[DATARAM LOGO] DATARAM CORPORATION 2007 ANNUAL REPORT Table of Contents 1 Chairman's Letter 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Financial Review 20 Selected Financial Data [PICTURE OF ROBERT TARANTINO] Chairman's Letter To Our Shareholders: The last fiscal year has been a challenging year for the Company. While we generated net earnings of $770,000 or $0.09 per share, our revenue and earnings expectations were not met. Revenues for fiscal 2007 totaled $38.4 million versus $41.8 million for the prior fiscal year. The overall decline in revenue came primarily from reduced sales to one OEM customer, with which the Company no longer transacts business. Revenues derived from sales to this customer were $3.0 million in fiscal 2006, substantially all of which was in the first quarter of that fiscal year. More importantly, our revenues were adversely impacted by a decline in average selling prices. The Company's average selling price per gigabyte declined by approximately 25% in fiscal 2007 compared to the prior year. This decline in selling prices was especially severe in our fourth quarter, as our average selling prices were lower by approximately 13 percent from third quarter levels primarily due to the well-publicized decline in the price of DRAM chips. DRAM chips account for approximately 75% of our product cost. In order to better align our expenses with our revenues, we initiated a reduction in our cost structure in the fourth quarter. We reduced our workforce by approximately 14 percent, which resulted in a pretax charge of $320,000 in the fourth quarter that consisted primarily of a provision for severance payments. The operational efficiencies achieved by this action are expected to generate approximately $900,000 in annual cost savings. Slightly more than a year ago, we expanded our sales team and focused our sales and marketing resources back on the underlying principles that built our compatible memory business, which comprises 77% of our total business. Our strategy is to expand our customer base by focusing on creating demand at the source with value added resellers and end-users. This strategy is working. In spite of the precipitous decline in selling prices, our revenues for our compatible memory offerings increased by 1% from the prior fiscal year. We are confident that we will achieve further success with this model in the upcoming year. It is more difficult to expand our OEM business because of the long selling cycle involved. However, we are actively working new opportunities and look for progress in this area of the business as well. Despite the significant challenges, we operated profitably and our already strong financial condition continued to improve. For fiscal 2007, we achieved: * Net earnings of $770,000. * Cash flow generated from operating activities of $1.7 million. * Dividends paid totaling $2.1 million. * A current ratio of 9.3, with cash and equivalents increasing to $14.1 million. As we enter the new fiscal year, we are optimistic that we will see improved financial performance in fiscal 2008. We believe we have made the changes necessary to be operationally profitable. Our selling prices remain under pressure. However, our fiscal 2008 operating margin to date is running ahead of our plan. Our financial condition is strong and we remain highly liquid. Our Board of Directors is committed to increasing shareholder value. In May, 2005, the Company's Board of Directors initiated a regular quarterly cash dividend. Subsequently, the Board of Directors approved a 20% increase to the quarterly dividend, which now stands at $0.06 per common share. On May 30, 2007, the Board of Directors declared the latest $0.06 per share quarterly dividend. On behalf of the Company's Board of Directors and management team, I would like to thank our shareholders for their continued support and our employees for their hard work and dedication. July 10, 2007 Robert V. Tarantino Chairman of the Board of Directors, President and Chief Executive Officer Page 1 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Dataram is a developer, manufacturer and marketer of large capacity memory products primarily used in high performance network servers and workstations. The Company provides customized memory solutions for original equipment manufacturers ("OEMs") and compatible memory for leading brands including Dell, HP, IBM, Silicon Graphics and Sun Microsystems. The Company also manufactures a line of memory products for Intel and AMD motherboard based servers. The Company's memory products are sold worldwide to OEMs, distributors, value-added resellers and end-users. The Company has a manufacturing facility in the United States with sales offices in the United States, Europe and Japan. The Company is an independent memory manufacturer specializing in high capacity memory and competes with several other large independent memory manufacturers as well as the OEMs mentioned above. The primary raw material used in producing memory boards is dynamic random access memory ("DRAM") chips. The purchase cost of DRAM chips typically represents approximately 75% of the total cost of a finished memory board. Consequently, average selling prices for computer memory boards are significantly dependent on the pricing and availability of DRAM chips. Results of Operations The following table sets forth consolidated operating data expressed as a percentage of revenues for the periods indicated. Years Ended April 30, 2007 2006 2005 _________________________________________________________________ Revenues 100.0% 100.0% 100.0% Cost of sales 76.6 70.5 75.8 _____ _____ _____ Gross profit 23.4 29.5 24.2 Engineering and development 3.2 2.7 2.0 Selling, general and administrative 25.0 22.0 16.2 _____ _____ _____ Earnings (loss) from operations (4.8) 4.8 6.0 Other income, net 8.0 5.8 0.3 _____ _____ _____ Earnings before income tax expense (benefit) 3.2 10.6 6.3 Income tax expense (benefit) 1.2 4.0 (3.9) _____ _____ _____ Net earnings 2.0 6.6 10.2 ===== ===== ===== Fiscal 2007 Compared With Fiscal 2006 Revenues for fiscal 2007 were $38.4 million compared to $41.8 million in fiscal 2006. The decline in revenues came primarily from reduced sales to one OEM customer, with which the Company no longer transacts business. Revenues derived from sales to this customer were $3.0 million in fiscal 2006, substantially all of which was in the first quarter of the fiscal year. Revenues were also adversely impacted by a decline in average selling prices. The Company's average selling price per gigabyte declined by approximately 25% in fiscal 2007 compared to the prior year. However, the decrease in average selling price was offset by higher volume, measured as gigabytes shipped. Revenues for the fiscal years ended April 30, 2007 and 2006 by geographic region were: Year ended Year ended April 30, 2007 April 30, 2006 ________________ ________________ United States $ 27,583,000 $ 29,321,000 Europe 6,484,000 9,151,000 Other(principally Asia Pacific Region) 4,337,000 3,323,000 ________________ ________________ Consolidated $ 38,404,000 $ 41,795,000 ================ ================ During the fourth quarter of fiscal 2007, the Company initiated a reduction of its cost structure. As part of the cost reduction initiative, the Company reduced its workforce by approximately 14 percent, which resulted in a pretax severance charge of $320,000. Of this amount $55,000 has been charged to cost of sales and $265,000 has been charged to selling, general and administrative expense. Cost of sales was $29.4 million in fiscal 2007 or 76.6 percent of revenues compared to $29.5 million or 70.5 percent of revenues in fiscal 2006. Fiscal 2006 cost of sales as a percentage of revenues is considered by management to be lower than normal and primarily results from higher than expected sales of certain large capacity memory products, which typically command higher margins. Management expects that cost of sales as a percentage of revenues will generally be approximately 75%, which is in line with its historical norm. Fluctuations either up or down of 3% or less in any given period are not unusual and can result from many factors, some of which are a rapid change in the price of DRAMs, a change in product mix possibly resulting from a large order or series of orders for a particular product or a change in customer mix. Fiscal 2007 cost of sales included royalty expense of approximately $119,000, or 0.3% of revenues compared to $173,000, or 0.4% of revenues in fiscal 2006. Management believes it is reasonable to assume that future royalty expense will be generally in line with fiscal year 2007 royalty expense as a percentage of revenues. Engineering and development costs amounted to $1.2 million in fiscal 2007 and $1.1 million in fiscal 2006. Management believes levels of expenditures in both fiscal years are within a normal range and expects that fiscal 2008 expenditures will remain within the same range. The Company maintains its commitment to the timely introduction of new memory products. Selling, general and administrative costs were $9.6 million in fiscal 2007 versus $9.2 million in fiscal 2006. This increase in expense is primarily the result of stock based compensation expense of $440,000 recorded in fiscal 2007 versus nil in fiscal 2006. Additionally, a $265,000 provision for severance related to the aforementioned reduction in workforce was recorded. Other income, net for fiscal year 2007 totaled $3.1 million versus $2.4 million in fiscal 2006. Other income in fiscal 2007 included $2.3 million received from a DRAM manufacturer related to a settlement agreement that the Company entered into in the second quarter. In fiscal 2007 the Company also received $712,000 of net interest income and realized approximately $97,000 of foreign currency transaction gains. Fiscal 2006 other income included approximately $1.9 million of gain from the sale of the Company's undeveloped land, $455,000 of net interest income and $65,000 of foreign currency transaction losses. Income tax expense for fiscal 2007 was $450,000 versus $1.7 million in fiscal 2006. As of April 30, 2007, the Company has a net operating loss ("NOL") carryforward of approximately $5.1 million, which can be used to offset future taxable income. In April 2007, after review of its operating results and operating plans, management concluded that it remains more likely than not that the Company will utilize all of its NOL carryforwards. Page 2 Fiscal 2006 Compared With Fiscal 2005 Revenues for fiscal 2006 were $41.8 million compared to $65.7 million in fiscal 2005. The decline in revenues came primarily from reduced sales to one OEM customer that was experiencing financial difficulties. Revenues derived from sales to this customer were $3.0 million in fiscal 2006 compared to $21.9 million in fiscal 2005. Fiscal 2006 sales to this customer occurred in the Company's first fiscal quarter ended July 31, 2005. Revenues were also adversely impacted by a decline in average selling prices. The Company's average selling price per gigabyte declined by approximately 22% in fiscal 2006 compared to the prior year. This was primarily related to lower average prices of DRAM chips. The Company's average price paid per DRAM was approximately 35% lower in fiscal 2006 than fiscal 2005. Cost of sales was $29.5 million in fiscal 2006 or 70.5 percent of revenues compared to $49.8 million or 75.8 percent of revenues in fiscal 2005. Fiscal 2006 cost of sales as a percentage of revenues is considered by management to be lower than normal and primarily resulted from higher than expected sales of certain large capacity memory products, which typically command higher margins. Fiscal 2006 cost of sales included royalty expense of approximately $173,000, or 0.4% of revenues compared to $469,000, or 0.7% of revenues in fiscal 2005. Engineering and development costs amounted to $1.1 million in fiscal 2006 and $1.3 million in fiscal 2005. Selling, general and administrative costs were $9.2 million in fiscal 2006 versus $10.7 million in fiscal 2005. This reduction in expense was primarily the result of reduced salary and employee related costs due to reduced workforce. Approximately $257,000 of the expense reduction was from reduced levels of depreciation and amortization expenses of certain assets, primarily leasehold improvements. Other income, net for fiscal year 2006 totaled $2.4 million versus $202,000 in fiscal 2005. Fiscal 2006 other income included approximately $1.9 million of gain on the sale of the Company's undeveloped land, $455,000 of net interest income and $65,000 of foreign currency transaction losses. Fiscal 2005 other income, net consisted primarily of $94,000 of net interest income, $75,000 of gains on sale of certain assets and $33,000 of foreign currency transaction gains. Income tax expense (benefit) for fiscal 2006 was $1.7 million versus ($2.6 million) in fiscal 2005. In April, 2005, management concluded that it was more likely than not that the Company would utilize all of its NOL carry forwards. As a result, fiscal 2005 income tax benefit includes a reversal of the valuation allowance, totaling approximately $2.6 million, that the Company had previously placed on its NOL carryforwards. Liquidity and Capital Resources The Company's cash and working capital position remains strong. Working capital at the end of fiscal 2007 amounted to $21.3 million, including cash and cash equivalents of $14.1 million, compared to working capital of $21.4 million, including cash and cash equivalents of $14.0 million at the end of fiscal 2006. Current assets at the end of fiscal 2007 were 9.3 times current liabilities compared to 8.9 at the end of fiscal 2006. Trade receivables at the end of fiscal 2007 were $4.7 million compared to fiscal 2006 year-end trade receivables of $4.9 million. The Company generated $1.7 million of cash flows from operating activities primarily as a result of net earnings of $770,000, increased by the non-cash deferred tax expense of $269,000, depreciation and amortization expense of $383,000, reduced by excess tax benefits from sale of common shares under the Company's stock option plan of $113,000. Net changes in assets and liabilities decreased cash flows from operating activities by $73,000. Cash used in investing activities totaled $320,000 and consisted primarily of additions of property and equipment. Cash used in financing activities totaled $1.3 million and consisted primarily of dividends paid totaling approximately $2.1 million, offset by proceeds from stock option exercises of $651,000. Capital expenditures were $320,000 in fiscal 2007 compared to $480,000 in fiscal 2006. Fiscal 2008 capital expenditures are expected to total approximately $500,000. At the end of fiscal 2007, contractual commitments for capital purchases were zero. On December 4, 2002 the Company announced an open market repurchase plan providing for the repurchase of up to 500,000 shares of the Company's common stock. As of April 30, 2007, the total number of shares authorized for purchase under the program is 172,196 shares. In fiscal 2007, the Company did not repurchase any shares of its common stock. In fiscal 2006, the Company repurchased 51,450 shares of its common stock at a total price of approximately $230,000. On June 21, 2004, the Company entered into a credit facility with a bank, which provides for up to a $5 million revolving credit line. Advances under the facility were limited to 75% of eligible receivables, as defined in the agreement. The agreement provides for LIBOR rate loans and base rate loans at an interest rate no higher than the bank's base commercial lending rate. The Company is required to pay a fee equal to one-eighth of one percent per annum on the unused commitment. The agreement contains certain restrictive covenants, specifically a trailing twelve month profitability requirement, a current asset to current liabilities ratio, a total liabilities to tangible net worth ratio and certain other covenants, as defined in the agreement. The agreement was amended on April 4, 2005. The effect of the amendment was to increase the limit of the Company's combined open market stock repurchases and dividend payments to $2.5 million per year from $1.0 million per year without prior waiver. The agreement was scheduled to expire on June 21, 2006. On June 20, 2006, the agreement was amended. The effect of the amendment was to extend the expiration date of the agreement to August 15, 2008 and remove the eligible accounts receivable limitation on advances under the facility. The amendment also modified the total liabilities to tangible net worth ratio covenant. The Company is in compliance with all covenants of the agreement and there were no borrowings against the credit line in fiscal 2007. Management believes that the Company's cash flows generated from operations will be sufficient to meet short-term liquidity needs as the Company does not expect any unforeseen demands beyond general operating requirements for cash. Management further believes that its working capital together with internally generated funds from its operations and its bank line of credit are adequate to finance the Company's long term operating needs and future capital requirements. Page 3 On December 29, 2005, the Company closed on an agreement entered into in fiscal 2003 to sell its undeveloped land. The purchase price was $3,075,000 of which half, or $1,537,500, was paid in the form of a note, that accrued interest, payable monthly at 5% per annum for a period of one year and 7.5% per annum thereafter. The note was secured by a mortgage. Of the remainder, $250,000 had been previously paid as deposits and $1,253,000, which was net of closing costs, was received in cash at closing. The note receivable is treated as a non-cash transaction in the 2006 Consolidated Statements of Cash Flows. Subsequent to the end of fiscal 2007, the note was paid in full and the mortgage released. Contractual Obligations Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2007 are as follows: Operating leases Year ending April 30: ________________ 2008 $ 490,000 2009 403,000 2010 411,000 2011 365,000 2012 34,000 Thereafter 0 ________________ $ 1,703,000 ================ Purchases At April 30, 2007, the Company had open purchase orders outstanding totaling $2.2 million primarily for inventory items to be delivered in the first quarter of fiscal 2008. These purchase orders are cancelable. Inflation Inflation has not had a significant impact on the Company's revenues and operations. New Accounting Pronouncements In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151, amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. The provisions of this statement were effective for the Company beginning May 1, 2006, and had no material effect on the Company's consolidated financial statements and cash flows for fiscal 2007. In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company beginning with the first quarter of fiscal 2008, with the cumulative effect, if any, upon adoption of FIN48 to be recorded as an adjustment to opening retained earnings. The Company does not expect that the adoption of FIN 48 will have a material effect on its consolidated financial statements. In September 2006, the SEC released Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 provides interpretive guidance on the SEC's views regarding the process of quantifying materiality of financial statement misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application for the first interim period of the same fiscal year is encouraged. The application of SAB 108 in fiscal 2007 did not have a material effect on our financial results. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS No. 157). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value, and enhance disclosures about fair value measurements. The measurement and disclosure requirements are effective for the Company beginning in the first quarter of fiscal year 2008. The Company does not believe that application of SFAS No. 157 will have a material effect on its consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The Company does not believe that application of SFAS No. 159 will have a material effect on its consolidated financial statements. Critical Accounting Policies In December 2001, the Securities and Exchange Commission ("SEC") published a Commission Statement in the form of Financial Reporting Release No. 60 which requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC has defined critical accounting policies as those that are both important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While the Company's significant accounting policies are summarized in Note 1 to the consolidated financial statements included in this Annual Report, management believes the following accounting policies to be critical: Revenue Recognition- Revenue is recognized when title passes upon shipment of goods to customers. The Company's revenue earning activities involve delivering or producing goods. The following criteria are met before revenue is recognized: persuasive evidence of an arrangement exists, shipment has occurred, selling price is fixed or determinable and collection is reasonably assured. The Company does experience a minimal level of sales returns and allowances for which the Company accrues a reserve at the time of sale in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists". Estimated warranty costs are accrued by management upon product shipment based on an estimate of future warranty claims. Page 4 Stock Option Expense - In December 2004, SFAS No. 123 (revised 2004), "Share- Based Payment" ("SFAS 123(R)") was issued. SFAS 123(R) revises SFAS 123 and supersedes APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123, as originally issued in 1995, established as preferable a fair value-based method of accounting for share-based payment transactions with employees. However, SFAS 123 as amended permitted entities the option of continuing to apply the intrinsic value method under APB 25 that the Company had been using, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair value-based method been used. SFAS 123(R) requires that the compensation cost relating to all share-based payment transactions, including employee stock options, be recognized in the historical financial statements. That cost is measured based on the fair value of the equity or liability instrument issued and amortized over the related service period. The Company adopted the guidance in SFAS 123(R) effective May 1, 2006. As such, the accompanying consolidated statement of operations for the fiscal year ended April 30, 2007 includes approximately $440,000 of compensation expense in the selling, general and administrative expense line item related to the fair value of options granted to employees and directors under the Company's stock-based employee compensation plans which is being amortized over the service period in the financial statements, as required by SFAS 123(R). These awards have been classified as equity instruments, and as such, a corresponding increase of $440,000 has been reflected in additional paid-in capital in the accompanying balance sheet as of April 30, 2007. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected life is based on the Company's historical experience of option exercises relative to option contractual lives; Expected volatility is based on the historical volatility of the Company's share price; Expected dividend yield assumes the current dividend rate remains unchanged; Risk free interest rate approximates United States government debt rates at the time of option grants. Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers certain tax planning strategies in its assessment as to the recoverability of its tax assets. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. Use of Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including deferred tax asset valuation allowances and certain other reserves and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Some of the more significant estimates made by management include the allowance for doubtful accounts and sales returns, the deferred tax asset valuation allowance and other operating allowances and accruals. Actual results could differ from those estimates. Quantitative and Qualitative Disclosure About Market Risk The Company does not invest in market risk sensitive instruments. The Company's investments during the past fiscal year have consisted of overnight deposits with banks and commercial paper, which matures within ninety days. The average principal sum invested was approximately $13.4 million and the weighted average effective interest rate for these investments was approximately 4.7%. The Company's rate of return on its investment portfolio changes with short-term interest rates, although such changes will not affect the value of its portfolio. The Company's objective in connection with its investment strategy is to maintain the security of its cash reserves without taking market risk with principal. The Company purchases and sells primarily in U.S. dollars. The Company sells in foreign currency (primarily Euros) to a limited number of customers and as such incurs some foreign currency risk. At any given time, approximately 5 to 10 percent of the Company's accounts receivable are denominated in currencies other than U.S. dollars. At present, the Company does not purchase forward contracts as hedging instruments, but could do so as circumstances warrant. Controls and Procedures The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal controls over financial reporting during the fiscal year ended April 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Common Stock Information The Common Stock of the Company is traded on the NASDAQ National Market with the symbol "DRAM". The following table sets forth, for the periods indicated, the high and low prices for the Common Stock. 2007 2006 ___________________ __________________ High Low High Low ___________________ __________________ First Quarter $ 5.94 $ 4.61 $ 7.00 $ 3.90 Second Quarter 5.07 4.01 7.58 6.05 Third Quarter 4.80 4.04 6.75 4.65 Fourth Quarter 4.78 4.03 6.10 4.68 At April 30, 2007, there were approximately 7,000 shareholders. The Company pays a dividend on its common stock, currently $0.06 per share per quarter. On May 30, 2007, the Board of Directors approved a $0.06 per share quarterly dividend payable on June 27, 2007 to shareholders of record as of June 13, 2007. Page 5 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets April 30, 2007 and 2006 (In thousands, except share and per share amounts) 2007 2006 ______ ______ Assets Current assets: Cash and cash equivalents $14,138 $14,044 Trade receivables, less allowance for doubtful accounts and sales returns of $300 in 2007 and 2006 4,717 4,893 Inventories: Raw materials 1,497 1,506 Work in process 42 63 Finished goods 582 620 ______ ______ 2,121 2,189 Deferred income taxes 1,149 1,365 Note receivable 1,537 1,537 Other current assets 231 80 ______ ______ Total current assets 23,893 24,108 Deferred income taxes 1,123 1,176 Property and equipment: Machinery and equipment 10,886 10,641 Leasehold improvements 2,103 2,028 ______ ______ 12,989 12,669 Less accumulated depreciation and amortization 12,205 11,822 ______ ______ Net property and equipment 784 847 Other assets 105 105 ______ ______ $25,905 $26,236 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,597 $ 2,057 Accrued liabilities 976 653 ______ ______ Total current liabilities 2,573 2,710 Commitments and contingencies Stockholders' equity: Common stock, par value $1.00 per share. Authorized 54,000,000 shares; issued and outstanding 8,687,755 in 2007 and 8,487,396 in 2006 8,688 8,487 Additional paid-in capital 5,796 4,906 Retained earnings 8,848 10,133 ______ ______ Total stockholders' equity 23,332 23,526 ______ ______ $25,905 $26,236 ====== ====== See accompanying notes to consolidated financial statements. Page 6 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years ended April 30, 2007, 2006 and 2005 (In thousands, except per share amounts) 2007 2006 2005 _______ _______ _______ Revenues $ 38,404 $ 41,795 $ 65,684 Costs and expenses: Cost of sales 29,410 29,458 49,816 Engineering and development 1,243 1,136 1,300 Selling, general and administrative 9,605 9,194 10,653 _______ _______ _______ 40,258 39,788 61,769 _______ _______ _______ Earnings (loss) from operations (1,854) 2,007 3,915 Other income (expense): Interest income 717 467 115 Interest expense (5) (12) (21) Currency gain (loss) 97 (65) 33 Other income 2,265 2,041 75 _______ _______ _______ 3,074 2,431 202 _______ _______ _______ Earnings before income tax expense (benefit) 1,220 4,438 4,117 Income tax expense (benefit) 450 1,666 (2,598) _______ _______ _______ Net earnings $ 770 $ 2,772 $ 6,715 ======= ======= ======= Net earnings per common share: Basic $ 0.09 $ 0.33 $ 0.78 ======= ======= ======= Diluted $ 0.09 $ 0.31 $ 0.74 ======= ======= ======= See accompanying notes to consolidated financial statements. Page 7 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended April 30, 2007, 2006 and 2005 (In thousands) 2007 2006 2005 ______ _____ ______ Cash flows from operating activities: Net earnings $ 770 $ 2,772 $ 6,715 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 383 787 1,133 Bad debt expense (recovery) 29 (67) 38 Stock-based compensation expense 440 - - Gain on sale of land - (1,916) - Deferred income tax expense (benefit) 269 1,347 (3,165) Excess tax benefits from sale of common shares under stock option plan (113) 117 122 Changes in assets and liabilities: Decrease in trade and other receivables 146 3,571 411 Decrease in inventories 67 180 168 Decrease (increase) in other current assets (150) 50 (38) Increase in other assets - (51) (4) Decrease in accounts payable (460) (471) (1,334) Increase (decrease) in accrued liabilities 324 (785) (208) _____ _____ _____ Net cash provided by operating activities 1,705 5,534 3,838 _____ _____ _____ Cash flows from investing activities: Additions to property and equipment (320) (480) (316) Proceeds from sale of property and equipment - 1,253 13 _____ _____ _____ Net cash provided by (used in) investing activities (320) 773 (303) _____ _____ _____ Cash flows from financing activities: Purchase and subsequent cancellation of shares of common stock - (230) (1,505) Proceeds from sale of common shares under stock option plan (including tax benefits) 651 459 445 Excess tax benefits from sale of common shares under stock option plan 113 - - Dividends paid (2,055) (1,773) - _____ _____ _____ Net cash used in financing activities (1,291) (1,544) (1,060) _____ _____ _____ Net increase in cash and cash equivalents 94 4,763 2,475 Cash and cash equivalents at beginning of year 14,044 9,281 6,806 _____ _____ _____ Cash and cash equivalents at end of year $ 14,138 $ 14,044 $ 9,281 ===== ===== ===== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 5 $ 22 $ 18 ===== ===== ===== Income taxes $ 205 $ 328 $ 476 ===== ===== ===== See accompanying notes to consolidated financial statements. Page 8 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended April 30, 2007, 2006 and 2005 (In thousands, except share amounts) Total Additional stock- Common paid-in Retained holders' stock capital earnings equity ______ ________ ________ ________ Balance at April 30, 2004 $ 8,527 $ 4,676 $ 3,201 $16,404 Issuance of 146,485 shares under stock option plans, including income tax benefit of $122 146 421 - 567 Purchase and subsequent cancellation of 311,504 shares (312) (531) (662) (1,505) Net earnings - - 6,715 6,715 ______ _______ ______ _______ Balance at April 30, 2005 8,361 4,566 9,254 22,181 Issuance of 177,346 shares under stock option plans, including income tax benefit of $117 177 399 - 576 Purchase and subsequent cancellation of 51,450 shares (51) (59) (120) (230) Net earnings - - 2,772 2,772 Dividends paid (1) - - (1,773) (1,773) ______ _______ _______ _______ Balance at April 30, 2006 8,487 4,906 10,133 23,526 Issuance of 200,359 shares under stock option plans, including income tax benefit of $113 201 450 - 651 Net earnings - - 770 770 Stock-based compensation expense - 440 - 440 Dividends paid (2) - - (2,055) (2,055) ______ _______ _______ _______ Balance at April 30, 2007 $ 8,688 $ 5,796 $ 8,848 $23,332 ====== ======= ======= ======= (1) Dividends paid in the fiscal year ended April 30, 2006 totaled $0.21 per common share and were paid at the rate of $0.05 per common share in each of the first three fiscal quarters of the year and $0.06 per common share in the fourth quarter of the fiscal year. (2) Dividends paid in the fiscal year ended April 30, 2007 totaled $0.24 per common share and were paid quarterly at the rate of $0.06 per common share. See accompanying notes to consolidated financial statements. Page 9 Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) (1) Significant Accounting Policies Description of Business Dataram Corporation is a worldwide provider of server and workstation memory. The Company offers a specialized line of gigabyte-class memory for entry to enterprise-level servers and workstations as well as customized memory solutions for original equipment manufacturers. Principles of Consolidation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company has certain foreign subsidiaries which act only as sales offices and which are deemed to be essentially branches of the US company. The functional currency of these sales offices is considered to be the US dollar. Accordingly, any amounts denominated in a currency other than the US dollar are being recorded at the balance sheet rate of exchange and gains and losses arising from changes in foreign currency rates for those assets and liabilities are being reported in the consolidated statements of earnings. Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted cash, money market accounts and commercial paper purchased with maturities of three months or less when acquired. Inventories Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Note Receivable On December 29, 2005, the Company closed on an agreement entered into in fiscal 2003 to sell its undeveloped land. The purchase price was $3,075 of which half, or $1,537, was paid in the form of a note, that accrued interest, payable monthly at 5% per annum for a period of one year and 7.5% per annum thereafter. The note was secured by a mortgage. Of the remainder, $250 had been previously paid as deposits and $1,253, which was net of closing costs, was received in cash at closing. The note receivable is treated as a non-cash transaction in the 2006 Consolidated Statements of Cash Flows. Subsequent to the end of fiscal 2007, the note was paid in full and the mortgage released. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed on the straight-line basis. Depreciation and amortization rates are based on the estimated useful lives, which range from three to five years for machinery and equipment and five to six years for leasehold improvements. When property or equipment is retired or otherwise disposed of, related costs and accumulated depreciation and amortization are removed from the accounts. Repair and maintenance costs are charged to operations as incurred. Long-Lived Assets Long-lived assets consist of property, plant and equipment. Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets" provides a single accounting model for long-lived assets to be disposed of. SFAS No.144 also changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less cost to sell, and no longer depreciated. The Company considers various valuation factors, principally undiscounted cash flows, to assess the fair values of long-lived assets. Revenue Recognition Revenue Recognition- Revenue is recognized when title passes upon shipment of goods to customers. The Company's revenue earning activities involve delivering or producing goods. The following criteria are met before revenue is recognized: persuasive evidence of an arrangement exists, shipment has occurred, selling price is fixed or determinable and collection is reasonably assured. The Company does experience a minimal level of sales returns and allowances for which the Company accrues a reserve at the time of sale in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists". Estimated warranty costs are accrued by management upon product shipment based on an estimate of future warranty claims. Product Development and Related Engineering The Company expenses product development and related engineering costs as incurred. Engineering effort is directed to the development of new or improved products as well as ongoing support for existing products. Income Taxes Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers certain tax planning strategies in its assessment as to the recoverability of its tax assets. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. Page 10 Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents in financial institutions and brokerage accounts. To the extent that such deposits exceed the maximum insurance levels, they are uninsured. The Company performs ongoing evaluations of its customers' financial condition, as well as general economic conditions and, generally, requires no collateral from its customers. At April 30, 2007, amounts due from one customer totaled approximately 16% of accounts receivable. In fiscal 2007, the Company had no sales to any one customer that accounted for 10% or more of revenues. In fiscal 2006, sales to one customer accounted for approximately 11% of revenues and in fiscal 2005, sales to a different customer accounted for approximately 33% of revenues. Net Earnings Per Share Net Earnings Per Share is presented in accordance with SFAS No. 128, "Earnings Per Share". Basic net earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share was calculated in a manner consistent with basic net earnings per share except that the weighted average number of common shares outstanding also includes the dilutive effect of stock options outstanding (using the treasury stock method). The following presents a reconciliation of the numerator and denominator used in computing basic and diluted net earnings per share. Year ended April 30, 2007 Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 770 8,572,000 $ .09 Effect of dilutive securities - -stock options - 232,000 - _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 770 8,804,000 $ .09 ======= ========= ====== Year ended April 30, 2006 Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 2,772 8,447,000 $ .33 Effect of dilutive securities - -stock options - 374,000 - _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 2,772 8,821,000 $ .31 ======= ========= ====== Year ended April 30, 2005 Earnings Shares Per share (numerator) (denominator) amount _________ ___________ _________ Basic net earnings per share - -net earnings and weighted average common shares outstanding $ 6,715 8,571,000 $ .78 Effect of dilutive securities - -stock options - 541,000 - _______ _________ ______ Diluted net earnings per share - -net earnings, weighted average common shares outstanding and effect of stock options $ 6,715 9,112,000 $ .74 ======= ========= ====== Diluted net earnings per common share does not include the effect of options to purchase 555,938 shares of common stock for the year ended April 30, 2007 because they are anti-dilutive. Diluted net earnings per common share does not include the effect of options to purchase 391,880 shares of common stock for the year ended April 30, 2006 because they are anti-dilutive. Diluted net earnings per common share does not include the effect of options to purchase 443,700 shares of common stock for the year ended April 30, 2005 because they are anti-dilutive. Page 11 Product Warranty The majority of the Company's products are intended for single use; therefore, the Company requires limited product warranty accruals. The Company accrues estimated product warranty cost at the time of sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. Balance Charges to Balance Beginning Costs and End of Year Expenses Deductions of Year _________ _________ __________ ________ Year Ended April 30, 2007 $ 54 4 (4) $ 54 Year Ended April 30, 2006 $ 54 19 (19) $ 54 Year Ended April 30, 2005 $ 54 9 (9) $ 54 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to market data and other valuation techniques as appropriate. The Company believes that there is no material difference between the fair value and the reported amounts of financial instruments in the consolidated balance sheets. Stock-Based Compensation At April 30, 2007, the Company has stock-based employee and director compensation plans, which are described more fully in Note 4. New shares of the Company's common stock are issued upon exercise of stock options. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R supersedes APB No. 25 and requires that such transactions be accounted for using a fair value-based method. SFAS 123R requires companies to recognize an expense for compensation cost related to share-based payment arrangements, including stock options and employee stock purchase plans. The Company implemented SFAS 123R effective May 1, 2006. To calculate the excess tax benefits available as of the date of adoption for use in offsetting future tax shortfalls, the Company followed the alternative transition method discussed in Financial Accounting Standards Board Staff Position No. 123(R)-3. Prior to May 1, 2006, as permitted under SFAS No. 123, "Accounting for Stock- Based Compensation," ("SFAS 123"), compensation cost for stock options was recognized using the intrinsic value method described in APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Effective May 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment," ("SFAS 123R") and Securities and Exchange Commission Staff Accounting Bulletin No. 107. Under SFAS 123R, the fair value of options granted is amortized over the related service period. SFAS 123R was adopted using the modified prospective transition method; therefore, prior periods have not been restated. Compensation expense recognized in Fiscal 2007, includes compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Compensation cost for any share-based payments granted subsequent to May 1, 2006 are based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. As a result of adopting SFAS 123R, our earnings before taxes and net earnings for the fiscal year ended April 30, 2007 are $440 and $258 lower, respectively, than if we had continued to account for stock-based compensation under APB 25. This resulted in a decrease in our reported basic and diluted net earnings per share of $.03. Compensation expense is recognized in the selling, general and administrative expenses line item of the accompanying consolidated statements of operations on a ratable basis over the vesting periods. We measure the fair value of stock options using the Black-Scholes option pricing model based upon the market price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends, using an expected quarterly dividend rate of $0.06 and risk-free interest rates ranging from 3.0% to 5.0%. Stock options are amortized over their applicable vesting period, which generally ranges from one to five years. These stock option grants have been classified as equity instruments, and as such, a corresponding increase of $440 has been reflected in additional paid-in capital in the accompanying balance sheet as of April 30, 2007. There were no capitalized stock-based compensation costs at April 30, 2006. Prior to the adoption of SFAS 123R, benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows. SFAS 123R requires excess tax benefits to be reported as a financing cash inflow. The Company had $113 of excess tax benefits in Fiscal 2007. The Company had $117 of excess tax benefits in Fiscal 2006. Page 12 A summary of option activity under the plans for the fiscal year ended April 30, 2007 is as follows: Weighted Weighted average Aggregate average remaining intrinsic Shares exercise price contractual life value(1) __________ __________ __________ __________ Balance April 30, 2006 1,299,375 $4.78 3.65 $2,252 Granted 143,300 $4.70 - - Exercised (200,359) $2.68 - $ 363 Cancelled (34,250) $6.65 - - Balance April 30, 2007 1,208,066 $5.24 3.22 $ 675 Exercisable April 30, 2007 1,008,616 $5.34 2.78 $ 672 (1) These amounts represent the difference between the exercise price and $4.22, the closing price of Dataram common stock on April 30, 2007 as reported on the NASDAQ Stock Market, for all in-the-money options outstanding. For exercised options, intrinsic value represents the difference between the exercise price and the closing price of Dataram common stock on the date of exercise. Total cash received from the exercise of options in fiscal 2007 was $538. During fiscal 2007, 146,100 options completed vesting. As of April 30, 2007, there was $243 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of one year. At April 30, 2007, an aggregate of 1,135,300 shares were authorized for future grant under the Company's stock option plans. The following table illustrates the pro forma effect on net earnings and earnings per share for fiscal years 2006 and 2005 if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation: Years ended April 30 2006 2005 ----------- ----------- Net earnings as reported $ 2,772 $ 6,715 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of tax (517) (97) ----------- ----------- Pro forma net earnings $ 2,255 $ 6,618 =========== =========== Basic and diluted net earnings per common share: Basic: As reported $ .33 $ .78 =========== =========== Pro forma under SFAS 123R $ .27 $ .77 =========== =========== Diluted: As reported $ .31 $ .74 =========== =========== Pro forma under SFAS 123R $ .26 $ .73 =========== =========== The 2005 expense includes a pro forma tax benefit from the reversal of the valuation allowance on certain pro forma net operating losses from previous years. Page 13 The fair value of each stock option granted during the year is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 2007 2006(1) 2005(1) ------- ------- ------- Expected life (years) 4.0 4.0 7.5 Expected volatility 67% 63% 52% Expected dividend yield 5.1% - - Risk-free interest rate 5.0% 5.0% 3.0% Weighted average fair value of options granted during the year $ 2.00 $ 3.18 $ 3.22 (1) Estimated values and assumptions used in the calculation of fair value prior to the adoption of SFAS 123R. Expected life is based on the Company's historical experience of option exercises relative to option contractual lives. Expected volatility is based on the historical volatility of the Company's share price. Expected dividend yield assumes the current dividend rate remains unchanged. Risk free interest rate approximates United States government debt rates at the time of option grants. (2) Long-Term Debt On June 21, 2004, the Company entered into a credit facility with a bank, which provides for up to a $5,000 revolving credit line. Advances under the facility were limited to 75% of eligible receivables, as defined in the agreement. The agreement provides for LIBOR rate loans and base rate loans at an interest rate no higher than the bank's base commercial lending rate. The Company is required to pay a fee equal to one-eighth of one percent per annum on the unused commitment. The agreement contains certain restrictive covenants, specifically a trailing twelve month profitability requirement, a current asset to current liabilities ratio, a total liabilities to tangible net worth ratio and certain other covenants, as defined in the agreement. The agreement was amended on April 4, 2005. The effect of the amendment was to increase the limit of the Company's combined open market stock repurchases and dividend payments to $2,500 per year from $1,000 per year without prior waiver. The agreement was scheduled to expire on June 21, 2006. On June 20, 2006, the agreement was amended. The effect of the amendment was to extend the expiration date of the agreement to August 15, 2008 and remove the eligible accounts receivable limitation on advances under the facility. The amendment also modified the total liabilities to tangible net worth ratio covenant. The Company is in compliance with all covenants of the agreement and there were no borrowings against the credit line in fiscal 2007. (3) Income Taxes Income tax expense (benefit) for the years ended April 30 consists of the following: 2007 2006 2005 _____ _____ _____ Current: Federal $ 113 $ 117 $ 82 State 68 202 169 _____ _____ _____ 181 319 251 _____ _____ _____ Deferred: Federal 274 1,238 (2,849) State (5) 109 - _____ _____ _____ 269 1,347 (2,849) _____ _____ _____ Total income tax expense (benefit) $ 450 $ 1,666 $(2,598) ===== ===== ===== The actual income tax expense (benefit) differs from "expected" tax expense (benefit) (computed by applying the U. S. corporate tax rate of 35% to earnings before income taxes) as follows: 2007 2006 2005 _____ _____ _____ Computed "expected" tax expense $ 427 $ 1,553 $ 1,441 State income taxes(net of Federal income tax benefit) 41 147 112 Change in valuation allowance - - (2,569) Utilization of net operating losses - - (1,217) Other (18) (34) (365) _____ _____ _____ $ 450 $ 1,666 $ (2,598) ===== ===== ===== Page 14 The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: 2007 2006 ____ ____ Deferred tax assets: Compensated absences, principally due to accrual for financial reporting purposes $ 111 $ 114 Stock-based compensation expense 163 - Accounts receivable, principally due to allowance for doubtful accounts and sales returns 111 111 Property and equipment, principally due to differences in depreciation 37 123 Inventories 100 111 Foreign tax credit 53 53 Domestic net operating losses 1,692 1,640 Alternative minimum tax 382 389 _____ _____ Gross deferred tax assets 2,649 2,541 Deferred tax liabilities: Installment sale obligation, principally due to note receivable (377) - _____ _____ Gross deferred tax liabilities (377) - _____ _____ Net deferred tax assets $ 2,272 $ 2,541 ===== ===== During fiscal 2005, the Company reversed the valuation allowance it had previously placed on its deferred tax assets since management concluded that it is more likely than not that such assets will be realized through future taxable income or certain tax planning strategies. The Company has U.S. net operating loss carryforwards of approximately $5,083 which can be used to offset income through 2023. The tax benefit of net operating loss carryforwards utilized in each of the three years ended April 30, 2007 is as follows: Federal State Total 2007 $1,056 $ - $1,056 2006 $1,901 $109 $2,010 2005 $1,199 $104 $1,303 Page 15 (4) Stock Option Plans The Company has a 1992 incentive and non-statutory stock option plan for the purpose of permitting certain key employees to acquire equity in the Company and to promote the growth and profitability of the Company by attracting and retaining key employees. In general, the plan allowed granting of up to 2,850,000 shares, adjusted for stock splits, of the Company's common stock at an option price to be no less than the fair market value of the stock on the date such options are granted. Under option agreements granted under the plan, the holder of the option may purchase 20% of the common stock with respect to which the option has been granted on or after the first anniversary of the date of the grant and an additional 20% of such shares on or after each of the four succeeding anniversary dates. At April 30, 2007, 455,741 of the outstanding options are exercisable. No further options may be granted under this plan. The Company also has a 2001 incentive and non-statutory stock option plan for the purpose of permitting certain key employees to acquire equity in the Company and to promote the growth and profitability of the Company by attracting and retaining key employees. In general, the plan allows granting of up to 1,800,000 shares of the Company's common stock at an option price to be no less than the fair market value of the Company's common stock on the date such options are granted. Currently, options granted under the plan vest ratably on the annual anniversary date of the grants. Vesting periods for options currently granted under the plan range from one to five years. At April 30, 2007, 396,875 of the outstanding options are exercisable. The status of the plans for the three years ended April 30, 2007, is as follows: Options Outstanding ________________________________________________ Exercise price Weighted average Shares per share exercise price _________ ______________ ___________ Balance April 30, 2004 1,366,200 $ 1.708-24.250 $ 4.463 Granted 120,500 6.500-6.750 6.729 Exercised (153,450) 1.708-7.980 3.474 Cancelled (78,400) 2.990-24.250 10.539 _________ ____________ ____________ Balance April 30, 2005 1,254,850 1.708-24.250 4.422 Granted 147,600 5.140-6.630 6.125 Exercised (180,475) 1.708-4.833 2.923 Cancelled (94,600) 2.990-7.980 5.835 _________ ____________ ____________ Balance April 30, 2006 1,127,375 1.708-24.250 4.767 Granted 103,300 4.700 4.700 Exercised (200,359) 2.313-4.090 2.684 Cancelled (18,250) 2.313-10.000 6.026 _________ ____________ ____________ Balance April 30, 2007 1,012,066 $ 2.813-24.250 $ 5.150 ========= ============ ========== The Company periodically grants nonqualified stock options to non-employee directors of the Company. These options are granted for the purpose of retaining the services of directors who are not employees of the Company and to provide additional incentive for such directors to work to further the best interests of the Company and its shareholders. The options granted to these non-employee directors are exercisable at a price representing the fair value at the date of grant, and expire either five or ten years after date of grant. Of each option, 100% are exercisable one year after the date of grant. At April 30, 2007, 156,000 of the outstanding options are exercisable. Page 16 The status of the non-employee director options for the three years ended April 30, 2007, is as follows: Options Outstanding ________________________________________________ Exercise price Weighted average Shares per share exercise price _________ _____________ ____________ Balance April 30, 2004 120,000 $ 2.990-7.980 $ 5.020 Granted 40,000 6.750 6.750 Exercised (16,000) 2.990-4.090 3.540 Cancelled - - - ________ ____________ ____________ Balance April 30, 2005 144,000 2.990-7.980 5.665 Granted 44,000 6.420-6.630 6.573 Exercised (16,000) 2.990-4.090 3.540 Cancelled - - - ________ ____________ ____________ Balance April 30, 2006 172,000 2.990-7.980 6.095 Granted 40,000 4.700 4.700 Exercised - - - Cancelled (16,000) 6.750-7.980 7.365 ________ ____________ ____________ Balance April 30, 2007 196,000 $ 2.990-7.980 $ 5.965 ======== ============ ============ (5) Accrued Liabilities Accrued liabilities consist of the following at April 30: 2007 2006 -------- -------- Payroll, including vacation $ 300 $ 303 Severance costs 310 106 Commissions 180 84 Other 186 160 -------- -------- $ 976 $ 653 ======== ======== (6) Commitments Leases The Company and its subsidiaries occupy various facilities and operate various equipment under operating lease arrangements. Rent charged to operations pursuant to such operating leases amounted to approximately $725 in 2007, $769 in 2006 and $840 in 2005. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2007 are as follows: Operating Leases ________________ Year ending April 30: 2008 $ 490 2009 403 2010 411 2011 365 2012 34 Thereafter 0 ________________ $ 1,703 ================ Purchases At April 30, 2007, the Company had open purchase orders outstanding totaling $2,184, primarily for inventory items to be delivered in the first quarter of fiscal 2008. These purchase orders are cancelable. Page 17 License Agreements The Company has entered into certain licensing agreements with varying terms and conditions. The Company is obligated to pay royalties on certain of these agreements. Legal Proceedings The Company is not involved in any claim or legal action, which in the opinion of management, would have a material effect on the Company's consolidated financial position, results of operations or liquidity. (7) Employee Benefit Plan The Company has a defined contribution plan (the Plan) which is available to all qualified employees. Employees may elect to contribute a portion of their compensation to the Plan, subject to certain limitations. The Company contributes a percentage of the employee's contribution, subject to a maximum of 6 percent of the employee's eligible compensation, based on the employee's years of service. The Company's matching contributions aggregated approximately $236, $250 and $268 in 2007, 2006 and 2005, respectively. (8) Revenues by Geographic Location The Company operates in one business segment and develops, manufactures and markets a variety of memory systems for use with servers and workstations which are manufactured by various companies. Revenues and total assets for 2007, 2006 and 2005 by geographic region is as follows: United Europe Other* Consolidated States _______ _______ ______ ____________ April 30, 2007 Revenues $ 27,583 $ 6,484 $ 4,337 $ 38,404 Total assets $ 25,428 $ 464 $ 13 $ 25,905 Long lived assets $ 784 $ 0 $ 0 $ 784 April 30, 2006 Revenues $ 29,321 $ 9,151 $ 3,323 $ 41,795 Total assets $ 25,761 $ 447 $ 28 $ 26,236 Long lived assets $ 847 $ 0 $ 0 $ 847 April 30, 2005 Revenues $ 50,210 $ 8,716 $ 6,758 $ 65,684 Total assets $ 25,866 $ 281 $ 0 $ 26,147 Long lived assets $ 2,028 $ 0 $ 0 $ 2,028 *Principally Asia Pacific Region (9) Quarterly Financial Data (Unaudited) Quarter Ended ____________________________________________ Fiscal 2007 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $ 9,305 $10,902 $ 9,366 $ 8,831 Gross profit 2,405 2,577 1,862 2,151 Net earnings (loss) (70) 1,446 (298) (309) Net earnings (loss) per diluted common and common equivalent share (.01) .16 (.03) (.04) Quarter Ended ____________________________________________ Fiscal 2006 July 31 October 31 January 31 April 30 ___________ _______ __________ __________ ________ Revenues $13,944 $ 9,858 $ 9,220 $ 8,773 Gross profit 4,198 2,972 2,700 2,466 Net earnings 931 353 1,405 83 Net earnings (loss) per diluted common and common equivalent share .11 .04 .16 .01 Earnings per share is calculated independently for each quarter and therefore may not equal the total for the year. Page 18 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS The Board of Directors and Stockholders Dataram Corporation: We have audited the accompanying consolidated balance sheets of Dataram Corporation and Subsidiaries as of April 30, 2007 and 2006, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dataram Corporation and Subsidiaries as of April 30, 2007 and 2006, and their results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the company changed the manner in which it accounts for share-based compensation in fiscal 2007. /s/ J.H. Cohn LLP Lawrenceville, New Jersey July 3, 2007 The Board of Directors and Stockholders Dataram Corporation: We have audited the accompanying consolidated statements of earnings, stockholders' equity, and cash flows of Dataram Corporation and subsidiaries for the year ended April 30, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Dataram Corporation and subsidiaries for the year ended April 30, 2005, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Short Hills, New Jersey July 8, 2005 Page 19 Selected Financial Data (Not covered by Independent Registered Public Accounting Firms' Reports) (In thousands, except per share amounts) Years Ended April 30, 2007 2006 2005 2004 2003 ______________________ ____ ____ ____ ____ ____ Revenues $ 38,404 $ 41,795 $ 65,684 $ 61,984 $ 53,529 Net earnings (loss) 770 2,772 6,715 2,271 (15,604) Basic earnings (loss) per share .09 .33 .78 .27 (1.84) Diluted earnings (loss) per share .09 .31 .74 .25 (1.84) Current assets 23,893 24,108 23,435 19,004 15,619 Total assets 25,905 26,236 26,147 21,912 20,207 Current liabilities 2,573 2,710 3,966 5,508 6,186 Total stockholders' equity 23,332 23,526 22,181 16,404 14,021 Cash dividends paid 2,055 1,773 - - - Performance Graph (Not covered by Independent Registered Public Accounting Firms' Reports) COMPARISON OF THE FIVE-YEAR CUMULATIVE TOTAL RETURN* AMONG DATARAM CORPORATION, THE S&P 500 INDEX AND A PEER GROUP [The chart is a three-line graph of dollars versus dates having the following data points: 4/02 4/03 4/04 4/05 4/06 4/07 ____ ____ ____ ____ ____ ____ Dataram 100 34 95 58 82 63 Peer Group** 100 111 112 135 213 187 S&P 500 100 87 107 113 131 151 *$100 invested on 4/30/02 in stock or index including reinvestment of dividends. Fiscal year ending April 30. **Standard Industrial Code Peer Group includes the following companies: Ciprico, Inc.; Dataram Corp.; Dot Hill Systems Corp.; Iomega Corp.; Komag Inc.; Lasercard Corp.; MTI Technology Corp.; Netlist, Inc.; Network Engines, Inc.; Overland Storage, Inc.; Stec, Inc.; and Western Digital Corp. Page 20 DIRECTORS AND CORPORATE OFFICERS Directors Robert V. Tarantino Chairman of the Board of Directors, President and Chief Executive Officer of Dataram Corporation Thomas A. Majewski* Principal, Walden Inc. Bernard L. Riley* Private Investor Roger C. Cady* Principal, Arcadia Associates Rose Ann Giordano* President, Thomis Partners John H. Freeman* Independent Consultant *Member of audit committee Corporate Officers Robert V. Tarantino President and Chief Executive Officer Mark E. Maddocks Vice President, Finance and Chief Financial Officer Jeffrey H. Duncan Vice President of Manufacturing and Engineering Tony Pawlik Vice President of Sales Anthony M. Lougee Controller Thomas J. Bitar Secretary Member, Dillon, Bitar & Luther, L.L.C. Corporate Headquarters Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 609-799-0071 Auditors J.H. COHN LLP Lawrenceville, NJ General Counsel Dillon, Bitar & Luther, L.L.C. Morristown, NJ Transfer Agent and Registrar American Stock Transfer and Trust Company 10150 Mallard Creek Drive Suite 307 Charlotte, NC 28262 Stock Listing Dataram's common stock is listed on the NASDAQ with the trading symbol DRAM. Annual Meeting The annual meeting of shareholders will be held on Thursday, September 27, 2007, at 2:00 p.m. at Dataram's corporate headquarters at: 186 Princeton Road (Route 571) West Windsor, NJ 08550 Form 10-K A copy of the Company's Annual Report on Form 10-K filed with the Securities & Exchange Commission is available without charge to shareholders. Address requests to: Vice President, Finance Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 Corporate Headquarters Dataram Corporation 186 Princeton Road (Route 571) West Windsor, NJ 08550 Toll Free: 800-DATARAM Phone: 609-799-0071 Fax: 609-799-6734 www.dataram.com End of Document