[DATARAM LOGO] DATARAM CORPORATION 2011 ANNUAL REPORT Table of Contents 1 President's Letter 3 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Financial Review 20 Selected Financial Data [PICTURE OF JOHN FREEMAN] President's Letter To Our Shareholders: Two years ago, I outlined our growth and diversification strategy for the Company and the initiatives we put in place to implement that strategy. I am pleased to report on our growth, progress and future plans. We continued the implementation of our new go to market corporate strategy instituted last fiscal year. As I stated last year, we changed our traditional direct sales model. We focused a direct sales team on selling solutions within industry verticals, opened web based e-sales, created an inside sales team and increased our investment in our partner strategy. We now have implemented Alliance Partners for corporations, Reseller and Distributor Partners, Government Partners and Individual Partners. Each of these changes made contributions to our growth. In fiscal 2011, our memory solutions business grew by 6 percent to $46.8 million and we posted our second consecutive year of growth after five years of negative growth. This business is now operating profitably. On March 31, 2009, we acquired certain assets of Micro Memory Bank, Inc. (MMB), a prominent memory module company offering legacy to advanced solutions in laptop, desktop and server memory products. Both MMB and the traditional Dataram memory business have benefited from leveraging each other's skills, strategies, marketing, sales, engineering and purchasing resources. During fiscal 2011, we continued our integration of MMB and our traditional memory business. In March, 2011, we completed the consolidation of our two manufacturing facilities and reduced our expenses by approximately $1.2 million annually as a result. In fiscal 2010, we developed and launched a new corporate website incorporating new features, functions, content, and branding which reflects and supports our new corporate mission and strategy. The website's interactive e-commerce capabilities generated business leads and sales representing over $1.7 million in revenues in fiscal 2011 compared to approximately $1.0 million last year. Revenues generated through the website are continuing to grow and are trending towards an annualized run rate exceeding $2.0 million. In fiscal 2011, we incorporated a quote and order application to facilitate ease of quotation and order placement and further strengthen our business relationship with our premier channel partners and select enterprise clients. During fiscal 2011, we continued to make significant investments in the development of our XcelaSAN product line. XcelaSAN is a unique intelligent Storage Area Network (SAN) optimization solution that delivers substantive application performance improvement to applications such as Oracle, SQL and VMware. XcelaSAN augments existing storage systems by transparently applying intelligent caching algorithms that serve the most active block-level data from high-speed storage, creating an intelligent, virtual solid state SAN. This breakthrough solution allows organizations to dramatically increase the performance of their business-critical applications without the costly hardware upgrades or over-provisioning of storage typically found in current solutions for increased performance. 3 Our development team has successfully incorporated high availability functionality into the product software and the first generation product is now available for sale. The product is currently installed and being evaluated for purchase at selected customer sites. XcelaSAN continues to provide significant performance improvements over traditional solutions at dramatically less cost. Many clients are reconsidering traditional computing paradigms requiring major technology refreshes every several years. Instead we have seen our clients seek out solutions which optimize the performance and extend the useful life of existing IT assets. By doing so, our clients realize substantial reductions in computing costs, eliminate business risks associated with the introduction of new technology, and avoid substantial resource overhead required to implement these new IT assets. We believe the timing of introducing XcelaSAN into the market is ideal as it provides exponential optimization of storage assets while also extending their useful life. In addition, as our clients deploy "tiered" storage architectures designed to store data in the most logical and economical repository, XcelaSAN represents a critical component in leveraging and supporting that strategy. We have completed the formation of a dedicated XcelaSAN lead generation and sales team. In May, 2011, we secured the financing we believe necessary to sustain the Company through the period of the product launch. We will continue to execute our new strategy and leverage the investments we have made in sales, marketing and new product development to increase our growth and profits in our memory solutions and XcelaSAN storage businesses. These investments have also set the stage for Dataram to provide more solutions and optimization benefits to our clients as we continue to diversify and create a stronger foundation for growth. 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 17, 2011 John H. Freeman President and Chief Executive Officer 4 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Dataram Corporation ("the Company") 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 and Sun Microsystems. Additionally, the Company manufactures a line of memory products for Intel and AMD motherboard based servers. The Company is also a developer, manufacturer and marketer of a line of high performance storage caching products. The Company's 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 DRAMs is the largest single component 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. On March 31, 2009, the Company acquired certain assets of Micro Memory Bank, Inc. ("MMB"), a privately held corporation. MMB is a manufacturer of legacy to advanced solutions in laptop, desktop and server memory products. The acquisition expanded the Company's memory product offerings and routes to market. The results of operations of MMB for the period from the acquisition date through April 30, 2011 have been included in the consolidated results of operations of the Company. 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, 2011 2010 2009 _________________________________________________________________ Revenues 100.0% 100.0% 100.0% Cost of sales 76.4 73.6 67.4 _____ _____ _____ Gross profit 23.6 26.4 32.6 Engineering 2.2 2.3 4.7 Research and development 4.0 9.7 5.9 Selling, general and administrative 26.4 30.3 42.7 _____ _____ _____ 5 Loss from operations (9.0) (15.9) (20.7) Other income (expense), net (0.9) (0.3) 0.9 _____ _____ _____ Loss before income tax expense (benefit) (9.9) (16.2) (19.8) Income tax expense (benefit) 0.0 8.2 (7.7) _____ _____ _____ Net loss (9.9) (24.4) (12.1) ===== ===== ===== Fiscal 2011 Compared With Fiscal 2010 Revenues for fiscal 2011 were $46.8 million compared to $44.0 million in fiscal 2010. The Company's revenues increased by approximately 6% in fiscal 2011 versus fiscal 2010. Revenues for the fiscal years ended April 30, 2011 and 2010 by geographic region were: Year ended Year ended April 30, 2011 April 30, 2010 ________________ ________________ United States $ 37,400,000 $ 36,410,000 Europe 6,481,000 5,055,000 Other (principally Asia Pacific Region) 2,966,000 2,555,000 ________________ ________________ Consolidated $ 46,847,000 $ 44,020,000 ================ ================ Cost of sales was $35.8 million in fiscal 2011 or 76.4 percent of revenues compared to $32.4 million or 73.6 percent of revenues in fiscal 2010. Management expects that cost of sales as a percentage of revenue will generally be approximately 75%. Fluctuations either up or down of 3% or less are not unusual and can result from many factors, some of which are rapid changes 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. Engineering expenses in each of fiscal 2011 and fiscal 2010 were $1.0 million. Research and development expenses in fiscal 2011 were $1.9 million, versus $4.3 million in fiscal 2010. Research and development expense includes payroll, employee benefits, stock-based compensation expense and other headcount-related expenses associated with product development. Research and development expense also includes third-party development and programming costs. In the first quarter of fiscal 2009, the Company implemented a strategy to introduce new and complementary products into its offerings portfolio. The Company is currently focusing on the development of a line of high-performance storage caching products ("XcelaSAN"). XcelaSAN is a unique intelligent Storage Area Network ("SAN") optimization solution that delivers substantive application performance improvement to applications such as Oracle, SQL and VMware. XcelaSAN augments existing storage systems by transparently applying intelligent caching algorithms that serve the most 6 active block-level data from high-speed storage, creating an intelligent, virtual solid state SAN. As part of that strategy, in January 2009, the Company entered into a software purchase and license agreement with another company whereby the Company acquired the exclusive right to purchase specified software for a price of $900,000 plus a contingent payment of $100,000. Fiscal 2010's research and development expense includes $600,000 of expense related to this agreement, of which $300,000 was expensed in the first fiscal quarter and $300,000 was expensed in the second fiscal quarter. The Company exclusively owns the software. The software and the storage products, which incorporate the software, are currently under development. On November 4, 2011, the Company determined that technological feasibility of the product was established. In fiscal 2011 the Company capitalized $1.5 million of research and development costs. We expect to make further investments in this area. Selling, general and administrative(S,G&A) expenses were $12.4 million in fiscal 2011 versus $13.4 million in fiscal 2010. Stock-based compensation expense was recorded as a component of S,G&A expense and totaled approximately $482,000 in fiscal 2011, versus $918,000 in fiscal 2010. In fiscal 2011, there were options granted to purchase 139,000 shares of the Company's common stock compared to grants to purchase 899,500 shares in fiscal 2010. Intangible asset amortization is recorded as a component of S,G&A expense and totaled approximately $407,000 in fiscal 2011, versus $637,000 in fiscal 2010. Other income (expense), net for fiscal year 2011 totaled $401,000 expense versus $117,000 expense in fiscal 2010. Other income (expense) in fiscal 2011 includes $286,000 of interest expense. Other income in fiscal year 2011 also includes $135,000 of foreign currency transaction losses, primarily as a result of the US dollar strengthening against the EURO. Additionally, other income (expense) includes approximately $47,000 of income recorded for the gain on sale of assets. Other income in fiscal 2010 includes $85,000 of foreign currency transaction losses and approximately $42,000 of interest expense, net of interest income. The Company's consolidated statements of operations for fiscal 2011 include tax expense of approximately $5,000 that consists of state minimum tax payments. The Company's consolidated statements of operations for fiscal 2010 include approximately $3.6 million of income tax expense. The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of the Expenses - Income Taxes Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Under the asset and liability method, deferred income 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 the Company determines that it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company considers certain tax planning strategies in its assessment as to the recoverability of its deferred income tax assets. In each reporting period, the Company assesses, based on the weight of all evidence, both positive and negative, whether a valuation allowance on its deferred income tax assets is warranted. Based on the assessment conducted in the Company's reporting period ended January 31, 2010, the Company concluded that such an allowance was warranted and, accordingly, recorded a valuation allowance of approximately $5.8 million in that reporting period. Deferred income tax assets and liabilities are measured 7 using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. 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. As of April 30, 2011 the Company had Federal and State net operating loss (NOL) carry-forwards of approximately $17.1 million and $15.1 million, respectively. These can be used to offset future taxable income and expire between 2023 and 2031 for Federal tax purposes and 2016 and 2031 for state tax purposes. The Company's NOL carry-forwards are a component of its deferred income tax assets which are reported net of a full valuation allowance in the Company's consolidated financial statements at April 30, 2011 and at April 30, 2010. Fiscal 2010 Compared With Fiscal 2009 Revenues for fiscal 2010 were $44.0 million compared to $25.9 million in fiscal 2009. The Company's acquired MMB business unit generated revenues of approximately $14.0 million in fiscal 2010 and $0.9 million in fiscal 2009. Exclusive of the effect of the acquired MMB business units revenues, the Company's revenues increased by approximately 20% in fiscal 2010 versus fiscal 2009. Cost of sales were $32.4 million in fiscal 2010 or 73.6 percent of revenues compared to $17.4 million or 67.4 percent of revenues in fiscal 2009. Fiscal year 2010 cost of sales as a percentage of revenue is considered by management to be within the Company's normal range. Fiscal year 2009 percentages are considered by management to be unusually low and were the result of a product mix skewed more heavily toward higher margin legacy products as sales of lower margin mainstream products were negatively impacted by the world financial crisis. Fluctuations in cost of sales as a percentage of revenues are not unusual and can result from many factors, including rapid changes in the price of DRAMs, or changes in product mix possibly resulting from a large order or series of orders for a particular product or a change in customer mix. Engineering expenses in fiscal 2010 were $1.0 million, versus $1.2 million in fiscal 2009. Research and development expenses in fiscal 2010 were $4.3 million, versus $1.5 million in fiscal 2009. In the first quarter of the prior fiscal year, the Company implemented a strategy to introduce new and complementary products into its offerings portfolio. The Company is currently focusing on the development of certain high performance storage products. As part of that strategy, in January 2009, the Company entered into a software purchase and license agreement with another company whereby the Company acquired the exclusive right to purchase specified software for a price of $900,000 plus a contingent payment of $100,000. Fiscal 2010's research and development expense includes $600,000 of expense related to this agreement, of which $300,000 was expensed in the first fiscal quarter and $300,000 was expensed in the second fiscal quarter. Selling, general and administrative(S,G&A) expenses were $13.4 million in fiscal 2010 versus $11.1 million in fiscal 2009. The acquired MMB business unit's S,G&A expense recorded in fiscal 2010 was approximately $2.1 million, versus $161,000 in fiscal 2009. The prior fiscal year's expense included a charge of approximately $716,000 related to a retirement agreement entered into with the Company's former chief executive officer. Stock-based compensation expense was recorded as a component of S,G&A expense and totaled approximately $918,000 in fiscal 2010, versus $533,000 in fiscal 8 2009. In fiscal 2010, the Company recorded marketing and sales expense related to our new storage products of approximately $906,000 versus nil in the comparable prior year. These expenses are mainly related to the addition of sales personnel and sales engineers for the storage products. Other income (expense), net for fiscal year 2010 totaled $117,000 expense versus $223,000 income in fiscal 2009. Other income (expense) in fiscal 2010 includes $85,000 of foreign currency transaction losses, primarily as a result of the EURO weakening against the US dollar. Additionally, other income (expense) includes $42,000 of interest expense, net of interest income. Approximately $10,000 of income was recorded for the gain on sale of assets. Other income in fiscal 2009 includes $294,000 of interest income, net of interest expense. Additionally, other income includes $68,000 of foreign currency transaction losses, primarily as a result of the EURO weakening against the US dollar. The Company's consolidated statements of operations for fiscal 2010 include approximately $3.6 million of income tax expense. The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of the Expenses - Income Taxes Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) (Codification). Under the asset and liability method, 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 the Company determines that 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. In each reporting period, the Company assesses, based on the weight of all evidence, both positive and negative, whether a valuation allowance on its deferred tax assets is warranted. Based on the assessment conducted in the Company's reporting period ended January 31, 2010, the Company concluded that such an allowance was warranted and accordingly, recorded a valuation allowance of approximately, $5.8 million in that reporting period. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences or tax attributes are expected to be recovered or settled. 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. Income tax expense (benefit) for fiscal 2009 was a benefit of $2.0 million. The Company's effective tax rate for financial reporting purposes in fiscal 2009 was approximately 39%. Liquidity and Capital Resources Cash and cash equivalents at April 30, 2011 amounted to $345,000 and working capital amounted to $3.1 million, reflecting a current ratio of 1.4 to 1, compared to cash and cash equivalents of $2.5 million, working capital of $8.5 million and a current ratio of 2.4 to 1 as of April 30, 2010. Accounts receivable at the end of fiscal 2011 totaled $4.6 million compared to fiscal 2010 year end accounts receivable of $5.3 million. Net cash used in operating activities totaled $2.4 million and consisted primarily of net losses totaling approximately $4.6 million, non-cash depreciation and amortization expense of approximately $1.0 million and non-cash stock-based compensation expense of $610,000. Net changes in assets and liabilities reduced net cash used in operating activities by $608,000. Of these, accrued liabilities decreased by approximately 9 $898,000, primarily as a result of payments made for the accrued contingently payable acquisition price for MMB recorded at April 30, 2010. Accounts payable decreased by approximately $578,000, primarily as a result of a reduction in inventories of approximately $1.4 million. The reduction in inventory is attributable to higher availability of DRAMs resulting in shorter lead times. Cash used in investing activities totaled approximately $2.4 million and consisted of a contingently payable purchase price of approximately $488,000 for the MMB acquisition, more fully described below, capitalized software development costs totaling approximately $1.5 million and additions of property and equipment, totaling approximately $478,000. Cash provided by financing activities totaled approximately $2.7 million and consisted of borrowings under a revolving credit facility, more fully described below, totaling approximately $2.2 million and net proceeds from a loan from a related party totaling $500,000. Proceeds from the sale of common shares under the Company's stock option plan totaling approximately $13,000 were also received. On July 27, 2010, the Company entered into an agreement with a financial institution for formula-based secured debt financing of up to $5,000,000. The amount of financing available to the Company under the agreement varies with the level of the Company's eligible accounts receivable. At April 30, 2011 the Company had $28,000 of financing available to it under the terms of the agreement. Also, on July 27, 2010, the Company entered into an agreement with a vendor, which is wholly owned by an employee and executive officer of the Company, to consign a formula-based amount of up to $3,000,000 of certain inventory into the Company's manufacturing facilities. As of April 30, 2011, the Company has received financing totaling $1,500,000 under this agreement, of which $1,000,000 was used to repay in full a Note payable to the employee arising from an agreement entered into with the employee in February, 2010 and which expired in August, 2010. At April 30, 2011 no further financing was available to the Company under the formulas contained in the consignment agreement, although the formulas provide for additional possible financing in the future. The weighted average interest rate on amounts borrowed under these agreements at April 30, 2011 and 2010 was 11.4% and 5.25%, respectively. The average dollar amounts borrowed under these agreements for the fiscal years ended April 30, 2011, 2010 and 2009 was $2,263,000, $250,000 and nil, respectively. On May 11, 2011, the Company and certain investors entered into a securities purchase agreement pursuant to which the Company agreed to sell an aggregate of 1,775,000 shares of its common stock and warrants to purchase a total of 1,331,250 shares of its common stock to such investors. The aggregate net proceeds of such offering and sale, after deducting fees to the Placement Agent and other estimated offering expenses payable by the Company, was approximately $3.0 million. The transaction closed on May 17,2011. Based on the cash received from the Purchase Agreement and on the cash flows expected to be provided from the two financing agreements above along with the cash flows projected to result from the Company's operations, management has concluded that the Company's liquidity needs will be satisfied. The Company's short-term cash flow projections include cash flow generated from its traditional memory solutions business as well as from revenues generated 10 by sales of its recently developed XcelaSAN product line. There can be no assurance, however, that in the short-term, realized revenues will be in line with the Company's projections. Management continues to evaluate the Company's liquidity needs and expense structure as it executes its business plan. 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, 2011, the total number of shares authorized for purchase under the program is 172,196 shares. In fiscal 2011 and 2010, the Company did not repurchase any shares of its common stock. On March 31, 2009, the Company acquired certain assets of MMB. The Company purchased the assets from MMB for total consideration of approximately $2.3 million, of which approximately $912,000 was paid in cash. The Company also assumed certain accounts payable totaling approximately $190,000 and certain accrued liabilities totaling approximately $122,000. The net assets acquired by the Company were recorded at their respective fair values under the purchase accounting guidance existing at the date of acquisition. Under the terms of the agreement with MMB, the remaining portion of the purchase price is contingently payable based upon the performance of the new Dataram business unit to be operated as a result of the acquisition (the Unit). Through April 30, 2011, the Company has paid or accrued approximately $2.2 million of the contingently payable purchase price which is recorded as a component of Goodwill in the Company's consolidated financial statements. The remaining contingently payable purchase price consists of a percentage, averaging approximately 55%, payable quarterly, over the next twenty-three months of earnings before interest, taxes, depreciation and amortization of the Unit and will be recorded as a component of Goodwill in the Company's consolidated financial statements. 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, 2011 are as follows: Year ending April 30: 2012 $ 272,000 2013 352,000 2014 365,000 2015 374,000 2016 368,000 Thereafter 147,000 _____________ $ 1,878,000 ============ Purchases At April 30, 2011, the Company had open purchase orders outstanding totaling $3.1 million primarily for inventory items to be delivered in the first six months of fiscal 2012. These purchase orders are cancelable. 11 Recently Adopted Accounting Guidance We have adopted the authoritative guidance issued by the FASB on the consolidation of variable interest entities. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities and additional disclosures for variable interests. The adoption of the FASB authoritative guidance did not have a material impact on our consolidated financial statements. We have adopted the authoritative guidance on revenue recognition issued by the FASB. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product are no longer within the scope of the software revenue recognition guidance, and software-enabled products are now subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of the FASB authoritative guidance on revenue recognition did not have a material impact on our consolidated financial statements. Recent Accounting Guidance Not Yet Adopted There are no new pronouncements which affect the Company. Critical Accounting Policies During December 2001, the Securities and Exchange Commission ("SEC") published a Commission Statement in the form of Financial Reporting Release No. 60 which encouraged 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 the Revenue Recognition - Right of Return Topic of the FASB ASC. Estimated warranty costs are accrued by management upon product shipment based on an estimate of future warranty claims. 12 Stock Option Expense - As required by the Compensation - Stock Compensation Topic of FASB ASC, the accounting for transactions in which an entity receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of such equity instruments are accounted for using a fair value-based method with a recognition of an expense for compensation cost related to share-based payment arrangements, including stock options and employee stock purchase plans. The consolidated statements of operations for fiscal 2011 and fiscal 2010 include approximately $610,000 and $918,000, respectively, of stock-based compensation expense. Stock-based compensation expense is recognized in the operating expenses line item of the accompanying consolidated statements of operations on a ratable basis over the vesting periods. These stock option grants have been classified as equity instruments and, as such, a corresponding increase, net of the reversal of the previously recorded income tax benefit for options which expired during the reporting period, has been reflected in additional paid-in capital in the accompanying consolidated balance sheet. 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: The expected life in fiscal year 2011 and 2010 represents the period that the Company's stock-based awards are expected to be outstanding and was calculated using the simplified method pursuant to SEC Staff Accounting Bulletin (SAB) No. 107 (SAB 107) and SAB No. 110. Expected life for fiscal years 2009 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 common stock using the daily closing price of the Company's common stock, pursuant to SAB 107. Expected dividend yield assumes the current dividend rate remains unchanged. Expected forfeiture rate is based on the Company's historical experience. The risk-free rate is based on the rate of U.S Treasury zero-coupon issues with a remaining term equal to the expected life of the option grants. Research and Development Expense - All research and development costs are expensed as incurred, including Company-sponsored research and development and costs of patents and other intellectual property that have no alternative future use when acquired and in which we had an uncertainty in receiving future economic benefits. Development costs of a computer software product to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. Technological feasibility of a computer software product is established when all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features and technical performance requirements are completed. The Company has been developing computer software for its XcelaSAN storage caching product line. On November 4, 2010, the Company determined that technological feasibility of the product was established, and development costs subsequent to that date have been capitalized. Prior to November 4, 2010, the Company expensed all development costs related to this product line. At the time the product is made available for general release to customers the capitalized costs will be amortized to cost of sales over the estimated useful life of the underlying technology. Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of the Expenses - Income Taxes Topic of the FASB ASC. Under the asset and liability 13 method, deferred income 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 income 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 income 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. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. The Company recognizes, in its consolidated financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on technical merits of the position. There are no material unrecognized tax positions in the financial statements. Goodwill - Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. The date of our annual impairment test is March 1. 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. At times, the Company's cash equivalents consist of overnight deposits with banks and money market accounts. 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 of the Company have evaluated the effectiveness of our disclosure controls and procedures as 14 required by Exchange Act Rule 13a-15(b) 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. Report of Management on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Management has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. There were no changes in our internal control over financial reporting during fiscal 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management has concluded that the Company's internal control over financial reporting was effective as of April 30, 2011. This Annual Report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm. 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. 2011 2010 ___________________ __________________ High Low High Low ___________________ __________________ First Quarter $ 2.40 $ 1.19 $ 1.75 $ 1.27 Second Quarter 2.63 1.52 4.49 1.39 Third Quarter 2.54 1.42 5.49 2.50 Fourth Quarter 2.65 1.91 3.51 2.22 At April 30, 2011, there were approximately 5,000 shareholders. 15 DATARAM CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets April 30, 2011 and 2010 (In thousands, except share and per share amounts) 2011 2010 ______ ______ Assets Current assets: Cash and cash equivalents $ 345 $ 2,507 Accounts receivable, less allowance for doubtful accounts and sales returns of $225 in 2011 and $250 in 2010 4,630 5,344 Inventories: Raw materials 3,229 3,919 Work in process 36 32 Finished goods 2,197 2,921 ______ ______ 5,462 6,872 Other current assets 127 87 ______ ______ Total current assets 10,564 14,810 Property and equipment: Machinery and equipment 11,931 12,300 Leasehold improvements 1,239 2,235 ______ ______ 13,170 14,535 Less accumulated depreciation and amortization 12,207 13,418 ______ ______ Net property and equipment 963 1,117 Other assets 111 105 Intangible assets, less accumulated amortization of $1,099 in 2011 and $692 in 2010 1,940 867 Goodwill 1,242 754 ______ ______ $14,820 $17,653 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Note payable-revolving credit line $ 2,154 $ 0 Accounts payable 2,945 3,523 Accrued liabilities 840 1,738 Due to related party 1,500 1,000 ______ ______ Total current liabilities 7,439 6,261 16 Commitments and contingencies Stockholders' equity: Common stock, par value $1.00 per share. Authorized 54,000,000 shares; issued and outstanding 8,928,309 at April 30, 2011 and 8,918,309 on April 30, 2010 8,929 8,919 Additional paid-in capital 8,622 8,009 Accumulated deficit (10,170) (5,536) ______ ______ Total stockholders' equity 7,381 11,392 ______ ______ $14,820 $17,653 ====== ====== See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended April 30, 2011, 2010 and 2009 (In thousands, except per share amounts) 2011 2010 2009 _______ _______ _______ Revenues $ 46,847 $ 44,020 $ 25,897 Costs and expenses: Cost of sales 35,777 32,408 17,443 Engineering 1,033 997 1,219 Research and development 1,894 4,265 1,531 Selling, general and administrative 12,371 13,365 11,064 _______ _______ _______ 51,075 51,035 31,257 _______ _______ _______ Loss from operations (4,228) (7,015) (5,360) Other income (expense): Interest income 0 12 300 Interest expense (286) (54) (6) Currency loss (135) (85) (68) Other income (expense) 20 10 (3) _______ _______ _______ (401) (117) 223 _______ _______ _______ Loss before income tax expense (benefit) (4,629) (7,132) (5,137) Income tax expense (benefit) 5 3,611 (2,002) _______ _______ _______ Net loss $ (4,634)$(10,743) $(3,135) ======= ======= ======= Net loss per common share: Basic $ (0.52)$ (1.21) $ (0.35) ======= ======= ======= 17 Diluted $ (0.52)$ (1.21) $ (0.35) ======= ======= ======= See accompanying notes to consolidated financial statements. DATARAM CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended April 30, 2011, 2010 and 2009 (In thousands) 2011 2010 2009 ______ ______ ______ Cash flows from operating activities: Net loss $ (4,634)$(10,743) $(3,135) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,039 1,193 456 Bad debt expense (recovery) (6) 32 204 Stock-based compensation expense 610 918 533 Other stock option expense - - 121 Loss (gain) on sale of property and equipment (47) (10) 2 Deferred income tax expense (benefit) - 3,582 (2,040) Changes in assets and liabilities (net of effect of acquisition of business): Decrease (increase) in accounts receivable 720 (1,994) 940 Decrease (increase) in inventories 1,410 (4,672) (223) Decrease (increase) in other current assets (40) 39 (28) Decrease (increase) in other assets (6) 31 (41) Increase (decrease) in accounts payable (578) 2,137 (594) Increase (decrease) in accrued liabilities (898) 650 217 _____ _____ _____ Net cash used in operating activities (2,430) (8,837) (3,588) _____ _____ _____ Cash flows from investing activities: Acquisition of business (488) (1,736) (912) Additions to property and equipment (478) (573) (617) Software development costs (1,480) - - Proceeds from sale of property and equipment 47 10 - _____ _____ _____ Net cash used in investing activities (2,399) (2,299) (1,529) _____ _____ _____ 18 Cash flows from financing activities: Net proceeds from borrowings under Revolving credit line 2,154 - - Proceeds from related party note payable 500 1,000 - Proceeds from sale of common shares under stock option plan 13 118 - _____ _____ _____ Net cash provided by financing activities 2,667 1,118 - _____ _____ _____ Net decrease in cash and cash equivalents (2,162) (10,018) (5,117) Cash and cash equivalents at beginning of year 2,507 12,525 17,642 _____ _____ _____ Cash and cash equivalents at end of year $ 345 $ 2,507 $ 12,525 ===== ===== ====== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 275 $ 54 $ 6 ===== ===== ===== Income taxes $ 5 $ 35 $ 20 ===== ===== ===== See accompanying notes to consolidated financial statements. 19