~and ~~provided.~~for ~~The~~excess, ~~associated~~slow ~~revenue~~moving isand ~~included~~obsolete ininventory, ~~product~~if ~~revenue~~necessary. InThe ~~instances~~review ~~where~~is webased ~~provide~~on ~~training~~several orfactors, ~~other~~including ~~assistance~~a ~~that~~current isassessment ~~considered inconsequential~~of tofuture ~~the~~product ~~license agreement~~demand, ~~the~~historical ~~estimated~~experience ~~fair~~and ~~value~~market ofconditions. ~~the~~If ~~services~~actual isconditions ~~recognized~~are inless favorable ~~connection~~than ~~with~~those ~~the~~that ~~initial~~we ~~license~~projected, ~~fee~~additional ~~and~~inventory isreserves ~~included~~may inbe ~~license revenue~~required.

~~Royalty~~Warranty. We ~~revenue~~warrant ~~from~~products ~~our~~for ~~Memory~~periods ~~Solutions~~up ~~business~~to ~~and~~37 ~~Rugged~~months ~~Technology~~following ~~Solutions~~the ~~business~~manufacture ~~license~~of ~~agreements~~our isproducts. While ~~recognized~~we engage in ~~the~~extensive ~~quarter~~product inquality ~~which~~programs ~~our licensees~~and ~~report~~processes, ~~royalties~~including actively tomonitoring ~~us.~~and ~~Certain~~evaluating ~~licensees~~the doquality ~~not~~of ~~provide~~our uscomponent ~~with~~suppliers, ~~forward~~our ~~estimates~~warranty orobligations ~~current-quarter~~are ~~information~~affected ~~concerning~~by ~~their~~product ~~shipments.~~failure ~~Because~~rates, wematerial ~~are~~usage ~~not~~and ~~able~~service todelivery ~~reasonably~~costs ~~estimate~~incurred ~~the~~in ~~amount~~correcting ofa ~~royalties~~product ~~earned~~failure. ~~during~~At ~~the~~each ~~period~~balance sheet indate, ~~which~~we ~~these~~record ~~licensees~~a ~~actually~~liability ~~ship~~for ~~products~~the ~~using~~estimated ~~our~~level ~~technologies,~~of wewarranty doclaims ~~not~~on ~~recognize~~previously ~~royalty~~recorded revenue. Should ~~until~~actual ~~the~~product ~~royalties~~failure ~~are~~rates, ~~reported~~material tousage usor ~~and~~service ~~the~~delivery ~~collection~~costs ofincrease, ~~these~~our ~~royalties~~warranty iscosts ~~reasonably~~to ~~assured.~~support the products in the field could increase.

Deferred Revenue. Our agreement with our largest OEM related to sales of a specific product line within our Rugged Technology Solutions business allows for price reductions, issued as rebates, as certain volume levels of shipments are reached. The per-unit price of lower-quantity tiers is variable above a certain minimum price, since the price can be retroactively adjusted downward if certain volume levels are satisfied. Pursuant to Emerging Issues Task Force 01-9, “Accounting for Consideration Given by a Vendor to a Customer” (EITF 01-9) Issue 6, we consider these pricing changes as a right of return and defer the amount of rebate that could occur until the end of the period when the actual volume levels are reasonably estimable. We estimate the amount of sales based on experience as well as forecasts provided by our OEM. Revenue above the fixed minimum price is deferred until the actual volume levels are achieved. The estimate is revised each reporting period and is ultimately adjusted to actual at the end of the year.

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

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

As of October 1, 2008, the goodwill remaining on the balance sheet was associated with our Rugged Technology Solutions segment. At that time we undertook our annual goodwill assessment and determined that no impairment of goodwill existed. However, during the fourth quarter of 2008, due to continued challenges presented by general economic conditions and our low market capitalization, we conducted a review to update the fair value of the Rugged Technology Solutions segment. As a result of that review, we recorded a non-cash charge of $4.0 million during the fourth quarter of 2008 for the impairment of the goodwill created by the Augmentix acquisition. The impairment charge reflected increased uncertainty in the business due to recent economic developments.

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

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

Warranty. We repair or replace products that have been authorized for repair or replacement by our customers. We utilize a third-party service provider to perform a full range of service and support options, ranging from telephone, online, on-site, return-to-depot, and customer replaceable units (parts) available in the continental U.S. and in select international cities. The costs of such repairs or replacements are expensed as actual costs are incurred. We warrant products for periods ranging from 12 to 37 months following the sale of our products. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs increase, our warranty costs to support the products in the field could increase.

Income Taxes. We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to affect taxable income. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. Our effective tax rate considers our judgment of expected tax liabilities in the various taxing jurisdictions, within which we are subject to tax as well as the future recovery of deferred tax assets. The recorded amounts of income tax are subject to adjustment upon audit, changes in interpretation and changes in judgment utilized in determining estimates.

Stock-Based Compensation. Effective January 1, 2006, we adopted the fair value recognition provisions of ~~Statement~~FASB ofASC ~~Financial~~Topic ~~Accounting~~718 ~~Standards~~using Nothe modified prospective transition method. ~~123~~ ~~(Revised~~Under ~~2004)~~the fair value recognition provisions of FASB ASC Topic 718, ~~“Share~~we recognize stock-~~Based~~based ~~Payment”~~compensation ~~(SFAS 123(R))~~net ~~using~~of an estimated forfeiture rate on a straight-line basis over the ~~modified~~requisite ~~prospective~~service ~~transition~~period ~~method~~of the award and, ~~therefore,~~only werecognize ~~did~~compensation ~~not~~cost ~~restate~~for ~~prior~~those shares ~~periods’~~expected ~~results~~to vest.

Under this method, we recognize compensation expense for all share-based payments granted after January 1, 2006, as well as those granted prior to but not yet vested as of January 1, 2006, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award and only recognize compensation cost for those shares expected to vest. Prior to SFAS 123(R) adoption, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25).

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

Recent Accounting Pronouncements

In ~~October 2008~~January 2010, the ~~Financial~~FASB issued Accounting Standards ~~Board~~Update No. 2010-06, “Fair Value Measurements Disclosures” (~~FASB~~ASU 2010-06), ~~issued~~which ~~FASB~~requires ~~Staff~~an ~~Position~~entity ~~No.~~to ~~FAS 157-3,~~disclose ~~“Determining~~separately the ~~Fair~~amounts ~~Value~~of significant transfers in to and out of aLevel ~~Financial~~1 ~~Asset~~and ~~When~~Level 2 fair value measurements and to describe the ~~Market~~reasons for ~~That~~the ~~Asset~~transfers. IsIn addition, ~~Not~~the ~~Active”~~information ~~(FSP~~about ~~157-3)~~purchases, tosales, ~~clarify~~issuances and settlements must be presented separately in the ~~application~~reconciliation offor Level 3 fair value measurements. ofAlso, athis ~~financial~~update ~~asset~~requires ~~when~~disclosures about the ~~market~~valuation techniques and inputs used to measure fair value for ~~that~~both ~~asset~~recurring isand ~~not~~nonrecurring ~~active~~fair value measurements using Level 2 and Level 3 inputs. ~~This clarifying~~ASU ~~guidance~~2010-06 ~~became~~is effective ~~upon~~for ~~issuance,~~interim ~~including~~and ~~prior~~annual periods beginning after December 15, 2009, except for disclosures regarding purchases, sales, issuances and settlements, which ~~financial~~are ~~statements~~effective ~~had~~for ~~not~~fiscal ~~been~~years ~~issued~~beginning after December 15, 2010. ~~The~~We do not expect the adoption of ~~FSP~~ASU ~~157~~2010-306 ~~did~~to ~~not~~have ~~significantly~~a material impact on our financial ~~position~~statement orfootnote ~~results of operations~~disclosures.

In40 April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The impact of adopting FSP 142-3 will depend on the future business combinations or asset acquisitions that we may pursue after its effective date.

In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delayed the effective date of FASB Statement No. 157, “Fair Value Measurements” (SFAS 157) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Non-recurring non-financial assets and liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, intangible assets measured at fair value for impairment, and those initially measured at fair value in a business combination. We do not expect the adoption of SFAS 157 for our non-financial assets and liabilities to have a material impact on our financial position and results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (SFAS 141R). This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or

~~after~~Subsequent ~~the~~Events beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will depend on the future business combinations that we may pursue after its effective date.

~~Subsequent~~We ~~Event~~have evaluated subsequent events through March 30, 2010, the filing date of this Annual Report on Form 10-K.

On March 1, 2010, we received a letter from The NASDAQ Stock Market notifying us that for the 30 consecutive business days preceding the date of the letter, our listed securities did not meet the minimum market value of publicly held shares required for continued inclusion on The NASDAQ Global Market. On March 10, 2010, we submitted a formal notice to NASDAQ of our decision to voluntary delist our common stock from the NASDAQ Global Market and our intent to file a Form 25 with the SEC and NASDAQ to delist our common stock on or about March 22, 2010, with the delisting taking effect no earlier than ten days thereafter. We filed a Form 25 on March 22, 2010, and we expect that the last day of trading of our common stock on the NASDAQ Global Market will be on March 31, 2010. After filing the Form 25, we also intend to ~~record~~terminate ~~charges~~the ~~related~~registration of our common stock and suspend our reporting obligations under the Exchange Act by filing a Form 15 with the SEC on or about April 2, 2010. We anticipate that our common stock will be quoted on the Pink Sheets, an electronic quotation service for over-the-counter securities, and we intend to ~~closing~~continue to provide information to our ~~manufacturing~~stockholders ~~facility~~and to take such actions within our control to enable our common stock to be quoted in ~~Mexico~~the ofPink ~~approximately~~Sheets $2so that our stockholders will have a place to trade their shares.~~0 million~~ There is no guarantee, however, that a broker will continue to make a market in our common stock, that we will be able to take the ~~first~~actions ~~quarter~~required to enable our shares to be quoted in the Pink Sheets, or that trading of ~~2009~~our common stock will continue on the Pink Sheets or otherwise. See Note 26, “Subsequent Events,” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information regarding the delisting of our common stock from the NASDAQ Global Market and deregistering our common stock under the Exchange Act.

In connection with closing our manufacturing facility in Mexico, we terminated approximately 140 employees in the fourth quarter of 2008 and the first quarter of 2009, all of whom signed a release of claims in exchange for severance. These agreements released all legal claims against us. Approximately 80 of these former employees have filed a legal action against us with the Labor Board in Reynosa because they do not believe we paid them their full severance amounts as required by Mexican law. Given the fact that all of these former employees signed a release of claims, appeared before the Labor Board when signing their releases stating that they agreed with the terms of the releases, and we paid the severance set forth in the releases, we do not believe we have any liability with respect to these claims. We plan to defend these actions filed against us.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk. The primary objective of our investment activities is to preserve principal while maximizing the related income without significantly increasing risk. Even so, some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates will have a significant impact on our interest income. AsAt of December 31, ~~2008~~2009, all of our cash was held in deposit or money market accounts, or invested in investment grade securities. AtFrom ~~December 31,~~time ~~2008~~to time, we ~~had~~may have amounts on deposit with financial institutions that ~~were~~are in excess of the federally insured limit of $250,000; however, the majority of our deposits are held in accounts insured by the Federal Deposit Insurance Corporation (FDIC) Transaction Account Guarantee Program, which provided an unlimited guarantee through December 31, 2009. We have not experienced any losses on deposits of cash and cash equivalents.

Our ~~exposure~~short-term investments toinclude ~~market~~approximately ~~rate~~$6.5 ~~risk for~~million ~~changes~~ in ~~interest~~ARS. ~~rates~~During ~~relates~~the tofirst ~~our~~quarter ~~convertible~~of ~~notes.~~2008, ~~The~~auctions ~~fair~~for ~~market~~certain ~~value~~ of ~~our~~these ~~convertible~~securities ~~notes~~began ~~is subject~~ to ~~interest~~fail. ~~rate~~The ~~risk~~funds ~~because~~associated ofwith ~~their~~failed ~~fixed~~auctions ~~interest~~are ~~rate~~not ~~and~~expected ~~market~~to ~~risk~~be ~~due~~accessible tountil ~~the~~June 30, ~~convertible~~2010, ~~feature~~or until ofa ~~our~~successful ~~convertible notes.~~auction ~~Generally~~occurs, the ~~fair~~issuer ~~market~~redeems ~~value~~the ofsecurities, ~~fixed~~a ~~interest~~buyer ~~rate~~is ~~debt~~found ~~will~~outside ~~increase~~of asthe ~~interest~~auction ~~rates~~process ~~fall~~or the underlying securities mature. Additionally, ~~and~~if ~~decrease~~we asdetermine ~~interest~~that ~~rates~~an ~~rise.~~other-than-temporary ~~The~~decline ~~fair~~in ~~market~~the fair value of any of our ~~convertible~~ARS ~~notes~~has ~~will~~occurred, ~~also~~we ~~increase~~may asbe ~~the~~required ~~market~~to ~~price~~adjust ofthe ~~our~~carrying ~~stock increases~~value ~~and~~of ~~decrease~~the asinvestments ~~the~~through ~~market~~an ~~price~~impairment ~~falls~~charge. ~~The~~See ~~interest~~Note ~~and~~6, ~~market~~“Investments,” ~~value~~to ~~changes affect~~ the ~~fair~~Consolidated ~~market~~Financial ~~value~~Statements ofincluded ~~our~~in ~~convertible~~this ~~notes~~Annual ~~but~~Report doon ~~not~~Form ~~impact~~10-K for ~~their~~additional ~~carrying value~~information.

~~Our~~41 long-term investments include approximately $6.7 million in ARS. During the first quarter of 2008, auctions for certain of these securities began to fail. The funds associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. Additionally, if we determine that an other-than-temporary decline in the fair value of any of our ARS has occurred, we may be required to adjust the carrying value of the investments through an impairment charge. See Note 6, “Investments,” for additional information.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Set forth below are our audited consolidated financial statements for the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm		5043
Consolidated Balance Sheets		5144
Consolidated Statements of Operations		5245
Consolidated Statements of Stockholders’ Equity		5346
Consolidated Statements of Cash Flows		5547
Notes to the Consolidated Financial Statements		5648

4942

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Entorian Technologies Inc.

We have audited the accompanying consolidated balance sheets of Entorian Technologies Inc. (the Company) as of December 31, ~~2008~~2009 and ~~2007~~ 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2008~~2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Entorian Technologies Inc. at December 31, ~~2008~~2009 and ~~2007~~2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2008~~2009 in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Austin, Texas

March 1030, ~~2009~~2010

5043

ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	December 31,2008			December 31,2007
	December 31,2009			December 31,2008
ASSETS
Current assets:
Cash and cash equivalents	$	151,~~651~~862		$	3415,~~013~~651
Investments		17,~~639~~046			271,~~912~~639
Accounts receivable, net of allowances of $597 in 2008 and $8 in 2007		5,256			5,681
Accounts receivable, net of allowances of $86 in 2009 and $597 in 2008		12,195			5,256
Inventories		58,~~018~~480			25,~~921~~018
Prepaid expenses		~~510~~310			~~633~~510
Income tax recoverable		1,571			1,969
Income tax receivable		7,221			1,571
Deferred tax asset		~~271~~279			~~143~~271
Other current assets		~~1,592~~371			~~916~~1,592
Total current assets		3137,~~508~~764			7431,~~188~~508
Property, plant and equipment, net		43,~~439~~290			94,~~212~~439
Long-term investments		~~7,337~~—			—7,337
Goodwill		—			4,953
Other intangible assets, net		8,061			10,611
Other intangible assets, net		10,611			10,826
Other assets		72			81
Other assets		81			234
Total assets	$	49,187		$	53,976
Total assets	$	53,976		$	99,413
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	411,~~995~~250		$	34,~~348~~995
Accrued compensation		~~1,951~~219			1,~~428~~951
Accrued liabilities		1,~~535~~312			31,~~077~~490
Total current liabilities		8,481			7,853
Deferred revenue		26			45
Other accrued liabilities		180			253
Total current liabilities		12,807			8,481
Deferred tax liabilities		170			38
Other accrued liabilities		38			180
Convertible notes payable		3,847			—
Deferred tax liabilities		269			170
Related party convertible notes payable		6,805			—
Convertible notes payable		—			3,847
Redeemable preferred stock; $0.001 par value; 5,000,000 shares authorized		—			—
Related party convertible notes payable		—			6,805
Redeemable preferred stock; $0.001 par value; 5,000,000 shares
authorized		—			—
Stockholders’ equity:
Common stock; $0.001 par value; 100,000,000 shares authorized at December 31, 2008 and 2007; 53,362,815 shares and 52,876,038 shares issued at December 31, 2008 and 2007, respectively		53			52
Common stock; $0.001 par value; 8,333,333 shares authorized at December 31, 2009 and 2008; 4,457,769 shares and 4,446,901 shares issued at December 31, 2009 and 2008, respectively		4			4
Additional paid-in capital		~~149~~150,~~375~~658			~~163~~149,~~298~~424
Treasury stock, at cost; 6,466,904 shares and 6,172,650 shares at December 31, 2008 and 2007, respectively		(25,850	)		(25,601	)
Treasury stock, at cost; 569,363 shares and 538,909 shares at December 31, 2009 and 2008, respectively		(25,982	)		(25,850	)
Accumulated other comprehensive income		26—			4426
Accumulated deficit		(8988,~~111~~607	)		(4689,~~524~~111	)
Total stockholders’ equity		3436,~~493~~073			9134,~~269~~493
Total liabilities and stockholders’ equity	$	5349,~~976~~187		$	9953,~~413~~976

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

5144

ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2008			2007			2006
	2009			2008			2007
Revenue:
Product	$	5243,~~494~~011		$	3452,~~490~~494		$	4334,~~084~~490
License		32,~~377~~047			63,~~380~~377			126,~~472~~380
Total revenue		5545,~~871~~058			4055,~~870~~871			5540,~~556~~870
Cost of revenue:
Product (1)		5135,~~557~~770			2851,~~250~~557			28,~~247~~250
Amortization of acquisition intangibles		32,~~067~~503			43,~~393~~067			64,~~623~~393
Impairment of acquisition intangibles and fixed assets		~~4,687~~—			~~684~~4,687			—684
Total cost of revenue		5938,~~311~~273			3359,~~327~~311			3433,~~870~~327
Gross profit (loss)		(36,~~440~~785	)		7(3,~~543~~440	)		207,~~686~~543
Operating expenses:
Selling, general and administrative (1)		1510,~~613~~587			15,~~937~~613			1415,~~805~~937
Research and development (1)		78,~~446~~410			57,~~654~~446			85,~~238~~654
Restructuring		32,~~149~~227			~~332~~3,149			~~391~~332
Provision for doubtful accounts		~~589~~288			43589			—43
Amortization of acquisition intangibles		~~570~~94			~~730~~570			~~817~~730
Impairment of acquisition intangibles		~~4,312~~—			—4,312			—
Goodwill impairment		~~9,036~~(159	)		279,~~903~~036			—27,903
Total operating expenses		4021,~~715~~447			5040,~~599~~715			2450,~~251~~599
Loss from operations		(4414,~~155~~662	)		(4344,~~056~~155	)		(343,~~565~~056	)
Other income (expense):
Interest income		1,230			3,051			3,077
Gain on debt extinguishment		2,012			—			—
Interest expense		(308	)		(17	)		(19	)
Gain on litigation settlement		7,718			—			—
Other, net		(185	)		25			(77	)
Interest income		173			1,230			3,051
Total other income, net		737			3,059			2,981
Interest expense		(590	)		(308	)		(17	)
Loss before income taxes		(43,418	)		(39,997	)		(584	)
Other, net		408			(185	)		25
Benefit for income taxes		(831	)		(10	)		(130	)
Total other income, net		9,721			737			3,059
Net loss	$	(42,587	)	$	(39,987	)	$	(454	)
Loss before income taxes		(4,941	)		(43,418	)		(39,997	)
Loss per share:
Benefit for income taxes		(5,445	)		(831	)		(10	)
Basic	$	(0.91	)	$	(0.85	)	$	(0.01	)
Net income (loss)	$	504		$	(42,587	)	$	(39,987	)
Diluted	$	(0.91	)	$	(0.85	)	$	(0.01	)
Income (loss) per share:
Shares used in computing loss per share:
Basic	$	0.13		$	(10.92	)	$	(10.17	)
Basic		46,799			47,156			48,080
Diluted	$	0.13		$	(10.92	)	$	(10.17	)
Diluted		46,799			47,156			48,080
Shares used in computing income (loss) per share:
Basic		3,900			3,900			3,930
Diluted		3,923			3,900			3,930
(1) Includes stock-based compensation as follows:
Cost of revenue	$	~~309~~19		$	~~426~~309		$	~~595~~426
Selling, general and administrative expense	$	~~1,953~~938		$	41,~~732~~953		$	4,~~599~~732
Research and development expense	$	~~431~~281		$	~~790~~431		$	~~1,022~~790

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

5245

ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

	Common Stock					AdditionalPaid-InCapital				TreasuryStock				DeferredStock-BasedCompensation				AccumulatedOtherComprehensiveIncome (Loss)				AccumulatedDeficit				TotalStockholders’Equity
							AdditionalPaid-InCapital				TreasuryStock				AccumulatedOtherComprehensiveIncome (Loss)				AccumulatedDeficit				TotalStockholders’ Equity
	Shares		Amount
	Common Stock
Balances at December 31, 2005	51,809,007		$	51		$	156,252			$	(12,572	)		$	(6,332	)		$	(32	)		$	(6,083	)		$	131,284
	Shares			Amount
ESPP purchases	35,970			—			171				—				—				—				—				171
Balances at December 31, 2006	4,376,139			$	4		$	157,242			$	(20,676	)		$	(4	)		$	(6,537	)		$	130,029
Share repurchases	—			—			—				(8,104	)			—				—				—				(8,104	)
ESPP purchases	1,035				—			34				—				—				—				34
Exercise of stock options	668,694			1			773				—				—				—				—				774
Share repurchases	—				—			—				(4,925	)			—				—				(4,925	)
Vesting of previously exercised unvested stock options	—			—			17				—				—				—				—				17
Exercise of stock options	20,497				—			187				—				—				—				187
Stock-based compensation	—			—			6,216				—				—				—				—				6,216
Vesting of previously exercised unvested stock options	—				—			12				—				—				—				12
Reclassification resulting from the adoption of SFAS 123(R)	—			—			(6,332	)			—				6,332				—				—				—
Stock-based compensation	—				—			5,777				—				—				—				5,777
Tax benefit from disqualifying disposition, net	—			—	—		96	95			—	—			—	—			—	—			—	95			96
Net loss	—			—			—				—				—				—				(454	)			(454	)
Restricted stock units issued	8,665				—			—				—				—				—				—
Unrealized gain on investment securities, net of tax	—			—			—				—				—				28				—				28
Net loss	—				—			—				—				—				(39,987	)			(39,987	)
Total comprehensive loss	—			—			—				—				—				—				—				(426	)
Unrealized gain on investment securities, net of tax	—				—			—				—				48				—				48
Balances at December 31, 2006	52,513,671			52			157,193				(20,676	)			—				(4	)			(6,537	)			130,028
Total comprehensive loss	—				—			—				—				—				—				(39,939	)
ESPP purchases	12,420			—			34				—				—				—				—				34
Balances at December 31, 2007	4,406,337				4			163,347				(25,601	)			44				(46,524	)			91,270
Share repurchases	—			—	—		—	—			~~(4,925~~	)(249	)		—	—			—	—			—	(249	)		~~(4,925~~	)
Exercise of stock options	~~245~~26,~~967~~245			—	—		~~187~~	104			—	—			—	—			—	—			—	104			~~187~~
Vesting of previously exercised unvested stock options	—			—			12				—				—				—				—				12
Stock-based compensation	—				—			2,609				—				—				—				2,609
Stock-based compensation	—			—			5,777				—				—				—				—				5,777
Restricted stock units issued	14,320				—			—				—				—				—				—
Tax benefit from disqualifying disposition, net	—			—			95				—				—				—				—				95
Return of capital to majority owner in connection with the Augmentix acquisition	—				—			(16,636	)			—				—				—				(16,636	)
Restricted stock units issued	103,980			—			—				—				—				—				—				—
Net loss	—				—			—				—				—				(42,587	)			(42,587	)
Net loss	—			—			—				—				—				—				(39,987	)			(39,987	)
Unrealized loss on investment securities, net of tax	—				—			—				—				(18	)			—				(18	)
Unrealized gain on investment securities, net of tax	—			—			—				—				—				48				—				48
Total comprehensive loss	—				—			—				—				—				—				(42,605	)
Total comprehensive loss	—			—			—				—				—				—				—				(39,939	)
Balances at December 31, 2008	4,446,901				4			149,424				(25,850	)			26				(89,111	)			34,493
Balances at December 31, 2007	52,876,038		$	52		$	163,298			$	(25,601	)		$	—			$	44			$	(46,524	)		$	91,269
Share repurchases	—				—			—				(132	)			—				—				(132	)
Exercise of stock options	7,929				—			2				—				—				—				2
Stock-based compensation	—				—			1,232				—				—				—				1,232
Restricted stock units issued	3,184				—			—				—				—				—				—
Reverse stock split fractional shares	(246	)			—			—				—				—				—				—
Net income	—				—			—				—				—				504				504
Unrealized loss on investment securities	—				—			—				—				(26	)			—				(26	)
Total comprehensive income	—				—			—				—				—				—				478
Balances at December 31, 2009	4,457,768			$	4		$	150,658			$	(25,982	)		$	—			$	(88,607	)		$	36,073

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

5346

ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(in thousands, except share amounts)

				AdditionalPaid-InCapital			TreasuryStock			AccumulatedOtherComprehensiveIncome (Loss)			AccumulatedDeficit			TotalStockholders’Equity
	Common Stock
	Shares	Amount
Balances at December 31, 2007	52,876,038	$	52	$	163,298		$	(25,601	)	$	44		$	(46,524	)	$	91,269
Share repurchases	—		—		—			(249	)		—			—			(249	)
Exercise of stock options	314,937		1		104			—			—			—			105
Stock-based compensation	—		—		2,609			—			—			—			2,609
Tax benefit from disqualifying disposition, net	—		—		—			—			—			—			—
Restricted stock units issued	171,840		—		—			—			—			—			—
Return of capital to majority owner in connection with the Augmentix acquisition	—		—		(16,636	)		—			—			—			(16,636	)
Net loss	—		—		—			—			—			(42,587	)		(42,587	)
Unrealized loss on investment securities, net of tax	—		—		—			—			(18	)		—			(18	)
Total comprehensive loss	—		—		—			—			—			—			(42,605	)
Balances at December 31, 2008	53,362,815	$	53	$	149,375		$	(25,850	)	$	26		$	(89,111	)	$	34,493

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

ENTORIAN TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2008			2007			2006
	2009			2008			2007
Cash flows from operating activities:
Net loss	$	(42,587	)	$	(39,987	)	$	(454	)
Net income (loss)	$	504		$	(42,587	)	$	(39,987	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of intangibles		74,~~275~~483			87,~~502~~275			118,~~726~~502
Impairment of intangibles and fixed assets		~~18,034~~(159	)		2818,~~587~~034			—28,587
Stock-based compensation expense		21,~~693~~238			52,~~948~~693			65,~~216~~948
Excess tax benefit related to the exercise of employee stock options		—			(95	)		(315	)
Gain on debt extinguishment		(2,012	)		—			—
Loss on patent abandonment		~~1,318~~154			~~284~~1,318			~~127~~284
Other non-cash charges		~~564~~165			~~208~~564			~~(46~~113	)
Deferred income taxes		490			~~1,169~~4			(41,~~200~~169	)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		4(6,~~355~~939	)		4,~~205~~355			~~(417~~4,205	)
Inventories		4(3,~~354~~462	)		14,~~613~~354			(1,~~649~~613	)
Other current assets		~~495~~687			81495			~~179~~81
Income tax receivable/payable		~~397~~(5,650	)		~~(2,039~~397	)		(2,~~969~~039	)
Accounts payable		(6,~~047~~255	)		(~~261~~6,047	)		~~825~~(261	)
Accrued liabilities		(2,~~630~~033	)		~~661~~(2,630	)		~~(12~~661	)
Deferred revenue		(~~644~~19	)		7(644	)		~~(283~~7	)
Net cash provided by (used in) operating activities		(126,~~419~~698	)		8(12,~~883~~419	)		148,~~666~~883
Cash flows from investing activities:
Purchases of investments		~~(4,418~~—	)		(374,~~868~~418	)		(4137,~~957~~868	)
Sales and maturities of investments		232,~~106~~010			4823,~~745~~106			3848,~~716~~745
Additions to property, plant and equipment		(1,~~838~~416	)		(~~725~~1,838	)		(~~1,468~~725	)
Proceeds from sale of equipment		52773			~~103~~52			~~226~~103
Acquisition of Southland Micro Systems, Inc., net of cash acquired		—			~~(20,874~~—	)		—(20,874	)
Acquisition of Augmentix Corporation related to minority owner, net of cash acquired		~~(12,480~~—	)		—(12,480	)		—
Patent application costs		(~~369~~255	)		(~~420~~369	)		(~~537~~420	)
Net cash provided by (used in) investing activities		41,~~053~~112			~~(11~~4,~~039~~053	)		(511,~~020~~039	)
Cash flows from financing activities:
Net proceeds from the issuance of common stock		~~105~~1			~~221~~105			~~943~~221
Excess tax benefit related to the exercise of employee stock options		—			95			315
Share repurchases		(132	)		(249	)		(4,925	)
Share repurchases		(249	)		(4,925	)		(8,104	)
Return of capital to common control owner related to the acquisition of Augmentix Corporation		—			(9,831	)		—
Return of capital to common control owner related to the acquisition of Augmentix Corporation		(9,831	)		—			—
Repayment of convertible notes to minority holder		(2,907	)		—			—
Payments on capitalized lease obligations		(21	)		(19	)		(14	)
Repayment of related party convertible note		(5,142	)		—			—
Net cash used in financing activities		(9,996	)		(4,628	)		(6,860	)
Other		(23	)		(21	)		76
Net increase (decrease) in cash and cash equivalents		(18,362	)		(6,784	)		2,786
Net cash used in financing activities		(8,203	)		(9,996	)		(4,628	)
Cash and cash equivalents at beginning of period		34,013			40,797			38,011
Net decrease in cash and cash equivalents		(13,789	)		(18,362	)		(6,784	)
Cash and cash equivalents at end of period	$	15,651		$	34,013		$	40,797
Cash and cash equivalents at beginning of period		15,651			34,013			40,797
Cash and cash equivalents at end of period	$	1,862		$	15,651		$	34,013
Supplemental disclosure of cash flows information:
Cash paid during the period for interest	$	36871		$	1036		$	1210
Cash paid during the period for income taxes, net of refunds	$	~~1,325~~70		$	~~797~~1,325		$	~~1,099~~797
Noncash activities:
Goodwill impairment	$	~~(9,036~~—	)	$	(289,~~081~~036	)	$	—(28,081	)
Issuance of long-term convertible debt in connection with the acquisition of Augmentix	$	~~10,652~~—		$	—10,652		$	—
Transfer of auction rate securities from available-for-sale to trading securities	$	~~863~~—		$	—863		$	—

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

5547

ENTORIAN TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Liquidity

Entorian Technologies Inc. ~~(“we,” “us” and “our”)~~ was originally formed by two investment funds affiliated with Austin Ventures, L.P. in May 2003 under the name Staktek Holdings, Inc. for the purpose of acquiring Staktek Corporation, which was incorporated in Texas in June 1990. In August 2003, we acquired by merger Staktek Corporation, which survives as our wholly owned subsidiary. In February 2008, we changed our name to Entorian Technologies Inc.

On August 31, 2007, we acquired Southland, a provider of memory products and services to OEMs located in Irvine, California. In the second quarter of 2008, we began to move manufacturing from Irvine to our facility in Reynosa, Mexico. In November 2008, we entered into a settlement agreement with the selling stockholders of Southland, in which we were released from our lease obligations on the Irvine facility, among other matters as more fully described in Note 3, “Acquisitions.”

Until July 2008, we focused exclusively on providing advanced module and system-level products for high-reliability and high-performance markets by offering stacking services, as well as memory module services. Historically, we reported our revenue under one segment.

On July 14, 2008, we acquired Augmentix Corporation (Augmentix), a provider of rugged computing solutions. Augmentix primarily re-engineers and “ruggedizes” certain Dell Inc. (Dell) products to provide solutions with the latest technologies, high performance levels, enhanced functionality and reliability, and the potential for a low total cost of ownership for mission-critical, rugged computing solutions. Through this acquisition, we expected to further expand into high-growth markets. As a result of this acquisition, we ~~are~~reported ~~now reporting~~ our revenue under two segments, Memory Solutions and Rugged Technology Solutions from July 14, 2008 to December 31, 2008.

OnDuring ~~December 17,~~the fourth quarter of 2008, we announced our plan to close manufacturing activities ~~for~~of our Memory Solutions business in the first quarter of 2009. We ~~will~~licensed ~~continue to license~~ our ~~extensive~~ stacking patent portfolio~~, but~~ ~~have~~and transferred our memory and stacking customers and certain manufacturing assets to third parties. WeFollowing our ~~took~~acquisition ~~this~~of ~~action~~Augmentix, ~~because~~we itdecided ~~became~~to ~~challenging~~shift toour ~~maintain~~focus aaway ~~long-term~~from ~~profitable~~commodity ~~outlook~~component ~~for~~markets ~~this~~towards ~~part~~vertical computing segments. As a result of ~~our~~exiting ~~business.~~the ~~With~~manufacturing ~~our acquisition~~activities of ~~Augmentix~~our memory business, which we ~~decided~~completed toduring ~~shift~~the ~~our~~first quarter ~~focus~~of ~~away~~2009, ~~from~~we ~~commodity~~now ~~component~~operate ~~markets~~under ~~towards~~only ~~vertical~~Rugged ~~computing~~Technology ~~segments~~Solutions.

Effective on or about April 2, 2010, we intend to terminate the registration of our common stock and suspend our reporting obligations under the Exchange Act by filing Form 15 with the SEC. See Note 26, “Subsequent Events,” for additional information.

Liquidity

We incurred negative cash flows from operations in 2009 and 2008. In order to improve profitability and enhance cash flow, we shifted our focus away from commodity component markets towards vertical computing segments. In 2009, our combined cash plus investments position decreased by an average of approximately $3 million per quarter, which will not be sustainable in future periods. We have undertaken, and will continue to undertake, cost reductions to reduce our operating expenses, including deregistering our shares of common stock, as set forth above, although we cannot provide assurance that we will be able to reduce our operating expenses to a sufficient degree to become profitable. Our ability to reduce, or eliminate, the decline in cash and investments is highly dependent on our success in achieving these operating expense reductions and on increasing revenue through the continued customer acceptance of our rugged solutions.

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

Dell Relationship

In addition, we heavily rely on the Dell sales force to sell our ruggedized notebook products and the Dell service organization to provide support to us. If we experience issues regarding insufficient training or lack of sales efforts by the Dell sales force, the decline of sales of our ruggedized notebook products could have a material and adverse effect on our operating results.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation, and Principles of Consolidation ~~and Liquidity~~

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

Following our acquisition of Augmentix on July 14, 2008, we divided our operations into two reportable segments, Memory Solutions and Rugged Technology Solutions. ~~See Note 3~~Subsequently, ~~“Acquisitions,”~~as ~~and~~a ~~Note~~result ~~20,~~of ~~“Segment~~exiting ~~Information,”~~the ~~for~~manufacturing ~~additional~~activities ~~information~~of ~~regarding~~ our ~~Augmentix~~memory ~~acquisition~~business, ~~and~~which ~~segment~~we ~~reporting~~completed during the first quarter of 2009, ~~respectively.~~we now operate under only Rugged Technology Solutions.

WeEffective ~~incurred~~October 30, ~~negative~~2009, ~~cash~~we ~~flows~~completed ~~from~~a ~~operations~~1-for-12 inreverse ~~2008. In~~split ~~order~~of toour ~~improve~~outstanding ~~profitability~~shares ~~and~~of ~~enhance~~common ~~cash~~stock. ~~flow,~~The wenumber of ~~decided~~common toshares ~~shift~~related to our ~~focus~~stock ~~away from~~options ~~commodity~~and ~~component~~restricted ~~markets~~stock ~~towards~~units ~~vertical~~(RSUs) ~~computing~~has ~~segments. As~~been aproportionately ~~result,~~adjusted onto ~~December 17,~~reflect ~~2008,~~the wereverse ~~announced~~split. ~~our~~Our ~~plan~~reverse tostock ~~terminate~~split ~~manufacturing~~was accounted for retroactively and reflected in our ~~Memory~~common ~~Solutions~~stock, ~~business~~treasury stock, instock ~~the~~option ~~first~~and ~~quarter~~RSU activity as of ~~2009. We~~and ~~will~~during ~~continue to~~the ~~license~~periods ~~our~~ended ~~extensive~~December 31, ~~stacking~~2007, ~~patent~~2008 and 2009.

portfolio, but have transferred our memory and stacking customers and certain manufacturing assets to third parties. Based on these changes in our business operations, we believe that our current assets, including cash and cash equivalents, investments and expected cash flow from operations, will be sufficient to fund our operations, our anticipated additions to property, plant and equipment, interest payments and any share repurchases under our stock repurchase program in 2009. However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to acquire other businesses, products or technologies.

Use of Estimates

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

~~Examples~~49 of significant estimates include the allowance for doubtful accounts, excess and obsolescence of inventory, the recoverability of property, plant and equipment, allocation of purchase price to assets acquired, for goodwill, intangible assets and other long-lived assets, the valuation allowances on deferred tax assets, estimates used in impairment analyses and fair value estimates for our ARS and the associated put option.

Examples of significant estimates include the allowance for doubtful accounts, excess and obsolescence of inventory, the recoverability of property, plant and equipment, allocation of purchase price to assets acquired, intangible assets and other long-lived assets, the valuation allowances on deferred tax assets, estimates used in impairment analyses and fair value estimates for our auction rate securities (ARS) and the associated put option.

Reclassifications

As a result of ~~creating~~the ~~two reportable~~Augmentix ~~segments~~acquisition, ~~our~~during ~~2007~~2008 ~~and~~we ~~2006~~created ~~financial~~two ~~information~~reportable ~~has~~segments ~~been~~and reclassified our 2007 financial information to conform to our 2008 presentation. InDuring ~~addition~~2009, ~~other~~we ~~reclassifications~~exited ~~have been made to~~ the ~~consolidated~~manufacturing ~~financial~~activities ~~statements~~of toour ~~conform~~memory tobusiness ~~the~~and ~~current~~now ~~year presentation.~~operate ~~The~~under ~~reclassifications~~only ~~had~~Rugged noTechnology ~~impact on our financial position or results of operations~~Solutions.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. ~~We classify variable rate demand note securities with hard put features, where the issuer holds the obligation, as cash equivalents.~~ At December 31, ~~2008~~2009 and ~~2007~~2008, our cash and cash equivalents included funds in ~~demand deposit accounts,~~ money market accounts, ~~municipal bonds, variable rate demand notes~~ and commercial paper.

Investments

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

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

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

Our ~~long-term~~ARS ~~investments~~and the associated put option are classified as trading securities and are reported at fair value, with gains or losses resulting from changes in fair value recognized in other income (expense), net. ~~Our~~During ~~trading~~November 2008, we accepted an offer provided to us by the investment firm through which we hold our ARS to sell our auction rate securities ~~consist~~to this firm, at par value, at any time over a two-year period, beginning June 30, 2010 and ending July 2, 2012. As a result of accepting this offer, during 2008, we transferred our ARS ~~and~~from ~~the~~available-for-sale to trading. The associated put option. ~~Prior~~is carried at fair value under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 825, which allows us to elect the ~~fourth~~fair ~~quarter~~value ofoption for our put option on the date the put option is first recorded in our financial statements. At December 31, 2008, our ARS were classified as long-term investments. As of June 30, 2009, we reclassified our ARS and related put option to short-term investments based on our intent to sell them to the investment firm on June 30, 2010.

available-for-sale. The investment firm through which we hold our ARS offered to let us sell our auction rate securities to this firm at par value at any time over a two-year period. We accepted their offer and, as a result, we transferred our ARS from available-for-sale to trading in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). The associated put option is carried at fair value under the Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS 159).

Inventories

Inventories consist of materials purchased and labor and overhead incurred for product that has not yet been shipped. Inventories are stated at the lower of cost or market (estimated realizable value) using a first-in, first-out (FIFO) method. We maintain a reserve for excess, slow moving and obsolete inventory, as well as for inventory with a carrying value in excess of its market value. We review inventory on hand quarterly and record a provision for lower of cost or market, and for excess, slow moving and obsolete inventory, if necessary.

Property, Plant and Equipment

We carry property, plant and equipment, including leasehold improvements, at cost less accumulated depreciation. Depreciation of property, plant and equipment is computed using the straight-line method over the useful lives of the assets, ranging from 18 months to 20 years. We amortize leasehold improvements over the shorter of the related lease term or the estimated life of the improvements. We amortize equipment under capital leases over the lease term, and this amortization is included in the depreciation of property, plant and equipment.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess purchase price over the fair value of net assets acquired in the Staktek, Southland and Augmentix acquisitions. We have two reporting units consisting of our two operating segments at an enterprise level and allocate goodwill to these reporting units for goodwill impairment testing. A reporting unit is defined as a component of an entity for which the operating results are regularly reviewed by management and discrete financial information is available.

We assess whether goodwill and indefinite-lived intangible assets (trademark) are impaired on an annual basis. Upon determining the existence of goodwill and/or trademark impairment, we measure that impairment based on the amount by which the book value of goodwill and/or trademark exceeds its fair value. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the book value of goodwill and/or trademark has been impaired. See Note 9, “Other Intangible Assets,” for a discussion of the impairment charge we took on our trademark during the first quarter of 2007.

As of October 1, 2008, the goodwill remaining on the balance sheet was associated with our Rugged Technology Solutions segment. At that time we undertook our annual goodwill assessment and determined that no impairment of goodwill existed. However, during the fourth quarter of 2008, due to continued challenges presented by general economic conditions and our low market capitalization, we conducted a review to update the fair value of the Rugged Technology Solutions segment. As a result of that review we recorded a non-cash charge of $4.0 million during the fourth quarter of 2008 for the impairment of the goodwill created by the Augmentix acquisition. The impairment charge reflected increased uncertainty in the business due to recent economic developments.

the third quarter of 2008 for the write off of the goodwill related to our DIMM business unit, which we established in connection with our Southland acquisition. The impairment charge reflected the changing business prospects for our DIMM business and declining demand for our products.

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

Intangible Assets

Amounts allocated to acquired technology, a customer ~~contract, customer~~ relationships, tradename and, ~~effective April 1, 2007,~~ our trademark are being amortized over the respective assets’ estimated useful lives of four to ten years using a method of amortization that reflects the pattern in which their economic benefits are consumed based upon the initial estimated contribution to discounted cash flows during the period. Amounts allocated to non-compete agreements are being amortized over their estimated useful lives of three to four years using the straight-line method. Amortization of acquired technology, trademark, ~~tradename~~ and atradename ~~customer contract~~ is included in amortization of acquisition intangibles in cost of revenue in the accompanying Consolidated Statements of Operations. Amortization of customer relationships and non-compete agreements is included in amortization of acquisition intangibles in operating expenses in the accompanying Consolidated Statements of Operations. We periodically review the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in a diminished fair value or revised useful life.

We capitalize third-party costs associated with patent registration. Capitalized patent costs are amortized over the estimated useful life of 12 years beginning when the patent is issued. Amortization expense related to our patents is included in product cost of revenue or research and development expense. At the time patent registration is deemed unsuccessful, or we have determined a patent to be commercially unviable, the related costs are written off. During 2008 and 2009, we recorded a charge of $1.3 million and $0.2 million, respectively, in connection with patents and patent applications that we will not use in our future business and which we do not believe our licensees will use in their manufacturing processes.

Impairment of Long-lived Assets

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

59In the fourth quarter of 2008, as a result of our decision to close our operations in Reynosa, Mexico, we reviewed the value of our land and building there. We estimated the cash flow that would result from the disposal of those assets and recorded an impairment expense of $0.6 million in the fourth quarter of 2008. The expense is included in impairment of acquisition intangibles and fixed assets in cost of revenue.

Due to a decline in revenue and negative cash flow related to our DIMM business unit, we reviewed our long-lived assets associated with this business unit for impairment in the third quarter of 2008. As a result of this review, we recorded a non-cash charge of $2.4 million, which is included in Impairment of acquisition intangibles and fixed assets in cost of revenue, for the write-down of the manufacturing equipment related to our DIMM business unit.

Fair Value of Financial Instruments

The fair values of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying values due to their short maturities. We determine the fair value of our investments in ARS using a pricing model that includes certain assumptions, such as the maximum interest rate, probability of passing auction, default probability and discount rate.

The fair values of our financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, investments and accounts receivable. We have invested $6.7 5 million in ARS that are rated Aaa and AA, the majority of which are guaranteed by the federal government under the Family Education Loans Program (FFELP). However, as ~~recently~~ reported in the financial press, the ~~current~~ disruptions in the credit markets have adversely affected the auction market for these types of securities, and they are currently illiquid. We cannot predict how long they will remain illiquid and whether we will be able to liquidate them prior to their maturities at prices approximating their face amounts. The final maturity dates of the ARS that we own is between 2034 and 2041. The current market for the ARS held by us is uncertain, and we will continue to monitor and evaluate the market for these securities to determine if impairment of the carrying value of the securities has occurred due to the loss of liquidity or for other reasons. If the credit ratings of the security issuers deteriorate or if normal market conditions do not return in the near future, we may be required to further reduce the value of these securities. We cannot predict how long these securities will remain illiquid. During November 2008, we accepted an offer provided to us by the investment firm through which we hold our ARS to sell all of our auction rate securities to this firm at par value at any time over a two-year period, beginning June 30, 2010 and ending July 2, 2012. This put option is held with one financial institution and is therefore subject to the credit worthiness of this firm. At December 31, 2008 and 2009, there were no indicators that this financial institution would not perform its obligations under the terms of the put option. Upon acceptance of this settlement, we ~~recorded~~ recorded the estimated fair value of the put option of approximately $0.7 million. The agreement also provides access to loans up to ~~100~~75% of the ~~par~~market value ~~for~~of ~~investment~~our ~~grade~~ARS ~~companies~~until ~~and~~June 30, up2010. toWe ~~75%~~expect ofto exercise the ~~par~~put ~~value~~option ~~for~~on ~~companies that are not investment grade until~~ June 30, 2010.

WeIn ~~maintain~~addition, ~~our~~we ~~cash~~have ~~and~~an ~~cash~~arrangement ~~equivalents~~with a manufacturer in ~~accounts~~which ~~with~~this ~~several~~third ~~major~~party ~~financial~~purchases ~~institutions~~and takes title of certain ininventory relating to certain of our products upon shipment from the ~~United~~original ~~States~~manufacturers orof insuch ~~countries~~inventory. ~~where~~This ~~our~~third ~~subsidiaries~~party ~~operate,~~recovers inthe cost of inventory upon the ~~form~~sale of ~~demand~~finished ~~deposits~~goods to us. This program offers us several advantages; however, this arrangement also results in concentrated credit and ~~money~~inventory ~~market~~risk ~~accounts~~for us. AtApproximately $5.0 million of our accounts receivable balance as of December 31, ~~2008~~2009 ~~and~~was ~~2007,~~with wethis ~~had~~third ~~amounts~~party. onThis ~~deposit~~was ~~with~~partially ~~financial~~offset ~~institutions~~by ~~that~~a ~~were~~balance of $4.1 million in ~~excess~~accounts ofpayable due to this third party for the ~~federally~~ ~~insured~~production ~~limit~~and delivery of ~~$250,000.~~finished Wegoods ~~have~~by ~~not~~the ~~experienced~~manufacturer ~~any~~relating ~~losses~~to oncertain ~~deposits~~ of ~~cash~~our ~~and~~products ~~cash~~at ~~equivalents~~December 31, 2009.

We ~~believe~~maintain ~~that~~our ~~the concentration~~cash ofand ~~credit~~cash ~~risk~~equivalents in ~~our~~ accounts ~~receivable~~with isseveral ~~substantially~~major ~~mitigated~~financial byinstitutions in the ~~relatively~~United ~~short~~States ~~collection~~or ~~terms~~in ~~and~~countries ~~the~~where our ~~high~~subsidiaries ~~level~~operate, ofin ~~credit~~the ~~worthiness~~form of ~~our~~demand ~~customers~~deposits and money market accounts. WeAt ~~record~~December 31, an2009 ~~allowance~~and ~~for~~2008, ~~doubtful~~we ~~accounts~~had ~~specific~~amounts toon ~~the accounts~~deposit ~~receivable~~with ~~balances~~financial ~~outstanding~~institutions ~~based~~that ~~upon~~were in excess of the ~~results~~federally insured limit of ~~our~~$250,000. ~~evaluation~~We have not experienced any losses on deposits of ~~our~~cash ~~customers’~~and ~~financial~~cash ~~condition~~equivalents.

6052

~~The~~We ~~following~~believe ~~tables~~that ~~summarize~~the ~~sales~~concentration toof ~~customers~~credit ~~for~~risk ~~products~~ in our ~~Memory~~accounts ~~Solutions~~receivable ~~and~~is ~~Rugged~~substantially ~~Technology~~mitigated ~~Solutions~~by ~~segments~~the ~~that~~relatively ~~represented~~short ~~10%~~collection orterms ~~more~~and the high level of ~~consolidated~~credit ~~total~~worthiness ~~revenue~~of our customers. We record an allowance for doubtful accounts specific to the ~~periods~~accounts ~~indicated:~~receivable balances outstanding based upon the results of our evaluation of our customers’ financial condition.

	Year Ended December 31,
	2008		2007		2006
Dell	36	%	*		*
SMART	15	%	19	%	13	%
Micron	*		34	%	18	%
Google	*		10	%	*
Samsung	*		*		20	%
HP	*		*		20	%
Netlist	*		*		18	%

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


	Year Ended December 31,
	2009		2008		2007
Dell	77	%	36	%	*
SMART	*		15	%	19	%
Micron	*		*		34	%
Google	*		*		10	%

*	Amount does not equal or exceed 10% for the indicated period.

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

	December 31,
	2008		2007
	2009		2008
Dell	2054	%	*20	%
SMART	13	%	18	%
Virtex	41	%	*
Mitac	12	%	*
SMART	*		13	%
Google	*		30	%
Mitac	*		12	%
Micron	*		16	%

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

Foreign Currency

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

Revenue Recognition

We ~~account for our revenue under the provisions of Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104). Under the provisions of SAB 104, we~~ recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and collectibility of the resulting receivable is reasonably assured. Our revenue is generated primarily from the sale of rugged notebook computers and ruggedized servers, ~~manufacturing services performed for customers, sale of memory modules assembled by us,~~ and from license fees or royalties earned pursuant to license agreements with customers.

Product Revenue

~~Our~~Currently, ~~manufacturing~~we ~~products~~derive ~~consist~~our ofrevenue ~~various~~from ~~customer~~ruggedized ~~arrangements~~notebooks and servers. Prior to 2009, ~~including~~we ~~manufacturing~~derived our revenue from rugged notebook computers and ruggedized servers, outsourcing the manufacture of our customers’ stacked memory units to us, outsourcing the assembly of memory modules to us using customer supplied components, and ~~the~~reselling ~~resale of~~ memory modules consigned to us. Additionally, we ~~assemble~~assembled memory modules from purchased components for resale to distributors and end users.

61In customer arrangements for outsourced manufacturing services, we determined that a net basis of revenue recognition was appropriate where the customer had instructed us to purchase specified memory packages from a

~~We report revenue generated under our Memory Solutions business in accordance with Emerging Issues Task~~ Force Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” In customer arrangements for outsourced manufacturing services, we have determined that a net basis of revenue recognition is appropriate where the customer has instructed us to purchase specified ~~memory packages from a specified~~ vendor for purposes of stacking or assembling and shipping to the customer, or where the customer ~~has~~had supplied us with components. Additionally, in situations where we ~~resell~~resold memory modules sold to us and the supplier ~~determines~~determined the final sales price or ~~grants~~granted favorable rights of return or credit terms to us, we ~~report~~reported the revenue on a net basis.

License Revenue

In addition to our product revenue, we also earn revenue from licensing our technologies. Initial nonrefundable license fees are recognized when: (1) we enter into a legally binding arrangement with a customer for the license; (2) we deliver the products; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. We may provide training and/or other assistance to our licensees under the terms of the license agreement. To date, the training or assistance we have provided has been limited and incidental to the licensed technologies. In instances where training or other assistance is provided under the terms of a license agreement, the estimated fair value of such services is deferred until these services are provided. The associated revenue is included in product revenue. In instances where we provide training or other assistance that is considered inconsequential to the license agreement, the estimated fair value of the services is recognized in connection with the initial license fee and is included in license revenue.

Currently we have license agreements with ~~five~~two ~~customers~~parties that specify that certain royalties are earned by us upon each customer’s shipment of products utilizing our proprietary technologies. We are collecting material royalties under ~~only~~ one of these agreements at this time. We recognize royalty revenue when the royalties are reported to us and the collection of these royalties is considered reasonably assured.

Deferred Revenue and Third Party Rebates

Our agreement with ~~our~~Dell ~~largest OEM customer~~ related to sales of ~~a specific product line within~~ our ~~Rugged Technology~~notebook ~~Solutions~~computers ~~business~~ allows for price reductions, ~~issued~~ as ~~rebates, as~~ certain volume levels of shipments are reached. The per-unit price of lower-quantity tiers is variable above a certain minimum price, since the price can be retroactively adjusted downward if certain volume levels are satisfied. Pursuant to ~~Emerging~~FASB ~~Issues~~ASC ~~Task~~Topic ~~Force 01-9~~605, ~~“Accounting for Consideration Given by a Vendor to a Customer” (EITF 01-9) Issue 6,~~ we consider these pricing changes as a right of return and defer the amount of ~~rebate~~price reduction that could occur until the end of the period when the actual volume levels are reasonably estimable. We estimate the amount of sales based on experience as well as forecasts provided by ~~our OEM~~Dell. Revenue above the fixed minimum price is deferred until the actual volume levels are achieved. The estimate is revised each reporting period and is ultimately adjusted to actual at the end of the year. During 2009, we recorded approximately $2.4 million in deferred revenue under this agreement. However, as a result of the actual volume achieved in 2009, we recorded a reduction in our deferred revenue of approximately $2.4 million during the fourth quarter of 2009, resulting in a balance of $22,000 at December 31, 2009.

Additionally, we often enter into arrangements with Dell to participate in providing rebates to their customers (the “end customer”). In these cases, we agree to a per-unit rebate with Dell, which is to be passed on to the end customer. Upon completion of the rebate arrangement and recognition of the sale by us, we record the liability for the rebate and reduce our reported revenue by the amount of the rebate.

Cost of Revenue

Cost of revenue includes the cost of labor, materials and overhead required to perform the manufacturing process. These costs are included in inventories until the product is shipped and revenue is recognized. Cost of revenue also includes the amortization and impairment of acquired technology, a customer contract, certain patents ~~and~~, ~~effective April 1, 2007,~~ our trademark asand ~~well as~~ stock-based compensation expense.

Shipping and Handling Cost

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

Research and Development

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

Warranty

We repair or replace products that have been authorized for repair or replacement by our customers. We utilize a third-party service provider to perform a full range of service and support options, ranging from telephone, online, on-site, return-to-depot, and customer replaceable units (parts) available in the continental U.S. and in select international cities. The costs of such repairs or replacements are expensed as actual costs are incurred. We warrant products for periods ~~ranging~~up ~~from 12~~ to 37 months following the ~~sale~~manufacture of our products. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. At each balance sheet date, we record a liability for the estimated level of warranty claims on previously recorded revenues. Should actual product failure rates, material usage or service delivery costs increase, our warranty costs to support the products in the field could increase.

Advertising Costs

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

Stock-Based Compensation

We account for our employee stock-based compensation using the fair value recognition provisions of ~~SFAS~~FASB ~~123(R)~~ASC Topic 718, using the modified prospective transition ~~method and, therefore, we have not restated prior periods’ results~~. Under this method, we recognize compensation expense for all share-based payments granted after January 1, 2006, as well as those granted prior to but not yet vested as of January 1, 2006, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award and only recognize compensation cost for those shares ~~expected~~ expected to vest. In addition, ~~under SFAS 123(R),~~ tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) are presented as financing cash flows in the ~~consolidated~~Consolidated ~~statement~~Statement of ~~cash~~Cash ~~flows~~Flows. ~~Prior to SFAS 123(R) adoption, we accounted for share-based payments under APB 25.~~

Equity instruments issued to non-employees are accounted for in accordance with FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

Income Taxes

We account for income taxes under the provisions of ~~SFAS~~FASB ~~No. 109, “Accounting~~ASC ~~for~~Topic ~~Income Taxes” (SFAS 109)~~740. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts we expect to realize.

63Earnings (Loss) Per Share

~~Table~~Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of ~~Contents~~vested common shares outstanding for the period. Diluted earnings (loss) per share is computed under the treasury method giving effect to all potential dilutive common stock, including options, warrants and common stock subject to repurchase. For the years ended December 31, 2008 and 2007, options and common stock subject to repurchase were not included in the computation of diluted earnings (loss) per share because the effect would be antidilutive.

between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts we expect to realize.

Loss Per Share

Basic loss per share is computed by dividing net loss by the weighted-average number of vested common shares outstanding for the period. Diluted loss per share is computed under the treasury method giving effect to all potential dilutive common stock, including options, warrants and common stock subject to repurchase. For the years ended December 31, 2008, 2007 and 2006, options and common stock subject to repurchase were not included in the computation of diluted loss per share because the effect would be antidilutive.

Recent Accounting Pronouncements

In ~~October 2008~~ January 2010, the FASB issued ASU ~~FSP 157~~2010-306, towhich ~~clarify~~requires ~~the~~an ~~application~~entity ofto ~~fair~~disclose ~~value~~separately ~~measurements of a financial asset when~~ the ~~market~~amounts ~~for~~of ~~that~~significant ~~asset~~transfers isin ~~not~~to ~~active.~~and ~~This~~out ~~clarifying guidance became effective upon issuance, including prior periods for which financial statements had not been issued. The adoption~~ of ~~FSP~~Level ~~157-3~~1 ~~did~~and ~~not~~Level ~~significantly~~2 ~~impact~~fair ~~our~~value ~~financial~~measurements ~~position~~and orto ~~results~~describe ~~of operations.~~ the

In55 April 2008, the FASB issued FSP 142-3 to amend the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS 142. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The impact of adopting FSP 142-3 will depend on the future business combinations or asset acquisitions that we may pursue after its effective date.

InTable February 2008, the FASB issued FSP FAS 157-2, which delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Non-recurring non-financial assets and liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, intangible assets measured at fair value for impairment, and those initially measured at fair value in a business combination. We do not expect the adoption of SFAS 157 for our non-financial assets and liabilities to have a material impact on our financial position and results of operations. Contents

In reasons ~~December~~for ~~2007,~~ the ~~FASB issued SFAS 141R~~transfers. ~~This~~In ~~standard~~addition, ~~establishes~~the ~~principles~~information ~~and~~about ~~requirements~~purchases, ~~for~~sales, ~~how~~issuances anand ~~acquirer~~settlements ~~recognizes~~must ~~and~~be ~~measures~~presented separately in ~~its~~ ~~financial~~the ~~statements~~reconciliation ~~the~~for ~~identifiable~~Level ~~assets~~3 ~~acquired,~~fair ~~including~~value ~~goodwill~~measurements. Also, ~~the~~this ~~liabilities~~update ~~assumed~~requires ~~and~~disclosures ~~any~~about ~~non-controlling~~the ~~interest~~valuation intechniques ~~the~~and ~~acquiree.~~inputs ~~SFAS~~used ~~141R~~to ~~also~~measure ~~establishes~~fair ~~disclosure~~value ~~requirements~~for toboth ~~enable~~recurring ~~users~~and ofnonrecurring ~~the~~fair ~~financial~~value ~~statements to~~measurements ~~evaluate~~using ~~the~~Level ~~nature~~2 and ~~financial~~Level ~~effects~~3 ~~of the business combination~~inputs. ~~SFAS 141R~~ASU 2010-06 is effective for ~~business~~interim ~~combinations~~and ~~for~~annual periods ~~which~~beginning ~~the~~after ~~acquisition~~December 15, ~~date~~2009, isexcept onfor orthe ~~after~~disclosures ~~the~~regarding ~~beginning~~purchases, ofsales, ~~the~~issuances ~~first~~and ~~annual~~settlements, ~~reporting~~which ~~period~~are ~~beginning~~effective onfor orfiscal years beginning after December 15, ~~2008~~2010. ~~The~~We ~~impact~~do ofnot ~~adopting~~expect ~~SFAS 141R~~the ~~will~~adoption ~~depend~~of onASU 2010-06 ~~the~~to ~~future~~have ~~business~~a ~~combinations~~material ~~that~~impact weon ~~may~~our ~~pursue~~financial ~~after~~statement ~~its~~footnote ~~effective date~~disclosures.

3. Acquisitions

2008 Augmentix Acquisition

On July 14, 2008, we acquired all of the outstanding ownership interests in Augmentix, a provider of rugged computing solutions, pursuant to an Agreement and Plan of Merger by and among us, Augmentix, August Merger Sub Corporation, a wholly owned subsidiary of Entorian, and the stockholders of Augmentix (Sellers) dated July 11, 2008 (the Merger Agreement). Through this acquisition, we expected to further expand into high-growth markets, which contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, we recorded goodwill. The goodwill, which is not deductible for income tax purposes, was assigned at the reporting unit level. The purchase price we paid for all outstanding shares at the effective time of the merger was approximately $23.5 million in cash and approximately $10.7 million in convertible notes, subject to a post-closing adjustment based on Augmentix’s estimated working capital of approximately $0.4 million and transaction costs of approximately $0.9 million. See Note 12, “Convertible Notes Payable,” for additional information regarding the convertible notes issued. The notes and funds were distributed as follows, including escrow amounts (in thousands):

dated July 11, 2008 (the Merger Agreement). Through this acquisition, we expected to further expand into high-growth markets, which contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, we recorded goodwill. The goodwill, which is not deductible for income tax purposes, was assigned at the reporting unit level. The purchase price we paid for all outstanding shares at the effective time of the merger was approximately $23.5 million in cash and approximately $10.7 million in convertible notes, subject to a post-closing adjustment based on Augmentix’s working capital of approximately $0.4 million and transaction costs of approximately $0.9 million. See Note 11, “Convertible Notes Payable,” for additional information regarding the convertible notes issued. The notes and funds were distributed as follows, including escrow amounts (in thousands):


	Augmentix Liabilities paid at Closing		Distributed/Allocated to Common Control Owner			Distributed/Allocated to Minority Shareholders			Totals
Cash	$	8,313	$	8,883		$	6,304		$	23,500
Notes		—		6,805			3,847			10,652
Anticipated Working Capital Adjustment		—		(238	)		(134	)		(372	)
Transaction Costs		—		478			442			920

	$	8,313	$	15,928		$	10,459		$	34,700

This acquisition was a transaction between commonly controlled entities, as Austin Ventures, our majority owner, also owned a majority ownership percentage of Augmentix. Under a transaction between commonly controlled entities, the acquired assets related to the common owner are recorded at historical cost, similar to a pooling of interest transaction, while the purchase of the minority interests is recorded at fair value. The purchase price allocable to the common control owner in excess of the book value of the assets acquired has been presented as a return of capital to the common control owner in our financial statements. We recorded the purchase of the minority interests of Augmentix as a purchase business combination, with the purchase price allocated to the fair value of assets, including acquired intangible assets and liabilities acquired, with the excess recorded as goodwill. For the intangible assets acquired, fair value was determined by management using a discounted cash flow model. The difference between the book, fair and allocated values is as follows:


	Augmentix Book Value			Fair Value			Allocated Purchase Price			Notes
Cash	$	1,737		$	1,737		$	1,737		No adjustment
Accounts receivable, net		3,929			3,929			3,929		No adjustment
Inventory		6,450			6,450			6,450		No adjustment
Property, plant and equipment		1,011			1,247			1,124		47.9% of difference capitalized
Other assets		56			56			56		No adjustment
Goodwill		—			9,180			4,084		47.9% capitalized
Developed Technology		—			6,850			3,281		47.9% capitalized
Trade Name		—			2,027			971		47.9% capitalized
Customer Relationships		—			13,037			6,245		47.9% capitalized
Current liabilities		(9,813	)		(9,813	)		(9,813	)	No adjustment

	$	3,370		$	34,700		$	18,064

~~Approximately~~We ~~$4.3~~granted ~~million~~certain ofAugmentix ~~the~~employees ~~purchase~~stock ~~price~~options ~~was~~to ~~deposited~~purchase ~~into~~a antotal ~~escrow~~of ~~account~~121,583 asshares ~~security~~of our ~~for~~common ~~working~~stock. ~~capital~~All ~~adjustments~~of ~~and~~these ~~indemnification~~options ~~obligations~~have ofan ~~the~~exercise ~~Sellers~~price ~~under~~equal to the ~~Merger~~closing ~~Agreement.~~sales ~~This~~price ~~amount~~per ~~held~~share inof ~~escrow~~Entorian iscommon ~~subject~~stock toon beJuly 14, ~~released~~2008, vest over a period of ~~two~~up to four years, ~~less~~and ~~any~~are ~~amounts~~recorded ~~for~~as ~~unresolved~~compensation ~~and~~expense ~~settled~~in ~~claims.~~accordance with FASB ASC Topic 718.

65The following table summarizes the purchase price of the assets acquired and liabilities assumed at July 14, 2008. The allocation of the purchase price changed due to a working capital adjustment in our favor of approximately $0.6 million. The purchase price allocation was based upon management’s best estimates of the relative fair values of the identifiable assets acquired and liabilities assumed. The purchase price was allocated as follows (in thousands):

We granted certain Augmentix employees stock options to purchase a total of 1,459,000 shares of our common stock. All of these options have an exercise price equal to the closing sales price per share of Entorian common stock on July 14, 2008, will vest over a period of up to four years and are recorded as compensation expense in accordance with SFAS 123(R).

The following table summarizes the purchase price of the assets acquired and liabilities assumed at July 14, 2008. The allocation of the purchase price is subject to change due to a working capital adjustment to be made during the first quarter of 2009. The preliminary purchase price allocation is based upon management’s best estimates of the relative fair values of the identifiable assets acquired and liabilities assumed. The preliminary purchase price was allocated as follows (in thousands):


	Amount			Useful Life (in years)
Cash	$	1,737
Accounts receivable, net		3,929
Inventory		6,450
Property, plant and equipment		1,124		1-3
Other assets		56
Goodwill		4,084
Customer relationships		6,245		5
Trade name		971		10
Developed technology		3,281		3
Current liabilities		(9,813	)

Purchase price for acquisition of minority interest		18,064
Return of capital to common control owner		16,636

Total purchase price, including transaction costs	$	34,700

We57 ~~recorded Augmentix’s results of operations with ours subsequent to the acquisition date, which was July 14, 2008.~~

Pro Forma Results (unaudited)

The following unaudited pro forma information presents the combined results of operations of Entorian and Augmentix for the years ended December 31, 2008 and 2007 as if the merger had been consummated at the beginning of the respective years. The information is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that actually would have occurred if the merger had been consummated at the beginning of the respective years, nor is it necessarily indicative of future operating results.

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

	Year ended December 31,
	2008			2007
Net sales	$	83,638		$	55,460
Net loss	$	(49,133	)	$	(47,327	)
Net loss per share-basic	$	(1.05	)	$	(1.00	)
Net loss per share diluted	$	(1.05	)	$	(1.00	)

We recorded Augmentix’s results of operations with ours subsequent to the acquisition date, which was July 14, 2008.

2007 Southland Microsystems Acquisition

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

We deposited $5.0 million of the purchase price into an escrow account as security for working capital adjustments and indemnification obligations of the Southland stockholders under the Merger Agreement. On November 28, 2007, we finalized the working capital adjustment, and $2.0 million was released from the escrow account, of which approximately $1.4 million was distributed to the sellers and $0.6 million was returned to us.

In addition, we entered into a restriction agreement with a key Southland employee and former stockholder who held shares of restricted stock of Southland. We paid him the merger consideration for the vested Southland stock he owned, but withheld the merger consideration for his unvested shares of restricted stock. As of the acquisition date, the vested portion of his merger payments, or approximately $0.4 million, was recorded as part of the purchase price. We terminated this employee’s employment in July 2008.

In addition to the purchase price, we agreed to pay an additional $7.0 million to Southland’s stockholders, based on the achievement of certain financial growth goals during the period from September 1, 2007 through August 31, 2009 (the Earn-Out). The Earn-Out was payable in two installments and each installment could be paid in any combination of cash or shares of our common stock. The financial growth goals were not achieved and no earn-out payments were made under this agreement.

InOn ~~addition~~November 3, as2008, ~~part of~~we ~~the~~entered ~~acquisition,~~into wea ~~granted~~settlement ~~stock~~agreement ~~options~~with tothe ~~certain~~two principal stockholders of Southland ~~employees~~at tothe ~~purchase~~time awe ~~total~~acquired it. In ofthis ~~500~~settlement agreement,~~000~~ ~~shares~~(i) we ofagreed ~~our~~to ~~common~~pay ~~stock~~approximately $0.3 ~~These~~million ~~options~~of ~~had~~our anremaining ~~exercise~~two-year ~~price~~lease ~~equal~~obligation toon the ~~closing~~building ~~sales~~we ~~price~~leased ~~per~~from ~~share~~these oftwo ~~Entorian~~principal ~~common~~stockholders ~~stock~~in ~~on August 31~~Irvine, ~~2007,~~California ~~vested~~in ~~over~~exchange for a ~~four-year~~release from ~~period~~this ~~and~~lease; ~~had~~(ii) all ~~associated~~parties ~~compensation~~agreed ~~expense~~to ~~recorded~~terminate inthe ~~accordance~~remainder ~~with~~of ~~SFAS~~the ~~123~~Earn-Out; and (Riii) we terminated the employment of these two principal stockholders in exchange for approximately $0.3 million in severance to each of them.

~~On November~~The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at August 331, 2007. ~~2008,~~The weallocation ~~entered~~of ~~into~~the purchase price changed due to a ~~settlement~~working ~~agreement~~capital ~~with~~adjustment ~~the~~of ~~two~~$0.6 ~~principal~~million. ~~stockholders~~The purchase price allocation was based upon management’s best estimates of ~~Southland~~the atrelative fair values of the ~~time~~identifiable weassets acquired itand liabilities assumed. InThe ~~this~~purchase ~~settlement~~price ~~agreement~~was allocated as follows (in thousands):

1. we agreed to pay 35%, or approximately $0.3 million, of our remaining two-year lease obligation on the building we leased from the two principal stockholders in Irvine, California in exchange for a release from this lease;

2. we agreed to release the remaining escrow held in the escrow account of approximately $2.1 million;

3. the two principal stockholders waived their rights to the Earn-Out for the second (and last) year for which they were eligible; and

4. we terminated the employment of the two principal stockholders. As part of this termination, they received one year of severance of approximately $0.3 million in accordance with their employment agreements, and agreed not to compete with us for one year except in certain circumstances regarding DRAM brokerage activities.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at August 31, 2007. The allocation of the purchase price changed due to a working capital adjustment of $0.6

million. The purchase price allocation was based upon management’s best estimates of the relative fair values of the identifiable assets acquired and liabilities assumed. The purchase price was allocated as follows (in thousands):


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

Total purchase price	$	21,122

We recorded Southland’s results of operations with ours subsequent to the acquisition ~~date,~~ ~~which was August 31, 2007~~date. On December 17, 2008, we announced our plan to terminate manufacturing for our Memory Solutions business in the first quarter of 2009. We will continue to license our extensive stacking patent portfolio, but have transferred our memory and stacking customers and certain manufacturing assets to third parties. We took this action because it became challenging to maintain a long-term profitable outlook for this part of our business.

4. Fair Value Measurements

On January 1, ~~2008~~ 2009, we adopted ~~SFAS~~FASB ~~157~~ASC Topic 820 for our non-financial assets. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The following table details the fair value measurements within the fair value hierarchy of our financial assets (in thousands):

Description	Fair Value atDecember 31,2008		Fair Value Measurements at December 31, 2008
	Fair Value atDecember 31,2009		Fair Value Measurements at December 31, 2009 Using:
			Quoted Prices inActive MarketsUsing IdenticalAssets (Level 1)		Significant OtherObservableInputs (Level 2)		SignificantUnobservableInputs (Level 3)
Description			Quoted Prices inActive MarketsUsing IdenticalAssets (Level 1)		Significant OtherObservableInputs (Level 2)		SignificantUnobservableInputs (Level 3)
Trading securities	$	6,525	$	—	$	—	$	6,525
Put option on trading securities		521		—		—		521
	$	7,046	$	—	$	—	$	7,046
	Fair Value atDecember 31,2008		Fair Value Measurements at December 31, 2008 Using:
Description			Quoted Prices inActive MarketsUsing IdenticalAssets (Level 1)		Significant OtherObservableInputs (Level 2)		SignificantUnobservableInputs (Level 3)
Cash equivalents	$	1,020	$	1,020	$	—	$	—
Available-for-sale securities		1,639		1,639		—		—
Trading securities		6,662		—		—		6,662
Put option on trading securities		675		—		—		675
	$	9,996	$	2,659	$	—	$	7,337

	Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)
Balance at December 31, 2007	$	—
Transfers into Level 3		10,250
Total losses included in other expense		(188	)
Net loss included in other income (expense)		(188	)
Purchases, issuances and settlements		(2,725	)
Balance at December 31, 2008	$	7,337
Transfers into Level 3		—
Net gain included in other income (expense)		134
Purchases, issuances and settlements		(425	)
Balance at December 31, 2009	$	7,046

68We have included our investments related to ARS of approximately $6.5 million, or 92% of par value, and our put option of $0.5 million in the Level 3 category. See Note 6, “Investments,” for additional information regarding our auction rate securities.

During November 2008, we accepted a settlement offer from one of our investment providers to sell, at par value, our ARS at any time during a two-year period beginning June 30, 2010 and ending July 2, 2012. In connection with this settlement, we elected to account for the put option related to our ARS under FASB ASC Topic 825, which allows us to elect the fair value option for our put option on the date the put option is first recorded in our financial statements. During 2009, we recorded a net loss of $0.1 million in other income (expense) related to the change in fair value of our put option. In addition, during 2009 approximately $0.4 million of our ARS was called at par by the issuers, resulting in a reduction in the value of our put option of approximately $31,000.

WeAs ~~have~~a ~~included~~result of our ~~investments~~decision ~~related~~ to ~~ARS~~close ~~and~~ our ~~put~~operations ~~option~~in ofReynosa, Mexico, we decided to sell approximately $60.78 million in fixed assets from our Memory Solutions business, orwhich ~~89% of~~we ~~par~~recorded ~~value~~as assets held for sale at December 31, ~~and~~2008. During 2009, we recorded an impairment charge of approximately $0.74 million, ~~respectively,~~related into ~~the~~our ~~Level~~assets held 3for ~~category.~~sale ~~See~~based ~~Note~~on 6quoted market prices for similar assets. Also, ~~“Investments~~during 2009,” we sold various assets recorded as assets held for ~~additional~~sale ~~information~~with ~~regarding~~a ~~our~~net ~~auction~~book ~~rate~~value ~~securities~~of approximately $0.4 million for a net gain of approximately $0.4 million.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS 159). This standard allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value. The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. During November 2008, we accepted a settlement offer from one of our investment providers to sell at par value our auction rate securities at any time during a two-year period beginning June 30, 2010 and ending July 2, 2012. In connection with this settlement, we elected to account for the put option related to our ARS under SFAS 159, and therefore recorded a gain of approximately $0.7 million in Other expense.

5. Accounts Receivable, net

The following are the components of accounts receivables (in thousands):

	December 31,
	2008			2007
	2009			2008
Gross accounts receivable	$	512,~~853~~281		$	5,~~689~~853
Allowance for doubtful accounts		(~~597~~86	)		(8597	)
	$	512,~~256~~195		$	5,~~681~~256

The increase in our accounts receivable balance at December 31, 2009, compared to December 31, 2008, was primarily due to due to the timing of sales during the fourth quarter of 2009. In addition, the increase in our accounts receivable balance was due to receivables of $5.1 million related to the sale of previously consigned inventory to our manufacturing partners. These receivables were partially offset by a balance of $4.7 million in accounts payable to these manufacturing partners for the production of finished goods and inventory held by the manufacturer related to certain of our products at December 31, 2009.

The following table summarizes the changes in our allowance for doubtful accounts (in thousands):

Balance at December 31, 2006	$	—
Balance at December 31, 2007	$	(8	)
Provision for uncollectible accounts, net of recoveries		(8	)
Balance at December 31, 2007		(8	)
Provision for uncollectible accounts, net of recoveries		(589	)
Balance at December 31, 2008	$	(597	)
Provision for uncollectible accounts, net of recoveries		(288	)
Write-off of uncollectible accounts		799
Balance at December 31, 2009	$	(86	)

The increase of approximately $0.6 million in our allowance for doubtful accounts at December 31, 2008 as , compared to December 31, 2007, is primarily due to the bankruptcy of a large customer. We wrote off the associated receivable and allowance for doubtful accounts during the second quarter of 2009.

6. Investments

During ~~2008~~ 2009 and ~~2007~~2008, we invested in securities with original maturities greater than three months. These securities are classified as either “available-for-sale” or “trading.” As of December 31, ~~2008~~2009, we held ~~approximately~~no ~~$1.6 million in~~ available-for-sale securities. In addition, we held approximately $6.75 million in ARS, or 8992% of par value, and $0.75 million in a put option. As of June 30, ~~which~~2009, ~~are~~we ~~classified~~reclassified asour ~~long~~ARS and related put option to short-term investments, inbased on our intent to sell them to the ~~Level~~investment 3firm ~~category~~on June 30, 2010.

Our auction rate securities are investments in student loans. The final maturity dates of the ARS that we own are between 2034 and 2041 and the securities are rated Aaa and AA. Approximately 6967% of our ARS are guaranteed by the federal government under the FFELP. The FFELP guarantees between 95% and 98% of the par value of these loans. The remaining 3133% of our ARS are private loans, of which 85% are insured.

~~Our~~60 auction rate securities have historically traded at par and are callable at par at the option of the issuer. Beginning in February 2008, auctions for these securities began to fail, and the interest rates for these ARS reset to the maximum rate according to the applicable investment offering document. As of December 31, 2008, there was insufficient observable ARS market information available to determine the fair value of these investments. Therefore, our ARS were valued based on a pricing model that included certain assumptions, such as our ARS

Our auction rate securities have historically traded at par and are callable at par at the ~~maximum~~option of the issuer. Beginning in February 2008, auctions for these securities began to fail, and the interest rates for these ARS reset to the maximum rate according to the applicable investment offering document. As of December 31, 2009, there was insufficient observable ARS market information available to determine the fair value of these investments. Therefore, our ARS were valued based on a pricing model that included certain assumptions, such as our ARS maximum interest rate, probability of passing auction, default probability and discount rate. Based on this assessment of fair value, as of December 31, ~~2008~~ 2009, we determined there was aan ~~decline~~increase in the fair value of our ARS of approximately $0.93 million. during 2009.

As of December 31, ~~2008~~2009, the maximum auction rates for our ARS ranged from 10.35% to 71.01%. Through December 31, ~~2008~~2009, we have continued to receive interest payments on our ARS in accordance with their terms and believe we will continue to receive interest payments as long as we hold these securities. During 2008 and 2009, approximately $2.7 million ofand ~~our ARS was called at par by the issuers~~$0. ~~In addition~~4 million, ~~during November 2008~~respectively, weof ~~accepted an offer provided to us by the investment firm through which we hold~~ our ARS towas ~~sell~~called ~~our auction rate securities to this firm~~ at par ~~value~~by ~~at any time over a two-year period, beginning June 30, 2010 and ending July 2, 2012. The agreement also provides access to loans up to 100% of~~ the ~~par value for investment grade companies and up to 75% of the par value for companies that are not investment grade until June 30, 2010~~issuers. As a result ~~of accepting this offer~~, we ~~transferred~~recorded ~~our~~a ~~ARS~~gain ~~from~~of ~~available-for-sale to trading as allowed under SFAS 115 and reclassified approximately~~ $0.9 ~~million~~and ~~from other comprehensive loss to other expense. In addition, upon acceptance of this settlement, we recorded the estimated fair value of the put option of~~ approximately $~~0.7 million~~38,000 ~~which~~during is2008 ~~classified~~and ~~as long-term investments~~2009, ~~in the Level 3 category, and elected to apply the fair value provisions of SFAS 159 to this put option~~respectively. We will recognize future changes in the fair value of the ARS and the put option in the statement of operations. The fair value adjustments to the ARS and put option will largely offset and will result in a minimal net impact to the statement of operations in future periods.

During November 2008, we accepted an offer provided to us by the investment firm through which we hold our ARS to sell our auction rate securities to this firm at par value at any time over a two-year period, beginning June 30, 2010 and ending July 2, 2012. The agreement also provides access to loans up to 75% of the market value of our ARS until June 30, 2010. As a result of accepting this offer, during 2008 we transferred our ARS from available-for-sale to trading and reclassified approximately $0.9 million from other comprehensive loss to other expense. In addition, upon acceptance of this settlement, we recorded the estimated fair value of the put option of approximately $0.7 million, which was classified as long-term investments, in the Level 3 category, and elected to apply the fair value provisions of FASB ASC Topic 825, which allows us to elect the fair value option for our option on the date the put option is first recorded in our financial statements. We will recognize future changes in the fair value of the ARS and the put option in the Consolidated Statement of Operations. The fair value adjustments to the ARS and put option will largely offset and will result in a minimal net impact to the Consolidated Statement of Operations in future periods.

Trading Securities

Our trading securities as of December 31, ~~2008~~2009 and ~~2007~~2008 were as follows (in thousands):

	2008					2007
	2009					2008
	EstimatedFair Value		~~NetRealizedLoss~~Net Unrealized LossIncluded in Earnings			EstimatedFair Value		~~NetRealizedLoss~~Net Unrealized LossIncluded in Earnings
Auction rate securities	$	6,~~662~~525	$	(~~863~~575	)	$	—6,662	$	—(863	)
Total trading securities	$	6,~~662~~525	$	(~~863~~575	)	$	—6,662	$	—(863	)

Net ~~losses~~realized gains on our ARS that we classified as trading assets held at the reporting date were $0.93 million ~~and $0~~ in ~~2008 and 2007, respectively~~2009. ~~Prior~~Net torealized ~~2008,~~losses on our ARS ~~were~~that we classified as ~~available-for-sale~~trading ~~securities~~assets inheld ~~short-term~~at ~~Investments~~December 31, 2008 were $0.9 million.

Available-for-Sale Securities

As of December 31, 2009, we did not hold any available-for-sale securities. The amortized cost, net unrealized gains and losses and estimated fair value of our available-for-sale securities as of December 31, 2008 ~~and~~was ~~2007 were~~ as follows (in thousands):

	AmortizedCost		NetUnrealizedGains		NetUnrealizedLosses		EstimatedFair Value
2008
Municipal bonds	$	1,613	$	26	$	—	$	1,639
	$	1,613	$	26	$	—	$	1,639
2007
Auction rate securities	$	10,300	$	—	$	—	$	10,300
Municipal bonds		15,568		43		—		15,611
Other available for sale securities		2,000		1		—		2,001
	$	27,868	$	44	$	—	$	27,912

~~Net~~61 ~~unrealized gains and losses at December 31, 2008 and 2007 were the result of fluctuations in the current market value of our available-for-sale securities in the marketplace.~~

~~Maturities~~Net ofunrealized ~~investment~~gains ~~securities classified as available-for-sale~~ at December 31, 2008 ~~and~~were ~~2007 by~~the ~~contractual~~result ~~maturity~~of ~~are~~fluctuations ~~shown below (~~in ~~thousands).~~the current ~~Expected~~market ~~maturities~~value ~~will~~of ~~vary~~our ~~from~~available-for-sale ~~contractual~~securities ~~maturities~~in ~~because borrowers may have~~ the ~~right to recall or prepay obligations with or without call or prepayment penalties~~marketplace.

	2008				2007
	AmortizedCost		EstimatedFair Value		AmortizedCost		EstimatedFair Value
Within 1 year	$	—	$	—	$	7,071	$	7,082
Between 1 and 5 years		—		—		6,516		6,539
Between 5 and 10 years		1,613		1,639		1,001		1,003
After 10 years		—		—		13,280		13,288
	$	1,613	$	1,639	$	27,868	$	27,912

We sold approximately $1.6 million and $22.9 million in investment securities held as available-for-sale in the years ended December 31, 2009 and 2008, respectively.

We sold approximately $22.9 million and $48.7 million in investment securities held as available-for-sale in the years ended December 31, 2008 and 2007, respectively.

7. Inventories

Inventories at December 31, ~~2008~~2009 and ~~2007~~2008 consisted of the following (in thousands):

	2008		2007
	2009		2008
Raw materials	$	47,~~849~~477	$	24,~~565~~849
Work in process		—291		15—
Finished goods		~~169~~712		~~341~~169
	$	58,~~018~~480	$	25,~~921~~018

OfThe ~~our~~increase ~~$5.0~~in ~~million~~our inventory balance at December 31, 2009, compared to December 31, 2008, ~~$1.1~~was ~~million~~primarily driven by the introduction of two new product platforms and ~~$3.9~~increased ~~million~~inventory ~~were related~~to meet anticipated demand, partially offset by the decision to exit manufacturing activities of our Memory Solutions ~~segment~~business ~~and~~during ~~our~~the ~~Rugged~~first ~~Technology~~quarter ~~Solutions~~of ~~segment, respectively~~2009. At December 31, ~~2008~~2009 and ~~2007~~2008, our reserve for excess, slow-moving and obsolete inventory was approximately $3.0.4 million and $03.80 million, respectively. ~~The~~As ~~increase~~of inDecember 31, 2007, our reserve for excess, slow-moving and obsolete inventory ~~was~~included ~~primarily due to~~ a charge of approximately $2.0 million related to the declining recoverability of our DIMM inventory. The decrease in our reserve for excess, slow-moving and obsolete inventory during 2009 was primarily due to the final disposal of our memory inventory.

8. Property, Plant and Equipment

Property, plant and equipment at December 31, ~~2008~~2009 and ~~2007~~2008 consisted of the following (in thousands):

Asset Class	EstimatedLife(in years)	~~2008~~2009			~~2007~~2008
Land		$	371		$	371
Buildings	20		21,~~345~~720			2,~~311~~345
Software	1-3		~~916~~572			~~1,098~~916
Vehicles	5		49—			5149
Office furniture and equipment	3-5		~~2,198~~962			2,~~411~~198
Lab equipment	3-5		123,~~113~~850			1612,~~809~~113
Tooling and fixtures	3-7		42,~~420~~114			24,~~171~~420
Leasehold improvements	3		~~418~~—			~~985~~418
			22,830			26,207
			9,589			22,830
Accumulated depreciation			(186,~~391~~299	)		(1618,~~995~~391	)
Property, plant and equipment, net		$	43,~~439~~290		$	94,~~212~~439

71Effective July 31, 2009, we entered into a lease agreement with Invensys Electronica Reynosa, S. de R.L. de C.V. (Invensys) to lease our manufacturing facility in Reynosa, Mexico. The lease has a term of five years, with two renewal periods of five years each. Invensys may terminate the lease after the third year. As of December 31, 2009, the cost and accumulated depreciation of our manufacturing facility in Reynosa, Mexico was approximately $1.9 million and $0.5 million, respectively.

As a result of our decision to ~~close~~implement ~~our~~a ~~operations~~new inenterprise ~~Reynosa,~~resource ~~Mexico,~~planning we(ERP) ~~reviewed the value of our land~~system ~~and~~during ~~building there. We estimated~~ the ~~cash~~second ~~flow~~quarter ~~that~~of ~~would~~2009, ~~result~~we ~~from~~reviewed the ~~disposal~~remaining ofuseful ~~those~~life ~~assets~~related ~~and~~to ~~recorded~~our anlegacy ~~impairment of $0~~system.6 ~~million~~Based ~~during~~on ~~the~~that ~~fourth quarter of 2008~~review, ~~which is included in Impairment of acquisition intangibles and fixed assets. In addition,~~ we ~~decided~~determined tothat ~~sell~~remaining ~~certain~~useful ~~assets~~life ~~from~~for our ~~Memory~~legacy ~~Solutions~~system ~~business,~~did ~~which~~not weextend ~~recorded~~beyond ~~as assets held for sale at December~~March 31, ~~2008.~~2009 ~~The~~and ~~market~~recorded additional ~~value~~depreciation of ~~these assets at the time we decided to sell them was~~ approximately $0.83 million, ~~which~~or ~~was~~$0.08 ~~equal~~per toshare, ~~the~~during ~~net book value and therefore no impairment was recorded~~2009.

~~Due~~As a result of our decision to aclose our ~~decline~~operations in ~~revenue~~Reynosa, Mexico, we reviewed the value of our land and ~~negative~~ building there. We estimated the cash flow ~~related~~that towould ~~our~~result ~~DIMM~~from ~~business~~the ~~unit~~disposal of those assets and recorded an impairment of $0.6 million during the fourth quarter of 2008, which is included in impairment of acquisition intangibles and fixed assets. In addition, we ~~reviewed~~decided ~~our~~to ~~long-lived~~sell certain assets ~~associated~~from ~~with~~our ~~this~~Memory Solutions business, ~~unit~~which ~~for~~we ~~impairment~~recorded as ofassets ~~September~~held for sale at December 3031, 2008. AsThe amarket ~~result~~value of these ~~this~~assets ~~review~~at the time we decided to sell them was approximately $0.8 million, which was equal to the net book value and therefore no impairment was recorded. During the three months ended March 31, 2009, we recorded aan ~~non-cash~~impairment charge of approximately $20.4 million, ~~which~~related ~~is included~~to inour ~~Impairment~~assets ofheld ~~acquisition~~for ~~intangibles~~sale ~~and~~based ~~fixed~~on quoted market prices for similar assets, which we recorded in ~~cost~~restructuring ofexpense. ~~revenue~~Also, ~~for~~during the ~~write-down~~first quarter of ~~the~~2009, ~~lab~~we ~~equipment~~recorded a provision of approximately $0.5 million related to ~~our~~certain ~~DIMM~~fixed ~~business~~assets ~~unit~~no longer used in manufacturing, which we recorded in restructuring expense.

~~During~~Due ~~the~~to ~~years~~a decline ~~ended~~in ~~December 31,~~revenue ~~2008, 2007~~ and ~~2006,~~negative wecash ~~recorded~~flow ~~depreciation~~related ~~expense~~to ofour ~~$3.6~~DIMM ~~million,~~business ~~$3.3 million and $4.2 million~~unit, ~~respectively.~~we ~~Amortization~~reviewed ofour ~~the~~long-lived assets ~~under~~associated ~~capital~~with ~~lease~~this ~~was~~business ~~included in~~unit ~~depreciation~~for ~~and~~impairment ~~was~~as ~~approximately~~of ~~$36~~September 30,~~000,~~ ~~$22,000~~2008. ~~and~~As ~~$18,000~~a ~~for~~result ~~the~~of ~~years~~this ~~ended December 31~~review, ~~2008,~~we ~~2007~~recorded ~~and~~a ~~2006,~~non-cash ~~respectively~~charge of $2.4 ~~Interest~~million, ~~expense~~which ~~related~~is toincluded ~~assets~~in ~~under~~impairment ~~capital~~of ~~lease~~acquisition ~~was~~intangibles ~~included~~and infixed ~~Interest~~assets ~~expense~~in ~~and~~cost ~~was~~of ~~approximately $7~~revenue,~~000,~~ ~~$10,000~~for ~~and~~the ~~$10,000~~write-down ~~for~~of the ~~years~~lab ~~ended~~equipment ~~December 31,~~related ~~2008,~~to ~~2007~~our ~~and~~DIMM ~~2006,~~business ~~respectively~~unit.

During ~~2006,~~the weyears ~~sold~~ended aDecember 31, ~~piece~~2009, of2008 ~~lab equipment for a gain of $0.2 million to SMART under our manufacturing agreement with SMART. During 2007~~ and ~~2008~~2007, we ~~sold~~recorded ~~certain~~depreciation ~~equipment~~expense ~~with a net book value~~ of $~~36,000~~1.8 ~~and $44~~million,~~000,~~ ~~respectively, for a gain of~~ $~~62,000~~3.6 million and $83.3 million,~~000,~~ respectively.

9During 2007 and 2008, we sold certain equipment with a net book value of $36,000 and $44,000, respectively, for a gain of $62,000 and $8,000, respectively. ~~Other~~During ~~Intangible~~2009, ~~Assets~~we sold various assets recorded as assets held for sale with a net book value of approximately $0.4 million for a net gain of approximately $0.4 million.

9. Goodwill and Other Intangible Assets

Goodwill represented the excess purchase price over the fair value of net assets acquired in our acquisition of Southland Micro Systems, Inc. (Southland) on August 31, 2007, and our acquisition of Augmentix on July 14, 2008. We allocate goodwill to reporting units for goodwill impairment testing. A reporting unit is defined as a component of an entity for which the operating results are regularly reviewed by management and discrete financial information is available.

We assess whether goodwill is impaired on an annual basis, as well as when events occur or circumstances change that would indicate the book value of goodwill has been impaired. Upon determining the existence of goodwill impairment, we measure the impairment based on the amount by which the book value of goodwill exceeds its fair value. During the fourth quarter of 2008, due to continued challenges presented by general economic conditions and our low market capitalization, we conducted a review to update the fair value of the Rugged Technology Solutions business. As a result of that review, we recorded a non-cash charge of $4.0 million for the impairment of the goodwill created by the Augmentix acquisition.

In addition, as a result of the decline in revenue and negative cash flow related to our DIMM business unit during the third quarter of 2008, we undertook an assessment to determine the fair value of our DIMM business. As a result of this review, we recorded a non-cash charge of $5.0 million for the write off of the goodwill related to our DIMM business unit.

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

We evaluate our other intangible assets for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. When these factors and circumstances exist, we compare the projected undiscounted future cash flows of these assets to their respective carrying values to determine if impairment exists. Impairment, if any, is measured as the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows.

In connection with our Augmentix acquisition during the third quarter of 2008, we acquired intangible assets consisting of customer relationships, trade name and developed technology for $6.2 million, $1.0 million and $3.3 million, respectively. In addition, through our Southland acquisition during the third quarter of 2007, we acquired intangible assets consisting of customer relationships, trade name and a noncompete agreement for $4.7 million, $1.8 million and $0.2 million, respectively.

As of September 30, 2008, as a result of a decline in revenue and negative cash flow related to our DIMM business unit, we impaired the remaining residual value of the trade name intangible asset acquired through our Southland acquisition and recorded a charge of approximately $1.6 million, which is included in Impairment of acquisition intangibles and fixed assets in cost of revenue. We also impaired the remaining residual value of our customer relationship and non-compete agreements acquired through our Southland acquisition as a result of the decline in revenue and negative cash flow related to our DIMM business unit, and recorded a charge of approximately $4.3 million, which is included ~~Impairment~~impairment of acquisition intangibles in operating expenses. In addition, as of June 30, 2008, as a result of the anticipated reduction in the future cash flow from our license agreement with Samsung Electronics Co., Ltd. (Samsung), we impaired the remaining residual value of the customer relationship intangible asset and recorded a charge of approximately $0.2 million, which is included in impairment ~~Impairment~~ of acquisition intangibles and fixed assets in cost of revenue. The value was initially recorded based upon the projected discounted net cash flows attributable to this relationship.

As of March 31, 2007, as a result of our customers’ increased use of competitive technologies and the associated uncertainty around our future revenue, we tested our trademark intangible asset for impairment. As a result of our review, during the three months ended March 31, 2007, we recorded an impairment charge of approximately $0.7 million, which is included in impairment of acquisition intangibles and fixed assets in cost of revenue. In addition, as of March 31, 2007, we determined that the trademark intangible asset has an estimated remaining useful life of four years. During the three months ended June 30, 2007, we began to amortize the remaining balance of $1.1 million over its estimated useful life in proportion to the estimated contribution to discounted cash flows during the four-year period.

72The gross carrying amounts and accumulated amortization of our other intangible assets at December 31, 2009 and 2008 consisted of the following (in thousands):


	2009					2008
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Acquired technology and patents	$	23,600	$	(20,640	)	$	23,499	$	(19,541	)
Trademark and trade name		2,087		(1,014	)		2,087		(629	)
Other intangible assets		12,043		(8,015	)		12,043		(6,848	)

	$	37,730	$	(29,669	)	$	37,629	$	(27,018	)

~~result~~Amortization ofexpense ~~our~~for ~~review,~~all ~~during~~intangibles in the ~~three~~years ~~months~~ ended ~~March~~December 31, ~~2007~~2009, we2008 ~~recorded~~and 2007 anwas ~~impairment charge of approximately~~ $02.7 million, ~~which~~$3.6 ismillion ~~included in Impairment of acquisition intangibles~~ and ~~fixed~~$5.8 ~~assets~~million, ~~in cost of revenue~~respectively. InDuring ~~addition~~2009, as2008 ofand ~~March 31,~~ 2007, we ~~determined~~also ~~that~~recorded ~~the~~a ~~trademark~~charge ~~intangible asset has an estimated remaining useful life~~ of ~~four years~~$0.2 ~~During~~million, ~~the~~$1.3 ~~three~~million ~~months~~and ~~ended June 30~~$0.3 million, ~~2007~~respectively, wein ~~began~~connection towith ~~amortize~~patents ~~the~~and ~~remaining~~patent ~~balance~~applications ofthat ~~$1.1~~we ~~million~~will not ~~over~~use ~~its~~in ~~estimated~~our ~~useful~~future ~~life~~business inand ~~proportion~~which towe ~~the~~do ~~estimated~~not ~~contribution~~expect toour ~~discounted~~licensees ~~cash~~will ~~flows~~use ~~during~~in ~~the~~their ~~four-year~~manufacturing ~~period~~processes.

The gross carrying amounts and accumulated amortization of our other intangible assets at December 31, 2008 and 2007 consisted of the following (in thousands):

	2008					2007
	Gross CarryingAmount		AccumulatedAmortization			Gross CarryingAmount		AccumulatedAmortization
Acquired technology and patents	$	23,499	$	(19,541	)	$	21,337	$	(18,735	)
Customer contract		—		—			26,100		(25,461	)
Trademark and trade name		2,087		(629	)		2,922		(326	)
Other intangible assets		12,043		(6,848	)		10,660		(5,671	)
	$	37,629	$	(27,018	)	$	61,019	$	(50,193	)

Amortization expense for all intangibles in the years ended December 31, 2008, 2007 and 2006 was $3.6 million, $5.8 million and $7.4 million, respectively. During 2008 and 2007, we also recorded a charge of $1.3 million and $0.3 million, respectively, in connection with patents and patent applications that we will not use in our future business and which we do not expect our licensees will use in their manufacturing processes.

The following table details the estimated aggregate annual amortization expense (in thousands) for each of the five succeeding years:

Year	Amount
2009	$	2,643
2010	$	3,421
2010	$	3,397
2011	$	2,140
2011	$	2,231
2012	$	925
2012	$	1,023
2013	$	463
2013	$	545
2014	$	172

10. Accrued Liabilities

Accrued compensation at December 31, ~~2008~~2009 and ~~2007~~2008 were as follows (in thousands):

	2008		2007
	2009		2008
Accrued salaries and wages	$	~~517~~181	$	~~306~~517
Accrued vacation		~~311~~—		~~835~~311
Accrued bonuses		~~138~~38		~~287~~138
Accrued severance and restructuring costs		985		—
Accrued severance		—		985
	$	~~1,951~~219	$	1,~~428~~951

Accrued ~~liabilities~~compensation atdecreased ~~December 31~~approximately $1.7 million during 2009, compared to 2008, primarily due to payments in 2009 of approximately $1.0 million of accrued severance to employees terminated during 2008. In addition, accrued salaries and ~~2007~~wages ~~were~~decreased $0.3 million as ~~follows~~a (result of a workforce reduction in ~~thousands):~~connection with exiting the manufacturing activities for our Memory Solutions business and accrued vacation decreased $0.3 million due to a policy change where employees can no longer carry forward unused vacation to future years.

	2008		2007
Accrued payroll taxes and indirect benefits	$	124	$	160
Accrued property taxes		159		183
Other accrued liabilities		1,252		2,734
	$	1,535	$	3,077

Accrued liabilities at December 31, 2009 and 2008 were as follows (in thousands):


	2009		2008
Accrued payroll taxes and indirect benefits	$	28	$	124
Accrued restructuring		155		—
Accrued property taxes		37		159
Other accrued liabilities		1,092		1,252

	$	1,312	$	1,535

11. Warranty Liability

We warrant products for periods up to 37 months following the time we manufacture them. Changes in our warranty liability during the years ended December 31, 2009 and 2008 were as follows (in thousands);


	Year Ended December 31,
	2009			2008
Warranty liability at beginning of period	$	118		$	136
Costs accrued for new warranty contracts		722			59
Changes in estimates for pre-existing warranties		(113	)		—
Obligations paid		(314	)		(77	)

Warranty liability at end of period	$	413		$	118

The ~~decrease~~increase in ~~other~~our ~~accrued~~warranty ~~liabilities~~liability ~~of $1.5 million~~ during ~~2008~~2009, as compared to ~~2007~~2008, is primarily due to ~~the~~an increase ~~reversal~~in ofunits ~~the~~covered ~~liability~~under ~~associated~~our ~~with~~warranty ~~the Southland earn-out of approximately $1~~policy.2 ~~million. See Note 12, “Commitments and Contingencies,” for additional discussion regarding the earn-out provision.~~

1112. Convertible Notes Payable

In connection with our acquisition of Augmentix, we issued approximately $10.7 million in convertible notes with an annual interest rate of 6% to certain stockholders of Augmentix. Interest payments ~~are~~were due each January 31 and July 30, with the principal due on December 31, 2010. The former Augmentix stockholders ~~have~~had the right to convert the principal and any unpaid interest into our common stock at a conversion price of $230.5000 at any time prior to the earlier of (i) December 31, 2010, (ii) a change of control of the Company or (iii) the redemption of all of the outstanding principal amount of the notes. AtEffective ~~any~~June 3, ~~time~~2009, ~~subsequent~~we tofinalized the ~~issuance~~post-closing ofworking ~~the~~capital ~~convertible~~adjustment ~~notes,~~as weset ~~have~~forth in the ~~right~~merger toagreement. ~~redeem~~The ~~the~~result ~~notes~~was ~~for~~an adjustment to the ~~redemption~~ ~~amount,~~working ~~which~~capital isin ~~equal~~our tofavor ~~the~~of ~~outstanding~~approximately ~~principal~~$0.6 ~~balance~~million. ~~plus~~The ~~accrued~~convertible notes ~~interest,~~were ~~with~~reduced atfrom ~~least~~approximately 30$10.7 ~~days~~million ~~prior~~to ~~written~~approximately ~~notice~~$10.1 Asmillion. ofDuring December ~~31,~~ ~~2008,~~2009 in connection with an agreement executed with the ~~fair~~convertible ~~value~~note ofholders, we paid off our convertible notes ~~was~~at a discount of 20% plus any unpaid interest, or approximately $98.93 million. ~~and~~We ~~were convertible~~recorded ~~into~~a gain of approximately 4$2.4 0 million ~~shares~~in gain on debt extinguishment as a result of paying off these convertible notes.

1213. ~~Commitments~~Letter ~~and~~of ~~Contingencies~~Credit

AtDuring ~~December 31,~~the ~~2008,~~first ~~approximately~~quarter ~~66%~~ of ~~our~~2009, ~~employees~~a infinancial institution ~~Mexico,~~issued ora ~~approximately~~letter ~~43%~~of credit to one of our ~~total employees~~suppliers, ~~were~~which ~~represented~~guarantees byup ato ~~labor organization~~$0.5 ~~that~~million ~~has~~of ~~entered~~our ~~into~~outstanding aaccount ~~labor~~balance ~~contract~~ with usthis supplier. ~~Given~~As ~~that~~a result of this agreement, we are ~~terminating~~required ~~manufacturing~~to inmaintain ~~Mexico,~~a wecompensating ~~expect~~balance toof ~~terminate~~$0.5 million ~~these~~on ~~employees~~deposit bywith the ~~end~~financial institution for a term of ~~the~~12 ~~first~~months ~~quarter~~ending on February 26, 2010. As of December 31, 2009, we had this required amount on deposit.

~~During October 2008, we entered into a minimum purchase agreement with one of our vendors~~14. ~~The~~Commitments ~~minimum purchase terms stipulate the purchase of $0.2 million of product by March 31, 2009, an additional $0.3 million by September 30, 2009,~~ and anContingencies additional $0.5 million by March 31, 2010. As of December 31, 2008, we had not purchased any product under this agreement; however, we expect to fulfill the minimum purchase requirement within the agreed-upon time frame.

During October 2008, we entered into a minimum purchase agreement with one of our vendors. The minimum purchase terms stipulate the purchase of $0.2 million of product by March 31, 2009, an additional $0.3 million by September 30, 2009, and an additional $0.5 million by March 31, 2010. During December 2009, we entered into an amendment related to this agreement, which amended the remaining minimum purchase terms to stipulate the purchase of $1.3 million of product by June 1, 2010. As of December 31, 2009, we met our minimum purchase requirement for this time period and expect to fulfill the minimum purchase requirement within the agreed-upon time frame.

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

~~Labor~~Currently ~~Situation~~we are not involved in ~~Mexico~~any material legal proceedings. However, from time to time, we may be subject to legal proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we operate, and non-contractual customer claims we may agree to in the interest of maintaining business relationships.

Samsung License Agreement

~~During~~66 the second quarter of 2008, Samsung sent us a letter asserting that it made errors in the royalty reports that it previously delivered to us during the period beginning in the fourth quarter of 2005 and ending in

~~Southland~~15. ~~Earn-Out Consideration~~ Leases

AsWe ~~part~~lease of our ~~purchase~~two ofAustin ~~Southland~~facilities onunder ~~August 31,~~non-cancelable ~~2007,~~operating welease ~~offered~~agreements, ~~compensation~~both of upwhich toexpire $7during ~~million~~2010. Total tooperating ~~the~~lease ~~sellers~~expense ifrelated ~~certain~~to ~~financial~~our ~~goals~~Austin ~~were achieved~~facilities ~~over~~for the ~~two~~ years ~~subsequent~~ended ~~to closing the acquisition.~~December ~~The~~31, ~~Earn-Out~~2009, ~~was~~2008 ~~payable in two installments~~ and ~~each~~2007 ~~installment~~was ~~could~~approximately be$0.4 ~~paid~~million, ~~in any combination of cash or shares of our common stock~~$1.0 ~~As of the first anniversary of the closing~~million, ~~the sellers did not achieve the financial milestones~~ and ~~we made no payment~~$0.6 ~~On November 3~~million, ~~2008,~~respectively. weWe ~~entered~~incurred ~~into~~approximately ~~a settlement agreement with the principal stockholders of Southland at the time we acquired it~~$0.4 Inmillion ~~this~~and ~~settlement~~$0.2 ~~agreement,~~million ~~the~~in ~~principal~~total ~~stockholders~~operating ~~waived~~expense ~~their~~related ~~rights~~ to ~~the~~our ~~earn-out~~lease ~~set~~in upIrvine, atCalifornia, ~~the~~during ~~time~~2008 ~~of the closing of the acquisition for the second (~~and ~~last)~~2007, ~~year~~respectively. For ~~for~~additional ~~which~~information ~~they~~relating ~~were eligible~~ to ~~participate~~this inlease, ~~the~~see ~~earn-out.~~Note ~~As of December 31~~3, ~~2008, we~~Acquisitions ~~have~~– no2007 ~~expense~~Southland ~~recorded~~Microsystems ~~for the second earn-out period~~Acquisition.

~~Staktek~~Future ~~Group,~~minimum ~~L.P.~~payments v.under ~~Kentron~~non-cancelable ~~Technologies,~~operating ~~Inc.~~leases ~~and~~with ~~Chris~~initial ~~Karabatsos~~terms of one year or more consist of the following at December 31, 2009 (in thousands):

On March 8, 2007, we filed an action in the U.S. District Court for the District of Massachusetts, Boston Division, against Kentron Technologies, Inc. and Chris Karabatsos, an individual, seeking damages and injunctive relief relating to the defendants’ false and disparaging statements regarding us and our ArctiCore™ technologies that we proposed to the JEDEC Solid State Technology Association (JEDEC), an industry standards-setting organization, for possible adoption as a standard. In particular, we alleged that the defendants’ actions constituted unfair competition under the Lanham Act, intentional interference with prospective business relations, defamation, business disparagement and caused actionable injury to our business reputation. On April 22, 2008, we entered into a settlement and purchase agreement with Kentron Technologies, Inc. and Mr. Chris Karabatsos for approximately $0.6 million, which we recorded during the first quarter of 2008, resolving our pending litigation regarding our ArctiCore technologies. The settlement included the sale by Kentron and Karabatsos of certain of their intellectual property to us so that we may pursue standardization of our ArctiCore technologies with JEDEC.


	Operating Leases
2010	$	261
2011		12
2012		—
2013		—
2014		—

Total minimum lease payments	$	273

~~Currently~~16. weRelated-Party ~~are~~Transactions ~~not involved in any material legal proceedings.~~

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

13. Leases

In connection with the Southland acquisition, on September 1, 2007, we entered into a lease agreement with an entity owned by two former Entorian employees (former Southland principals) to lease our Irvine facility for a term of three years. On November 3, 2008, we entered into a settlement agreement with these employees and agreed to pay 35% of our remaining two-year lease obligation on the building, or approximately $0.3 million, in exchange for a release from this lease. In addition, we incurred approximately $0.4 million and $0.2 million in total operating expense related to this lease during 2008 and 2007, respectively. We lease our Austin facilities under non-cancelable operating lease agreements, which will expire during 2010. Total operating lease expense related to our Austin facilities for the years ended December 31, 2008, 2007 and 2006 was approximately $1.0 million, $0.6 million, and $0.4 million, respectively.

Future minimum payments under non-cancelable operating leases with initial terms of one year or more consist of the following at December 31, 2008 (in thousands):

	OperatingLeases
2009	$	565
2010		412
2011		12
2012		—
2013		—
Total minimum lease payments	$	989

14. Related-Party Transactions

Revenue

Lease Agreement

In connection with ~~the~~our Southland acquisition, on September 1, 2007, we entered into a lease agreement with an entity owned by two former Entorian employees (former Southland principals) to lease our Irvine facility for a term of three years.

Relationship with Austin Ventures

At December 31, ~~2008~~2009, Austin Ventures and its affiliates beneficially owned approximately 78% of our outstanding common stock. Set forth below is a brief description of the existing relationships and agreements between Austin Ventures and us.

Augmentix Acquisition

Our acquisition of Augmentix was a transaction between commonly controlled entities, as our majority owner, Austin Ventures, also owned approximately 55% of the outstanding equity securities of Augmentix (on an as-converted to common stock basis). As a result of the acquisition, Austin Ventures received approximately $15.5 million in cash and notes receivable. This amount does not correspond to the ownership split between Austin Ventures and minority shareholders, primarily due to the accrued dividends due to the preferred holders upon completion of the acquisition. ~~Austin~~During ~~Ventures~~December ~~has~~2009, ~~the~~we ~~option~~paid tooff ~~convert~~our convertible ~~all~~notes orat ~~any~~a ~~portion~~discount of ~~the principal~~20% ~~amount~~plus ~~of the notes and~~ any unpaid interest, ~~related~~See ~~thereto~~Note ~~into~~12, ~~shares~~“Convertible ofNotes ~~our~~Payable,” ~~common~~for ~~stock~~additional atinformation regarding the ~~rate~~convertible ofnotes $2issued.50 ~~per share.~~

Board of Directors

Joseph C. Aragona, a general partner of Austin Ventures, is one of our directors. Clark W. Jernigan, a ~~principal~~venture partner of Austin Ventures, is one of our directors and serves ason ~~chairperson of~~ our compensation committee. Joseph A. Marengi, a venture partner of Austin Ventures and a director on the Augmentix board of directors at the time of our acquisition of Augmentix, is the chairman of our board of directors. Krishna Srinivasan, a partner of Austin Ventures during 2009, is also one of our directors and served as a director on the Augmentix board of directors at the time of our acquisition of Augmentix.

Registration Rights

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

~~15.~~68 ~~Loss Per Share~~

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

	Year Ended December 31,
	2008			2007			2006
Numerator:
Net loss	$	(42,587	)	$	(39,987	)	$	(454	)
Denominator:
Weighted average common shares outstanding		46,799			47,199			48,345
Less: Weighted common shares subject to repurchase		—			43			265
Total weighted average common shares used in computing basic loss per share		46,799			47,156			48,080
Effect of dilutive securities:
Common shares subject to repurchase		—			—			—
Stock options		—			—			—
Stock warrants		—			—			—
Dilutive potential common shares		—			—			—
Total weighted average common shares used in computing diluted loss per share		46,799			47,156			48,080
Loss per share:
Basic	$	(0.91	)	$	(0.85	)	$	(0.01	)
Diluted	$	(0.91	)	$	(0.85	)	$	(0.01	)

17. Income (Loss) Per Share

~~For~~Effective ~~the years ended December~~October 3130, ~~2008~~2009, ~~2007~~we ~~and~~completed ~~2006,~~a ~~options~~1-for-12 ~~and~~reverse split of our outstanding shares of common stock, ~~subject~~which towe accounted for ~~repurchase~~retroactively ~~were~~and ~~not~~is ~~included~~reflected in the ~~computation~~shares ofused in computing basic and diluted income (loss) per share ~~because~~presented in the ~~effect~~table ~~would be antidilutive~~below.

~~16.~~A ~~Stockholders’~~reconciliation ~~Equity~~of the numerator and denominator used in the calculation of basic and diluted income (loss) per share follows (in thousands, except per share data):


	Year Ended December 31,
	2009		2008			2007
Numerator:
Net income (loss)	$	504	$	(42,587	)	$	(39,987	)
Denominator:
Weighted average common shares outstanding		3,900		3,900			3,933
Less: Weighted common shares subject to repurchase		—		—			3

Total weighted average common shares used in computing basic income (loss) per share		3,900		3,900			3,930

Effect of dilutive securities:
Stock options		23		—			—

Dilutive potential common shares		23		—			—

Total weighted average common shares used in computing diluted income (loss) per share		3,923		3,900			3,930

Income (loss) per share:
Basic	$	0.13	$	(10.92	)	$	(10.17	)

Diluted	$	0.13	$	(10.92	)	$	(10.17	)

For the year ended December 31, 2009, we did not include approximately 506,000 weighted average common stock equivalents in the diluted earnings per share calculation because their impact would have been antidilutive. For the years ended December 31, 2008 and 2007, options and common stock subject to repurchase were not included in the computation of diluted loss per share because the effect would be antidilutive.

18. Stockholders’ Equity

Redeemable Preferred Stock

At December 31, ~~2008~~2009 and ~~2007~~2008, we had 5.0 million authorized shares of $0.001 par value redeemable preferred stock, none of which was issued or outstanding.

Common Stock

AtEffective ~~December~~October 3130, ~~2008 and 2007~~2009, we ~~had~~completed ~~100,000,000~~a 1-for-12 ~~authorized~~reverse split of our outstanding shares of common stock. OfThe ~~these authorized~~objective of the reverse stock split was to regain compliance with NASDAQ’s $1 per share minimum bid rule. The total number of shares, ~~16,830,000~~of common stock outstanding (excluding treasury shares) ~~have~~was ~~been~~reduced ~~reserved~~from ~~for~~approximately ~~the~~47 million ~~issuance~~to approximately 4 million shares. The number of common shares related to the company’s stock options. Ofhas ~~these~~been ~~options,~~automatically proportionately adjusted to reflect the reverse split.

77Under the terms of the reverse split, stockholders holding 12 or more shares of Entorian common stock at the close of business September 23, 2009 received one new Entorian share for every 12 shares held. Stockholders holding fewer than 12 shares received cash consideration in lieu of fractional shares.

We accounted for the reverse stock split retroactively and it is accounted for in our common stock activity below.

At December 31, 2009 and 2008, we had 8,333,333 authorized shares of common stock. Of 19these authorized shares,~~186~~ 1,~~878~~402,500 shares have been reserved for the issuance of stock options. Of these options, 1,607,637 had been granted, of which 3434,~~154,722~~310 were forfeited, leaving ~~797~~229,~~844~~173 available for issuance at December 31, ~~2008~~2009. At December 31, ~~2007~~2008, 12 1,~~341~~598,~~878~~906 had been granted, ~~and~~of ~~586~~which 66,~~337~~487 were available for issuance.

In February 2006, we announced that our Board of Directors renewed our stock repurchase program. Under this renewed program, we can spend up to $10.0 million to purchase shares of our common stock through open market transactions or privately negotiated transactions. In November 2006, our Board of Directors authorized an additional $10.0 million to purchase our common stock. During ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, we purchased 1112,~~406,683~~745 shares, 124,~~352,947~~521 shares, and ~~294~~30,~~254~~455 ~~shares~~ of our stock under this program at a total cost of $84.1 9 million, $40.92 million and $0.2 1 million, respectively.

Common Stock Warrant

In October 2003, we issued a warrant to purchase 211,~~500~~791 shares of common stock to a charitable foundation at $08.6704 per share. The warrant is exercisable by the warrant holder at any time prior to October 24, 2010. The fair value of the warrant was estimated using the Black-Scholes pricing model with the following assumptions: expected volatility of 98.0%; expected life of 7 years; expected dividend yield of 0.0%; and the risk-free interest rate of 3.0%. During the period ended December 31, 2003, the warrant was recorded at its fair market value of approximately $225,000 and expensed to ~~“Selling~~selling, general and administrative” expenses in the ~~consolidated~~Consolidated ~~statement~~Statement of ~~operations~~Operations.

1719. ~~Stock-Based~~Settlement ~~Compensation~~Gain

We were a claimant in the class action antitrust litigation entitled In ~~July~~Re DRAM Antitrust Litigation pending in the United States District ~~2003,~~Court weof ~~adopted~~the Northern District of California (the ~~2003~~Court). ~~Stock~~A ~~Option~~settlement ~~Plan~~was reached in this litigation. Pursuant to terms of the settlement, ~~which~~claimants ~~currently~~who ~~has~~purchased 16DRAM from April 1,~~830~~ 1999 through June 30,~~000~~ ~~authorized~~2002 ~~shares~~were able to make claims for recovery, based on evaluation and approval by the Court. ~~Options~~We ~~generally~~purchased ~~vest~~DRAM ~~over~~in athis ~~four-year~~time period and ~~are~~submitted ~~exercisable~~a ~~for~~claim awith ~~period~~the ofclaims ~~ten~~administrator. ~~years~~On ~~from~~October 28, 2009, the ~~date~~judge approved the final distribution of ~~grant~~funds pursuant to this settlement. During December 2009, we received our settlement of $7.7 million, which is recorded in gain on litigation settlement.

~~Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) and continued to use the Black-Scholes method of~~20. ~~valuation for share~~Stock-~~based~~Based ~~compensation.~~Compensation Under the fair value recognition provisions of SFAS 123(R), we adopted the modified prospective transition method, and therefore, recognize compensation expense for all share-based payments granted after January 1, 2006, as well as those granted prior to but not yet vested as of January 1, 2006.

~~SFAS 123(R)~~In ~~requires~~July ~~the~~2003, ~~cash flows~~we ~~resulting~~adopted ~~from~~ the ~~tax~~2003 ~~benefits~~Stock ~~from~~Option ~~tax~~Plan, ~~deductions~~which incurrently ~~excess~~has of1,402,500 ~~the~~authorized shares. ~~compensation~~Options ~~cost~~generally ~~recognized~~vest toover ~~be classified as financing cash flows. As~~ a ~~result,~~four-year ~~$0,~~period ~~$0.1 million~~ and ~~$0.3~~are ~~million~~exercisable ~~of excess tax benefits~~ for ~~2008,~~a ~~2007~~period ~~and~~of ~~2006, respectively,~~ten ~~have~~years ~~been~~from ~~classified~~the asdate ~~financing~~of ~~cash flows~~grant.

~~Information~~Effective ~~with~~October 30, ~~respect~~2009, towe completed a 1-for-12 reverse split of our outstanding shares of common stock, ~~option~~which ~~activity~~we accounted for ~~the~~retroactively ~~year~~and ~~ended December 31,~~is ~~2008~~reflected ~~was~~in asour ~~follows:~~stock option activity presented in the table below.

	Outstanding Options
	Number ofOptions		WeightedAverageExercise Price		WeightedAverageRemainingContractual Life(in years)	AggregateIntrinsicValue (inthousands)
Outstanding at December 31, 2007	5,333,260		$	3.31
Granted	6,845,000		$	0.62
Exercised	(314,937	)	$	0.33
Cancelled or forfeited	(1,756,507	)	$	2.48
Outstanding at December 31, 2008	10,106,816		$	1.72	8.33	$	29
Options exercisable at December 31, 2008	3,550,096		$	3.50	5.94	$	29

Information with respect to stock option activity for the year ended December 31, 2009 was as follows:


	Outstanding Options
	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2008	842,130		$	20.69
Granted	8,907		$	3.63
Exercised	(7,928	)	$	0.19
Cancelled or forfeited	(171,451	)	$	31.28

Outstanding at December 31, 2009	671,658		$	18.01	5.2	$	596

Options exercisable at December 31, 2009	379,520		$	26.18	4.2	$	152

As of December 31, ~~2008~~2009, there was approximately $3.1.4 million of unrecognized compensation cost related to outstanding stock options, which we expect to recognize over a weighted average period of 32.57 years. For the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007, the total intrinsic value of exercised stock options was $35,000, $0.1 million, and $0.7 ~~million~~ ~~and $3.3~~ million, respectively.

For grants issued during the 12 months ended December 31, ~~2008~~2009, 2008 ~~2007~~ and ~~2006~~2007, the weighted average assumptions used in determining fair value under the Black-Scholes model are outlined in the following table:

	Year Ended December 31,
	2008		2007		2006
	2009			2008		2007
Expected volatility	64100.~~3% – 87.8%~~0	%	~~59.0% – 61.6%~~	77.9	~~59.0~~% ~~– 62.0%~~	60.2	%
Dividend yield	0.0%	%	~~0.0%~~	0.0	~~0.0~~%	0.0	%
Expected term (in years)	56.~~3 – 7.0~~6		~~7.0~~	6.9	~~7.0 – 10.0~~	7.0
Risk-free interest rate	12.5~~% – 3.9%~~	%	~~3.0% – 5.0%~~	2.4	~~4.5~~% ~~– 5.2%~~	4.4	%

The computation of expected volatility is based on historical volatility of our common stock. The expected term of options issued to employees is estimated based on the average of the vesting period and contractual term of the option. The risk-free rate is based on U.S. Treasury yields for securities in effect at the time of grant, with terms approximating the expected term until exercise of the option. The weighted-average fair value of stock options granted during the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007 was $02.4295, $15.8310 and $321.9897, respectively. During the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007, we recorded share-based compensation expense for options of approximately $10.9 million, $51.09 million and $5.80 million, respectively.

Restricted Stock Units

During the second quarter of 2006, we adopted our Equity-Based Compensation Plan, which provides for granting restricted stock awards, stock appreciation rights, ~~restricted stock units (~~RSUs), bonus stock and dividend equivalents to eligible employees. As of December 31, ~~2008~~2009, we had ~~800~~66,~~000~~666 authorized shares under this plan. RSUs generally vest over a four-year period. Effective October 30, 2009, we completed a 1-for-12 reverse split of our outstanding shares of common stock, which we accounted for retroactively and is reflected in our RSU activity presented in the table below.

Information with respect to RSU activity for the year ended December 31, ~~2008~~ 2009 was as follows:

	Number of RSUs		Weighted Average GrantDate Fair Value
Outstanding at December 31, 2007	505,995		$	5.55
Outstanding at December 31, 2008	12,291		$	67.04
Granted	—		$	—
Vested	(~~245~~4,~~467~~588	)	$	569.5553
Forfeited	(~~112~~4,~~725~~745	)	$	567.4907
Outstanding at December 31, 2008	147,803		$	5.59
Outstanding at December 31, 2009	2,958		$	63.13

Share-based compensation related to RSUs is recorded based on our stock price as of the grant date. For the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007, RSU compensation expense was $0.83 million, $0.98 million and $0.49 million, respectively. As of December 31, ~~2008~~2009, there was approximately $0.82 million of unrecognized compensation cost related to outstanding RSUs, which we expect to recognize over a weighted average period of 10.89 years.

7971

1821. Income Taxes

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

	Year Ended December 31,
	2008			2007			2006
	2009			2008			2007
Current:
Federal	$	(15,~~029~~578	)	$	(1,~~767~~029	)	$	2(1,~~077~~767	)
Foreign		~~188~~43			~~595~~188			~~1,991~~595
State		6—			(56	)		6(5	)
Total current		(~~835~~5,535	)		(~~1,177~~835	)		4(1,~~074~~177	)
Deferred:
Federal		—			~~1,157~~—			(41,~~081~~157	)
Foreign		490			74			~~(112~~7	)
State		—			3—			~~(11~~3	)
Total deferred		490			~~1,167~~4			(41,~~204~~167	)
Benefit for income taxes	$	(~~831~~5,445	)	$	(10831	)	$	(~~130~~10	)

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

As of December 31, ~~2008~~2009, we had an operating loss carryforward of approximately $2425.81 million, ~~and~~ a federal research and development credit carryforward of approximately $0.75 million, ~~which~~and a federal foreign tax credit carryforward of approximately $0.2 million. The carryforwards will begin to expire in 2023 if not utilized. Utilization of the net operating losses and tax credits may be subject to substantial annual limitations due to the change in ownership provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and research and development credits before utilization. On November 6, 2009, Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009 (the Act). The Act amended Section 172 of the Internal Revenue Code to allow net operating losses realized in either tax year 2008 or 2009 to be carried back up to five years, compared to two years prior to enactment of the Act. This change allowed us to carry back our 2008 taxable losses to years not previously available to us, and receive an additional refund of approximately $5.6 million of previously paid Federal income taxes, which was received on March 9, 2010.

8072

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes as of December 31, ~~2008~~2009 and ~~2007~~2008 were as follows (in thousands):

	2008			2007
	2009			2008
Deferred tax assets:
Current deferred tax assets
Accrued liabilities	$	~~1,836~~741		$	~~701~~1,836
Gross current deferred tax assets		~~1,836~~741			~~701~~1,836
Valuation allowance		(~~1,479~~435	)		(~~471~~1,479	)
Net current deferred tax assets	$	~~357~~306		$	~~230~~357
Noncurrent deferred tax assets
Credit and net operating loss carryovers	$	12,484		$	76
Net operating loss carryforwards and credit carryovers	$	9,638		$	12,484
Accrued liabilities		~~126~~90			~~149~~126
Depreciation and amortization		5,~~901~~460			15,~~411~~901
Deferred compensation		34,~~948~~086			43,~~342~~948
Gross noncurrent deferred tax assets		2219,~~459~~274			522,~~978~~459
Valuation allowance		(1916,~~053~~842	)		(419,~~588~~053	)
Net noncurrent deferred tax assets	$	32,~~406~~432		$	13,~~390~~406
Deferred tax liabilities:
Current deferred tax liabilities
Prepaid expenses	$	(8627	)	$	(8786	)
Total current deferred tax liabilities	$	(8627	)	$	(8786	)
Noncurrent deferred tax liabilities
Deductible patent expense	$	(~~204~~240	)	$	(~~597~~204	)
Acquired intangibles		(32,~~372~~461	)		(~~831~~3,372	)
Total noncurrent deferred tax liabilities	$	(32,~~576~~701	)	$	(13,~~428~~576	)
Net current deferred tax asset	$	~~271~~279		$	~~143~~271
Net noncurrent deferred tax liability	$	(~~170~~269	)	$	(38170	)

We established a valuation allowance equal to the net domestic deferred tax assets due to ~~uncertainties~~ uncertainties regarding the realization of our deferred tax assets. During ~~2008~~2009, our valuation allowance ~~increased~~decreased by approximately $123.03 million due to the carryback of net operating losses ~~from~~for ~~operations~~an ~~and~~additional ~~approximately~~two ~~$3.5~~years, ~~million~~which ~~from~~was ~~the~~offset ~~Augmentix~~by ~~acquisition~~losses from operations.

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

~~The~~73 exercise of certain of our stock options results in compensation, which is includable in the taxable income of the exercising option holder and deductible by us for federal and state income tax purposes. This compensation results from increases in the fair market value of our common stock subsequent to the date of grant of the exercised stock options. Any option-related excess tax benefits are recorded as an increase to additional paid-in capital, while option-related tax deficiencies are recorded as a decrease to additional paid-in capital to the extent of our additional paid-in capital option pool, and the remainder, if any, is taken to the income tax provision. During the years ended December 31, 2008 and 2007, our option-related excess tax deductions resulted in an increase to additional paid-in capital of approximately $0 million and $0.1 million, respectively. In addition, we did not incur any option-related tax deficiencies that would result in a decrease to additional paid-in capital during the years ended December 31, 2008 and 2007.

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

	Year Ended December 31,
	2008			2007			2006
	2009			2008			2007
Computed at federal statutory rate	$	(151,~~196~~729	)	$	(1315,~~999~~196	)	$	(~~204~~13,999	)
Goodwill impairment		~~1,429~~(56	)		91,~~766~~429			—9,766
Deferred tax assets not benefited		12(3,~~011~~255	)		512,~~060~~011			—5,060
Stock-based compensation expense		~~1,226~~290			~~431~~1,226			~~387~~431
Research and development credit		(~~375~~220	)		(~~809~~375	)		—(809	)
Non-deductible and non-taxable items		(~~251~~20	)		(~~474~~251	)		(~~395~~474	)
State taxes, net of federal benefit		4(5	)		~~(11~~4	)		1(11	)
Other		~~321~~(450	)		26321			8126
Benefit for income taxes	$	(~~831~~5,445	)	$	(10831	)	$	(~~130~~10	)

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The tax years 2003 through ~~2008~~2009 remain open to examination by all the major ~~taxing~~ taxing jurisdictions to which we are subject. Our 2003 tax year is currently under examination for U.S. federal income tax purposes, though we ~~are~~have not ~~currently~~been ~~under~~notified ~~examination~~of byand ~~any~~do ~~major~~not ~~taxing~~expect ~~jurisdiction.~~material adverse income tax adjustments relating to this examination.

WeFor ~~adopted~~ the ~~provision~~years ofended ~~FASB Interpretation No.~~December 4831, ~~“Accounting~~2009 ~~for~~and ~~Uncertainty~~2008, inwe ~~Income~~did ~~Taxes”,~~not onhave ~~January 1,~~any ~~2007.~~unrecognized Astax abenefits. ~~result~~In of the ~~implementation~~event ~~of Interpretation 48,~~ we ~~recognized no changes in the liability for~~ have unrecognized tax benefits, ~~and~~we nowill ~~adjustments~~recognize to the ~~January 1,~~related ~~2007~~accrued ~~balance~~interest ~~of retained earnings. A reconciliation of the beginning~~ and ~~ending~~penalties ~~amount~~as ofincome ~~unrecognized~~ tax ~~benefits~~expense. ~~is as follows (in thousands):~~

	Year Ended December 31,
	2008		2007
Beginning balance	$	—	$	179
Additions based on tax positions related to the current year		—		—
Additions for tax positions of prior years		—		—
Reductions for tax positions of prior years		—		(179	)
Settlements		—		—
Ending balance	$	—	$	—

22. Segment Information

InWe determine our operating segments in accordance with FASB ASC Topic 280, which requires companies to disclose separately information about each material operating segment. An operating segment is a component of an entity that earns revenue and incurs expense, its reporting results are regularly reviewed by the ~~event~~chief operating decision maker and for which discrete financial information is available. Following our acquisition of Augmentix, we ~~have~~divided ~~unrecognized~~our ~~tax~~operations ~~benefits~~into two reportable segments, Memory Solutions and Rugged Technology Solutions. Subsequently, as a result of exiting the manufacturing activities of our memory business, which we ~~will~~completed ~~recognize~~during the ~~related~~first ~~accrued~~quarter ~~interest~~of 2009, we now operate under only Rugged Technology Solutions. Our chief operating decision maker currently reviews our operating results using consolidated financial information to assess financial performance and to allocate resources. Our Memory Solutions segment produced advanced module and system-level technologies for demanding high-reliability and high-performance markets. Our Rugged Technology Solutions ~~penalties~~segment asproduces ~~income~~rugged ~~tax~~computing ~~expense~~technologies. The results reported below for our Rugged Technology Solutions segment are subsequent to our acquisition of Augmentix on July 14, 2008. We have reclassified segment operating results for 2007 to conform to the 2008 presentation.

~~19.~~74 ~~Segment Information~~

We determine our operating segments in accordance with SFAS 131. As a result of the Augmentix acquisition, we now have two operating segments, Memory Solutions and Rugged Technology Solutions. Prior to the third quarter of 2008, we operated in one reportable segment. Our Memory Solutions segment produces advanced module and system-level technologies for demanding high-reliability and high-performance markets. Our Rugged Technology Solutions segment produces rugged computing technologies. Each reportable segment contains closely related products that are unique to the particular segment. These segments are managed separately because each business requires different technologies and marketing strategies. The accounting policies for each of our segments are the same as those described in Note 2. Management evaluates the performance of our segments based on operating income or loss, excluding stock-based compensation expense, goodwill impairment, amortization of acquisition intangibles and impairment of acquisition intangibles and fixed assets. In addition, we do not allocate cash and cash equivalents, investments, tax assets, goodwill, other

~~intangible~~Summarized ~~assets,~~financial ~~net~~information ~~and~~concerning ~~fixed asset impairments to~~ our reportable segments. ~~Future changes to our internal structure may result in changes to our reportable segments disclosed. The results reported below~~ for ~~our~~the ~~Rugged~~years ~~Technology Solutions segment are subsequent to our acquisition of Augmentix on July~~ended December 1431, 2008. Weand ~~have reclassified segment operating results for~~ 2007 ~~and~~was ~~2006~~as tofollows ~~conform to~~(in ~~the~~thousands): ~~2008 presentation.~~

Summarized financial information concerning our reportable segments for the year ended December 31, 2008, 2007 and 2006 is as follows (in thousands):


	Total Revenue		Income (Loss) from Operations			Depreciation/ Amoritzaton		Capital Expenditures		Segment Assets
2008:
Memory Solutions	$	31,782	$	(20,907	)	$	3,321	$	916	$	9,135
Rugged Technology Solutions		24,089		1,117			317		922		8,255

Total segment	$	55,871	$	(19,790	)	$	3,638	$	1,838	$	17,390

2007:
Memory Solutions	$	40,870	$	(3,398	)	$	3,379	$	725	$	19,597
Rugged Technology Solutions		—		—			—		—		—

Total segment	$	40,870	$	(3,398	)	$	3,379	$	725	$	19,597

	Total Revenue		Income (Loss)from Operations			Depreciation/Amortization		CapitalExpenditures		SegmentAssets
2008:
Memory Solutions	$	31,782	$	(20,907	)	$	3,321	$	916	$	9,135
Rugged Technology Solutions		24,089		1,117			317		922		8,255
Total segment	$	55,871	$	(19,790	)	$	3,638	$	1,838	$	17,390
2007:
Memory Solutions	$	40,870	$	(3,398	)	$	3,379	$	725	$	19,597
Rugged Technology Solutions		—		—			—		—		—
Total segment	$	40,870	$	(3,398	)	$	3,379	$	725	$	19,597
2006:
Memory Solutions	$	55,556	$	10,091		$	4,286	$	1,468
Rugged Technology Solutions		—		—			—		—
Total segment	$	55,556	$	10,091		$	4,286	$	1,468

Reconciliations of our segment income (loss) from operations to our consolidated loss from operations for 2008 and 2007 were as follows (in thousands):

Reconciliations of our segment income (loss) from operations to our consolidated loss from operations for the 2008, 2007, and 2006 are as follows (in thousands):


	2008			2007
Total segment income (loss) from operations	$	(19,790	)	$	(3,398	)
Stock-based compensation expense		(2,693	)		(5,948	)
Goodwill impairment		(9,036	)		(27,903	)
Amortization of acquisition intangibles		(3,637	)		(5,123	)
Impairment of acquisition intangibles and fixed assets		(8,999	)		(684	)

Consolidated loss from operations	$	(44,155	)	$	(43,056	)

	2008			2007			2006
Total segment income (loss) from operations	$	(19,790	)	$	(3,398	)	$	10,091
Stock-based compensation expense		(2,693	)		(5,948	)		(6,216	)
Goodwill impairment		(9,036	)		(27,903	)		—
Amortization of acquisition intangibles		(3,637	)		(5,123	)		(7,440	)
Impairment of acquisition intangibles and fixed assets		(8,999	)		(684	)		—
Consolidated loss from operations	$	(44,155	)	$	(43,056	)	$	(3,565	)

Reconciliations of our depreciation and amortization expense to our consolidated depreciation and amortization expense for 2008 and 2007 were as follows (in thousands):

Reconciliations of our depreciation and amortization expense to our consolidated depreciation and amortization expense for the 2008, 2007, and 2006 are as follows (in thousands):


	2008		2007
Total segment depreciation and amortization	$	3,638	$	3,379
Amortization of acquisition intangibles		3,637		5,123

Consolidated depreciation and amortization	$	7,275	$	8,502

	2008		2007		2006
Total segment depreciation and amortization	$	3,638	$	3,379	$	4,286
Amortization of acquisition intangibles		3,637		5,123		7,440
Consolidated depreciation and amortization	$	7,275	$	8,502	$	11,726

Reconciliation of our total assets to our consolidated total assets for 2008 was as follows (in thousands):


	2008
Total segment assets	$	17,390
Cash and cash equivalents		15,651
Investments		8,976
Other intangible assets, net		9,607
Other		2,352

Consolidated assets	$	53,976

~~Table~~23. ofEmployee ~~Contents~~Benefits

Reconciliations of our total assets to our consolidated total assets for the 2008 and 2007 are as follows (in thousands):

	2008		2007
Total segment assets	$	17,390	$	19,597
Cash and cash equivalents		15,651		34,013
Investments		8,976		27,912
Goodwill		—		4,953
Other intangible assets, net		9,607		10,826
Other		2,352		2,112
Consolidated assets	$	53,976	$	99,413

20. Employee Benefits

We offer all full-time employees subsidized health, dental and vision coverage. In addition, all full-time employees receive at our expense life insurance, accidental death coverage, workers’ compensation coverage and short- and long-term disability coverage.

401(k) Plan

We maintain ~~the~~a ~~Entorian Technologies’ L.P. Employees’~~ 401(k) ~~Profit~~plan ~~Sharing~~through ~~Plan~~Administaff, ~~and~~Inc. ~~Trust~~The Administaff 401(~~the~~k) ~~Entorian~~ Plan), ~~which~~ is a voluntary defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue ~~Code~~code of 1986. ~~Under~~Eligible ~~the Entorian Plan, eligible~~ employees ~~may~~can defer up to 7580% of ~~their~~the annual compensation, subject to maximum IRS limitations. ~~Under~~We ~~the provisions~~do ofnot ~~this~~make ~~plan,~~any ~~we matched employees’ contributions $1 for $1 up to six percent of their base compensation. Beginning in February 2009, we terminated the employer~~ matching ~~contribution.~~employee ~~Our~~ contributions to ~~the~~this ~~Entorian Plan were approximately $0~~plan.~~6 million, $0.4 million and $0.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.~~

We also maintain the Entorian Technologies’ L.P. Employees’ 401(k) Profit Sharing Plan and Trust (the Entorian Plan), which also is a voluntary defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code of 1986. Effective February 1, 2009, we froze this plan, although we continue to maintain it with contributions made as of February 1, 2009. Under the Entorian Plan, eligible employees could defer up to 75% of their annual compensation, subject to maximum IRS limitations. Under the provisions of this plan, we matched employees’ contributions $1 for $1 up to six percent of their base compensation. Beginning in February 2009, we terminated the employer matching contribution. Our contributions to the Entorian Plan were approximately $31,000, $0.6 million and $0.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.

During 2007, we maintained the Southland 401(k) Employees Savings Plan, which we acquired with the Southland acquisition (the Southland Plan). Under the provisions of the Southland Plan, we made a contribution for 2007 in the amount of $22,000. During 2008, we merged the Southland Plan into the Entorian Plan.

Augmentix also maintains a 401(k) plan through Administaff, Inc. Neither Augmentix nor Entorian made any matching employee contributions to this plan.

Bonus Plan

WeIn 2009, we had aan ~~quarterly~~annual bonus plan under which eligible employees could receive a percentage of their base pay in additional compensation. In ~~Typically,~~2008 weand ~~made~~2007, ~~these~~this ~~payments~~bonus ~~within~~plan 40was ~~days~~a ~~after~~quarterly ~~the end of the quarter in which the compensation was earned~~plan. ~~Total~~We ~~expense~~did ~~was~~not ~~approximately~~make $0any ~~million,~~payments ~~$0 million~~under ~~and~~this ~~$2.3~~plan ~~million~~in ~~for the years ended December 31~~2009, 2008, ~~2007~~or ~~and 2006, respectively~~2007.

Discretionary Payment

For the second quarter of 2008, the Board of Directors authorized a discretionary bonus payment to eligible employees for approximately $0.3 million, which was expensed as incurred in 2008. For the third and fourth quarters of 2007, the Board of Directors authorized discretionary bonus payments to eligible employees. Total expense recorded in 2007 for these payments was approximately $0.8 million. ~~For the fourth quarter of 2006, the Board of Directors authorized a discretionary bonus payment to eligible employees of approximately $0.8 million.~~

8424. Restructuring

Augmentix Bonus Plan

Augmentix had an annual bonus plan in 2008, under which eligible employees could receive a bonus based on Augmentix’s annual financial performance. Augmentix did not meet the requirements of this plan for 2008, and no payment was made.

21. Restructuring

~~During~~76 the fourth quarter of 2008, we recorded restructuring expense of $2.7 million due to a workforce reduction of approximately 180 positions as a result of our plan to close manufacturing activities for our Memory Solutions business in an effort shift our focus away from commodity component markets towards vertical computing segments. During the first quarter of 2009, we expect to incur an additional charge of approximately $2.0 million related to closing our manufacturing facility in Mexico, consisting of additional restructuring expense and closing costs. The following table details the changes in the related restructuring accrual (in thousands) during 2008:

Restructuring accrual at December 31, 2007	$	—
Restructuring expenses accrued		3,149
Payments of restructuring expenses		(2,316	)
Restructuring accrual at December 31, 2008	$	833

22During the fourth quarter of 2008, we recorded restructuring expense of $2.7 ~~Geographic~~million ~~Information~~due to a workforce reduction of approximately 180 positions as a result of our plan to close manufacturing activities for our Memory Solutions business. During 2009, we completed closing our manufacturing activities and recorded additional restructuring charges totaling $2.2 million. These charges included approximately $1.8 million related to employee severance expenses, $0.4 million related to exiting one of our facilities in Austin, Texas and $0.5 million related to certain fixed assets no longer used in manufacturing. In addition, during 2009, we recorded a reduction in our facility accrual of approximately $0.2 million as a result of a change in our estimated future liability. Also, during 2009 we recorded an impairment charge of approximately $0.4 million related to our assets held for sale, a net gain of approximately $0.4 million related to the sale of certain assets held for sale and a gain of approximately $0.2 million related to the sale of previously retired assets. The following table details the changes in the related restructuring accrual (in thousands) during 2009:


	Severance			Facility			Total
Restructuring accrual at December 31, 2008	$	833		$	—		$	833
Restructuring expenses accrued		1,756			394			2,150
Reversal of accrued restructuring expenses		(45	)		(175	)		(220	)
Payments of restructuring expenses		(2,517	)		(91	)		(2,608	)

Restructuring accrual at December 31, 2009	$	27		$	128		$	155

25. Geographic Information

Following is a summary of our revenues by geographic region (in thousands):

	Year Ended December 31,
	2008		2007		2006
	2009		2008		2007
Revenue:
North America:
North America	$	44,930	$	46,038	$	33,566
United States	$	45,640	$	33,368	$	43,133
Central America		—		2,568		2,313
Canada		398		198		—
Europe		66		260		163
Central America:
Asia Pacific		62		7,005		4,828
Dominican Republic		2,568		2,313		—
Total	$	45,058	$	55,871	$	40,870
Europe:
Germany		215		143		592
Other		45		20		1
Asia Pacific:
Taiwan		3,527		—		—
China		1,905		131		—
Japan		454		1,092		609
Malaysia		502		409		—
Australia		224		—		—
Thailand		211		305		—
Other		182		2,891		11,221
Total	$	55,871	$	40,870	$	55,556

85At December 31, 2009 and 2008, we had physical assets consisting of cash and net property, plant and equipment located at our facility in Reynosa, Mexico as follows (in thousands):


	2009		2008
Cash	$	55	$	79
Property, plant and equipment, net		1,440		1,629

Total	$	1,495	$	1,708

26. Subsequent Events

We have evaluated subsequent events through March 30, 2010, the filing date of this Annual Report on Form 10-K.

At stock ~~December~~on or about March 3122, ~~2008~~2010, with the delisting taking effect no earlier than ten days thereafter. We filed a Form 25 on March 22, 2010, and ~~2007~~we expect that the last day of trading of our common stock on the NASDAQ Global Market will be on March 31, 2010. After filing the Form 25, we ~~had~~also ~~physical~~intend ~~assets~~to ~~consisting~~terminate the registration of ~~cash~~our common stock and ~~net~~suspend ~~property~~our reporting obligations under the Exchange Act by filing a Form 15 with the SEC on or about April 2, ~~plant~~2010. We anticipate that our common stock will be quoted on the Pink Sheets, an electronic quotation service for over-the-counter securities, and we intend to continue to provide information to our ~~equipment~~stockholders ~~located~~and atto take such actions within our ~~manufacturing~~control ~~facility~~to enable our common stock to be quoted in ~~Reynosa~~the Pink Sheets so that our stockholders will have a place to trade their shares. There is no guarantee, ~~Mexico~~however, asthat ~~follows~~a (broker will continue to make a market in ~~thousands):~~our common stock, that we will be able to take the actions required to enable our shares to be quoted in the Pink Sheets, or that trading of our common stock will continue on the Pink Sheets or otherwise.

	2008		2007
Cash	$	79	$	129
Property, plant and equipment, net		1,629		3,019
Total	$	1,708	$	3,148

We expect that the deregistration of our common stock will become effective on July 1, 2010. However, our reporting obligations to file certain reports with the SEC, including Forms 10-Q and 8-K, will be immediately suspended upon filing the Form 15. Other filing requirements will terminate upon effectiveness of deregistration.

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

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the ~~Securities~~ Exchange Act ~~of 1934 (the Exchange Act)~~ is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and ~~procedures~~ procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its chief executive officer and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this annual report and concluded that our disclosure controls and procedures, ~~excluding the controls performed at our Augmentix subsidiary,~~ were effective for this purpose. This assessment excludes the controls performed at our Augmentix subsidiary because we acquired it in the second half of 2008. Augmentix’s total assets and total revenue represent approximately 42% of our total assets and 43% of our total revenue, respectively, as of December 31, 2008. While we are addressing Augmentix’s controls and procedures, we are permitted to exclude an acquisition for our assessment if, among other circumstances and factors, there is not adequate time between the closing date of the acquisition and the assessment date to assess its internal controls.

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

Management’s Report on Internal Control Over Financial Reporting

Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

8678

assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, ~~2008~~2009 pursuant to Rule 13a-15 under the Exchange Act. Our management based its evaluation on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management, with the participation of our chief executive officer and chief financial officer, concluded that, as of December 31, ~~2008~~2009, our internal control over financial reporting was effective. ~~As set forth in more detail above in this Item 9A, our evaluations excluded our Augmentix subsidiary, because we acquired it in the second half of 2008.~~

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the quarter ended December 31, ~~2008~~2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

8779

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth in the Proxy Statement to be delivered to stockholders in connection with our Annual Meeting of Stockholders to be held on April 2321, ~~2009~~2010 (the Proxy Statement) under the headings “Board Structure and Compensation,” “Proposal: Election of Directors,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference. In addition, the Company has adopted a Code of Conduct that applies to our directors and employees. This Code of Conduct can be found under the Investor Relations section on our web site and is included as Exhibit 14.1 to this Form 10-K.

ITEM 11.

EXECUTIVE COMPENSATION

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

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

8880

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

Financial Statement Schedules

1.	Financial Statements: See Index to Consolidated Financial Statements under Item 8.

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

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

(b)

Exhibits

INDEX TO EXHIBITS

Incorporated by Reference

ExhibitNumber

Exhibit Description

Form

File Number

Exhibit

FilingDate

FiledHerewith

2.1

Agreement and Plan of Merger, dated as of August 21, 2007, among Staktek Holdings, Inc., Southland Micro Systems, Inc. and certain other parties thereto

8-K

000-50553

2.1

9/5/07

2.2

Escrow Agreement, dated as of August 31, 2007, among Staktek Holdings, Inc., Wells Fargo Bank, N.A., and John R. Meehan

8-K

000-50553

2.2

9/5/07

2.3

Agreement and Plan of Merger, dated as of July 11, 2008, by and among Entorian Technologies Inc., August Merger Sub Corporation, Augmentix Corporation and Centennial Ventures VII, L.P., as Stockholder Representative

8-K

000-50553

2.1

7/16/08

2.4

Escrow Agreement, dated as of July 14, 2008, by and among Entorian Technologies Inc., Wells Fargo Bank, N.A., and Centennial Ventures VII, L.P., as Stockholder Representative

8-K

000-50553

2.2

7/16/08

3.1

Amended and Restated Certificate of Incorporation

10-Q

000-50553

3.1.1

11/713/0509

3.1.1

Certificate of Ownership and Merger

8-K

000-50553

3.1

2/27/08

3.2

Amended and Restated Bylaws

10-Q

000-50553

3.3

5/15/08

4.1

Reference is made to Exhibits 3.1 and 3.2 for provisions defining the rights of equity holders

4.2

Specimen certificate for shares of common stock of Staktek Holdings, Inc.

S-1/A

333-110806

4.2

1/20/04

10.1*

Entorian Technologies Inc. 2003 Stock Option Plan, as amended to date

~~8-K~~

~~000-50553~~

~~10.2~~

~~4/18/08~~

10.2*

Entorian Technologies Inc. 2006 Equity-Based Compensation Plan

S-8

33-133494

99.1

4/24/06

8981

Incorporated by Reference

ExhibitNumber

Exhibit Description

Form

File Number

Exhibit

FilingDate

FiledHerewith

10.2*

Entorian Technologies Inc. 2006 Equity-Based Compensation Plan

10.3*

Letter Agreements, dated August 19, 2003, among Staktek Holdings, Inc. and Austin Ventures, regarding management rights

S-1

333-110806

10.3

11/26/03

10.4

Amended and Restated Registration Rights Agreement, dated November 24, 2003, among Staktek Holdings, Inc. and Austin Ventures

S-1

333-110806

10.5

11/26/03

10.5**

Agreement, dated July 18, 2005, among Samsung Electronics Co., Ltd and Staktek Group, L.P.

10-Q

000-50553

10.2

11/7/05

10.6

Lease Agreement, dated December 1, 2003, among Staktek Group L.P. and 8900 Shoal Creek

S-1

333-110806

10.7

11/26/03

10.7*

Amended and Restated Executive Employment Agreement, dated ~~April~~February 176, ~~2008~~2009, ~~among~~between Entorian Technologies Inc.. and ~~Wayne R~~W. ~~Lieberman~~Kirk Patterson

8-K

000-50553

10.1

42/1810/0809

10.8*

Amended and Restated Executive Employment Agreement, dated February 6, 2009, between Entorian Technologies Inc. and WStephanie A. ~~Kirk Patterson~~Lucie

8-K

000-50553

10.1

2/10/09

10.9*

~~Amended~~Form ~~and~~of ~~Restated~~Indemnification ~~Executive Employment~~ Agreement, ~~dated~~for ~~February 6, 2009, between~~ Entorian Technologies Inc.’s directors and ~~Stephanie A. Lucie~~officers

8S-K1

~~000~~333-~~50553~~110806

10.19

211/1026/0903

10.10*

~~Form of Indemnification Agreement for~~ Entorian Technologies ~~Inc.’s~~2009 ~~directors~~Bonus ~~and~~Incentive ~~officers~~Plan

~~S-1~~

~~333-110806~~

~~10.9~~

~~11/26/03~~

10.11*

~~Entorian~~Offer ~~Technologies~~Letter between Staktek Holdings, Inc. ~~Medical~~and ~~Retiree~~Joseph ~~Plan~~A. Marengi

108-K

000-50553

10.91

310/917/0507

10.12*

Staktek Amended and Restated 2008 Bonus Incentive Plan

8-K

000-50553

10.1

8/28/08

10.12

Settlement and Mutual Release, dated November 7, 2008, by and among Entorian Technologies Inc., John R. Meehan and Joseph A. Meehan

8-K

000-50553

10.1

4/13/08

10.13

Loan Agreement, dated March 10, 2005, between Guaranty Bank and Staktek Holdings, Inc.

10-Q

000-50553

10.1

5/11/05

10.13*

Separation Agreement, dated as of November 6, 2008, between Entorian Technologies Inc. and Wayne R. Lieberman

8-K

000-50553

10.2

11/13/08

10.14

Revolving Promissory Note in connection with the Loan Agreement dated March 10, 2005

10-Q

000-50553

10.2

5/11/05

10.14*

Executive Employment Agreement, dated as of November 6, 2008, between Entorian Technologies Inc. and Stephan Godevais

8-K

000-50553

10.3

11/13/08

10.15

~~Guaranty~~Stockholders’ Agreement, dated as of March 10, ~~2005~~2010, between ~~Staktek~~Austin ~~Group,~~Ventures ~~L.P.~~ and ~~Guarantee~~Entorian ~~Bank~~Technologies Inc.

~~10-Q~~

~~000-50553~~

~~10.3~~

~~5/11/05~~

10.16

Amendment No. 3 to Loan Agreement, dated July 25, 2007, between Guaranty Bank and Staktek Holdings, Inc.

10-Q

000-50553

10.1

8/14/07

14.1

Code of Conduct

10-K

000-50553

14.1

3/9/05

10.17*

Offer Letter between Staktek Holdings, Inc. and Joseph A. Marengi

8-K

000-50553

10.1

10/17/07

21.1

List of Subsidiaries

10.18

Settlement and Mutual Release, dated November 7, 2008, by and among Entorian Technologies Inc., John R. Meehan and Joseph A. Meehan

8-K

000-50553

10.1

4/13/08

9082

Incorporated by Reference

ExhibitNumber

Exhibit Description

Form

~~File Number~~FileNumber

Exhibit

FilingDate

FiledHerewith

10.19*

Separation Agreement, dated as of November 6, 2008, between Entorian Technologies Inc. and Wayne R. Lieberman

8-K

000-50553

10.2

11/13/08

10.20*

Executive Employment Agreement, dated as of November 6, 2008, between Entorian Technologies Inc. and Stephan Godevais

8-K

000-50553

10.3

11/13/08

14.1

Code of Conduct

10-K

000-50553

14.1

3/9/05

21.1

List of Subsidiaries

23.1

Consent of Independent Registered Public Accounting Firm

24.1

Power of Attorney (See signature page of this Form 10-K)

31.1

Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 302 of the Sarbanes-Oxley Act of 2002)

31.2

Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 302 of the Sarbanes-Oxley Act of 2002)

32.1

Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

32.2

Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

* —Constitutes

management contract or compensatory arrangement

** —Confidential

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

9183

SIGNATURES

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

ENTORIAN TECHNOLOGIES INC.
By:		/s/ STEPHAN B. GODEVAIS
		Stephan B. Godevais President and Chief Executive Officer
Date: March 11, 2009
Date: March 30, 2010
By:		/s/ W. KIRK PATTERSON
		W. Kirk Patterson Senior Vice President and Chief Financial Officer
Date: March 11, 2009
Date: March 30, 2010

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

Pursuant to the requirements of the Securities Act of 1934, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Name	Title	Date
/s/ STEPHAN B. GODEVAIS Stephan Godevais	President, Chief Executive Officer and Director (principal executive officer)	March 1130, ~~2009~~2010
/s/ W. KIRK PATTERSON W. Kirk Patterson	Senior Vice President and Chief Financial Officer (principal accounting and financial officer)	March 1130, ~~2009~~2010
/s/ JOSEPH A. MARENGI Joseph A. Marengi	Chairman of the Board of Directors	March 1130, ~~2009~~2010
/s/ JOSEPH C. ARAGONA Joseph C. Aragona	Director	March 1130, ~~2009~~2010
/s/ MARTIN J. GARVIN Martin J. Garvin	Director	March 1130, ~~2009~~2010
/s/ KEVIN P. HEGARTY Kevin P. Hegarty	Director	March 1130, ~~2009~~2010
/s/ Clark W. Jernigan Clark W. Jernigan	Director	March 11, 2009
/s/ CLARK W. JERNIGAN Clark W. Jernigan	Director	March 30, 2010
/s/ KRISHNA SRINIVASAN Krishna Srinivasan	Director	March 1130, ~~2009~~2010
/s/ A. TRAVIS WHITE A. Travis White	Director	March 1130, ~~2009~~2010

9284

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OurTable stockof price is likely to be volatile and could drop unexpectedly. Contents

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

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Filing Compare · ENTORIAN TECHNOLOGIES INC