The following discussion should be read in conjunction with the audited financial statements and related notes and other financial information, which appear elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. See the disclosure regarding "Forward-Looking Statements" in Item 1 of this Annual Report. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including those factors discussed below and elsewhere in this Annual Report including in the "Risk Factors" section in Item 1A of this Annual Report.
We use a 52- to 53-week fiscal year ending on the last Friday in August. Financial information for one of our subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda., is included in our consolidated financial statements on a one month lag. The effects of the one month lag for the operations of SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda. is not material to our financial position and results of operations. Certain prior period amounts have been reclassified to conform to the current year presentation.
Overview
We are a leading independent designer, manufacturer and supplier of value added subsystems sold primarily to OEMs. Our subsystem products include memory modules, solid state storage products such as embedded flash and SSDs, embedded computing products and display products. We offer these products to customers worldwide. We also offer custom supply chain services including procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. Our products and services are used for a variety of applications in the computing, networking, communications, printer, storage, defense and industrial markets worldwide. Products that incorporate our subsystems include servers, routers, switches, storage systems, workstations, PCs, notebooks, printers and gaming machines. Generally, increases in overall demand by end users for, and increases in memory content in, products that incorporate our subsystems should have a positive effect on our business, financial condition and results of operations. Conversely, decreases in product demand and memory content can have a negative effect on our business, financial condition and results of operations. We offer more than 500 standard and custom products to leading OEMs, including Cisco Systems, Dell and Hewlett-Packard. We maintain a large global footprint with manufacturing capabilities in the United States, Malaysia and Brazil. Our global operations enable us to reduce costs and rapidly respond to our customers' requirements worldwide.
In April 2004, a group of investors led by TPG, Francisco Partners and Shah Capital Partners acquired SMART Modular from Solectron, at which time we began to operate our business as an independent company incorporated under the laws of the Cayman Islands. Since the acquisition, we repositioned portions of our business by focusing on delivery of certain higher value added products, diversifying our end markets, extending into new vertical markets, creating more technically engineered products and solutions, migrating manufacturing to low cost regions and controlling expenses. For example, in fiscal 2006 we completed a new manufacturing facility in Atibaia, Brazil where we import finished wafers and package them into memory integrated circuits and build memory modules. In fiscal 2008 we acquired Adtron Corporation ("Adtron"), a leading designer and global supplier of high performance and high capacity SSDs for the defense, aerospace and industrial markets which we recently renamed to SMART Modular Technologies (AZ), Inc.
In March 2009, we entered into a seven year operating lease with Newark Eureka Industrial Capital LLC to lease approximately 79,500 square feet of office, manufacturing, engineering, research and development, warehouse and distribution space to serve as our new corporate headquarters starting in the third quarter of fiscal 2009. Our principal executive office is now located at 39870 Eureka Drive, Newark, California 94560.
In March 2009, our Board of Directors authorized the repurchase of up to $10.0 million of our ordinary shares. In April 2009, we entered into a Rule 10b5-1 trading plan with a broker to repurchase ordinary shares based on pre-defined terms and conditions. Under the repurchase program, depending on price, regulatory requirements, market conditions and other factors, shares may be purchased on the open market or in privately negotiated transactions. Purchases under this program may be commenced, suspended or terminated at any time without prior notice. During the third quarter of fiscal 2009, we repurchased approximately forty-five thousand of our ordinary shares through open market repurchases at an average price of $1.82 per share for a total of approximately $0.1 million. As of August 28, 2009, the remaining balance available for future share repurchases was $9.9 million under our share repurchase program.

Key Business Metrics
The following is a brief description of the major components of the key line items in our financial statements.
Net Sales
We generate our product revenues from sales of our subsystems, including memory modules and flash memory cards, solid state storage devices, embedded computing boards and display products, principally to leading computing, networking, communications, printer, storage, defense and industrial OEMs. Sales of our products are generally made pursuant to purchase orders rather than long-term commitments. We generate service revenue from a limited number of customers by providing procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. Our net sales are dependent upon demand in the end markets that we serve and fluctuations in end-user demand can have a rapid and material effect on our net sales. Furthermore, sales to relatively few customers have accounted, and we expect will continue to account for, a significant percentage of our net sales in the foreseeable future. Cost of Sales
The most significant components of cost of sales are materials, fixed manufacturing costs, labor and depreciation. Increases in capital expenditures may increase our future cost of sales due to higher levels of depreciation expense. Cost of sales also includes any inventory write-downs. We may write-down inventory for a variety of reasons, including obsolescence, excess quantities and declines in market value below our cost. Research and Development Expenses
Research and development expenses consist primarily of the costs associated with the design and testing of new products. These costs relate primarily to compensation of personnel involved with development efforts, materials and outside design and testing services. Our customers typically do not separately compensate us for design and engineering work involved in the development of custom products.
Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of personnel costs, including commissions and benefits, facilities and non-manufacturing equipment costs, allowances for bad debt, costs related to advertising and marketing and other support costs including utilities, insurance and professional fees.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates that affect the reported amounts in our financial statements. We evaluate our estimates on an ongoing basis, including those related to our net sales, inventories, asset impairments, restructuring charges, income taxes, stock-based compensation and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are the most significant to the presentation of our financial statements and they at times require the most difficult, subjective and complex estimates.

Revenue Recognition
Our product revenues are derived from the sale of value added subsystems, including memory modules and flash memory cards, solid state storage devices, embedded computing boards and display products, which we design and manufacture. We recognize revenue primarily upon shipment, following receipt of written purchase orders, when the price is fixed or determinable, title has transferred, product acceptance has occurred, and collection of the resulting accounts receivable is reasonably assured. Amounts billed to customers related to shipping and handling are classified as sales, while costs incurred by us for shipping and handling are classified as cost of sales. Taxes, including value added taxes, assessed by a government authority that are both imposed on and concurrent with a specific revenue producing transaction are excluded from revenue.
Our service revenues are derived from procurement and logistics, inventory management, temporary warehousing, kitting and packaging services. The terms of our contracts vary, but we generally recognize service revenue upon the completion of the contracted services. Our service revenue is accounted for on an agency basis in accordance with Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Service revenue for these arrangements is typically based on material procurement costs plus a fee for any services provided. We determine whether to report revenue on a net or gross basis depending on a number of factors, including whether we are the primary obligor in the arrangement, have general inventory risk, have the ability to set the price, have the ability to determine who the suppliers are, can physically change the product, or have credit risk. Under some service arrangements, we may retain inventory risk. All inventory held under service arrangements is included in the inventory reported on the consolidated balance sheet.
The following is a summary of our net sales and gross billings:

                                                   Fiscal Year Ended
                                      August 28,      August 29,      August 31,
                                         2009            2008            2007

        Product net sales             $   404,474     $   628,791     $   794,397
        Service revenue                    36,843          41,360          50,230

        Net sales                         441,317         670,151         844,627
        Plus: Cost of sales (1)           625,635         875,839       1,085,715

        Gross billings to customers   $ 1,066,952     $ 1,545,990     $ 1,930,342

(1) Represents cost of sales associated with service revenue reported on a net basis.

Accounts Receivable
We evaluate the collectability of accounts receivable based on several factors. When we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations, we record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. Increases to the allowance for bad debt are recorded as a component of general and administrative expenses. For all other customer accounts receivable, we record an allowance for doubtful accounts based on a combination of factors including the length of time the receivables are outstanding, industry and geographic concentrations, the current business environment, and historical experience.
As a result of the current macroeconomic environment and associated credit market conditions, both liquidity and access to capital have impacted some of our customers. We have continued to closely monitor our credit exposure with our customers to anticipate exposures and minimize our risk.

Inventory Valuation
At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product family. Among other factors, we consider historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. We adjust remaining balances to approximate the lower of our manufacturing cost or net realizable value. Inventory cost is determined on a specific identification basis and includes material, labor and manufacturing overhead. From time to time, our customers may request that we purchase and maintain significant inventory of raw materials for specific programs. Such inventory purchases are evaluated for excess quantities and potential obsolescence and could result in a provision at the time of purchase or subsequent to purchase. Inventory levels may fluctuate based on inventory held under service arrangements. Our provisions for excess and obsolete inventory are also impacted by our arrangements with our customers and/or suppliers, including our ability or inability to re-sell such inventory to them. If actual market conditions or our customers' product demands are less favorable than those projected or if our customers or suppliers are unwilling or unable to comply with any arrangements related to their purchase or sale of inventory, additional provisions may be required and would have a negative impact on our gross margins in that period. We have had to write-down inventory in the past for reasons such as obsolescence, excess quantities and declines in market value below our costs, and we may be required to do so from time to time in the future.
Restructuring Charges
We record and account for our restructuring activities following formally approved plans that identify the actions and timelines over which the restructuring activities will occur. Restructuring charges include estimates pertaining to such items as employee severance and fringe benefit costs, facility exit costs, subleasing assumptions, and other assumptions. Adjustments to these estimates are made when changes in facts and circumstances suggest actual amounts will differ from original estimates. These changes in estimates may result in increases or decreases to our results of operations in future periods and would be presented on the restructuring charge line of our consolidated statements of operations.
Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and credit carry-forwards. When necessary, a valuation allowance is recorded or reduced to value tax assets to amounts expected to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs. U.S. income and foreign withholding taxes are not provided on that portion of unremitted earnings of foreign subsidiaries that are expected to be reinvested indefinitely.
After excluding ordinary losses in a tax jurisdiction for which no tax benefit can be recognized, we estimate our annual effective tax rate and apply such rate to year-to-date income, adjusting for unusual or infrequent items that are treated as discrete events in the period. We also evaluate our valuation allowance to determine if a change in circumstances causes a change in judgment regarding realization of deferred tax assets in future years. If the valuation allowance is adjusted as a result of a change in judgment regarding future years, that adjustment is recorded in the period of such change affecting our tax expense in that period.
The calculation of our tax liabilities involves accounting for uncertainties in the application of complex tax rules, regulations and practices. As a result of the implementation of FIN No. 48, we recognize benefits for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition of a benefit (or the absence of a liability) by determining if the weight of available evidence indicates that it is more likely than not that the position taken will be sustained upon audit, including resolution of related appeals or litigation processes, if any. If it is not, in our judgment, "more likely than not" that the position will be sustained, then we do not recognize any benefit for the position. If it is more likely than not that the position will be sustained, a second step in the process is required to estimate how much of the benefit we will ultimately receive. This second step requires that we estimate and measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, new facts, correspondence with tax authorities during the course of an audit, effective settlement of audit issues, and commencement of new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed We review our long-lived assets 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 future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell. Impairment of Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), we perform a goodwill impairment test of our two reporting units (Memory, Display & Embedded and Adtron) annually during the fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that an impairment may have occurred. Such events or circumstances may include significant adverse changes in the general business climate, among others. The test is performed by determining the fair value of the reporting unit based on estimated discounted future cash flows, considering the market price of our ordinary shares, and comparing the fair value to the carrying value of the reporting unit, including goodwill.
If the carrying value of each reporting unit is less than its fair value, we then allocate the fair value of the unit to all the assets and liabilities of the unit (including any unrecognized intangible assets) as if the reporting unit's fair value was the purchase price to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Stock-Based Compensation
Effective August 27, 2005, we adopted SFAS No. 123R, Share-Based Payment, using the prospective method. The key assumptions used in applying the provisions of SFAS No. 123R and the impact of adoption are described in Note 1(p) to the Consolidated Financial Statements.

Results of Operations
The following is a summary of our results of operations for fiscal years 2009, 2008 and 2007 (in millions).

                                                                     Fiscal Year Ended
                                  August 28,         % of         August 29,         % of         August 31,         % of
                                     2009           sales            2008           sales            2007           sales

Net sales                        $      441.3           100 %    $      670.2           100 %    $      844.6           100 %
Cost of sales                           351.5            80 %           550.4            82 %           695.1            82 %

Gross profit (1)                         89.8            20 %           119.7            18 %           149.6            18 %

Research and development                 19.8             4 %            20.2             3 %            16.4             2 %
Selling, general, and
administrative                           55.5            13 %            59.8             9 %            59.6             7 %
Goodwill impairment                      10.4             2 %             3.2             -                 -             -
Restructuring charges                     2.8             1 %             1.9             -                 -             -
In process research and
development charge                          -             -               4.4             1 %               -             -

Total operating expenses                 88.5            20 %            89.5            13 %            76.0             9 %

Income from operations                    1.3             -              30.2             5 %            73.4             9 %
Interest expense, net                    (6.6 )          -2 %            (5.4 )          -1 %            (7.4 )          -1 %
Other income (expense), net              (0.5 )           -               2.6             -               0.9             -

Total other income (expense)
(1)                                      (7.1 )          -2 %            (2.8 )           -              (6.4 )          -1 %

Income (loss) before
provision for income taxes               (5.8 )          -1 %            27.4             4 %            67.0             8 %
Provision for income taxes                5.6             1 %            18.4             3 %             9.5             1 %

Net income (loss) (1)            $      (11.4 )          -3 %    $        9.0             1 %    $       57.5             7 %

(1) Summations may not compute precisely due to rounding.

Fiscal Year Ended August 28, 2009 Compared to Fiscal Year Ended August 29, 2008 Net Sales. Net sales for fiscal 2009 were $441.3 million, a 34% decrease from $670.2 million for fiscal 2008. This includes a $206.0 million decrease in net sales of our memory products and a $30.4 million decrease in net sales in the balance of our Memory, Embedded & Display Segment. The decline in sales of memory products primarily resulted from falling prices during fiscal 2009 and a decrease in overall demand for memory products. These declines in pricing and demand resulted for the most part from the negative impact that the worldwide economic downturn had on sales of products in end markets served by our customers. Demand for our memory products was also impacted by our loss of market share to certain semiconductor manufacturers that offer memory modules as more of our customers transitioned from custom products that have been our strength, to more standard products available at lower prices from semiconductor manufacturers. The decline in net sales for the balance of our Memory, Embedded & Display Segment primarily resulted from one of our embedded programs transitioning to be manufactured in-house by the OEM. The decline in total net sales was partially offset by an increase of $7.5 million in net sales of our Adtron Segment due to the fact that this segment included a full year of sales in fiscal 2009 while fiscal 2008 only included six months of sales. Cost of Sales. Cost of sales for fiscal 2009 was $351.5 million, a 36% decrease from $550.4 million for fiscal 2008. Cost of sales as a percentage of net sales decreased to 80% in fiscal 2009, compared to 82% in fiscal 2008. The $198.9 million decrease in cost of sales included a $160.9 million decline in the cost of materials for our memory products and a $25.1 million decline in the cost of materials for the balance of our Memory, Embedded & Display Segment. These declines were partially offset by an increase of $2.5 million in the cost of materials in our Adtron Segment. These decreases in cost of materials were primarily due to the significant decreases in net sales discussed above. In addition, our factory overhead and other components of cost of sales decreased by $15.4 million, primarily due a $9.8 million decrease in payroll and other employee-related expenses resulting from a 26% headcount reduction in cost of sales, reduced manufacturing activities, decreased subcontractor services and a pay reduction implemented during fiscal 2009.

Gross Profit. Gross profit for fiscal 2009 was $89.8 million, a 25% decrease from $119.7 million for fiscal 2008. Gross margin percentage increased to 20% in fiscal 2009, as compared to 18% in fiscal 2008. The decrease in gross profit dollars was primarily due to the decline in net sales of our memory, embedded and display products in fiscal 2009. The increase in gross margin percentage was primarily due to the inclusion of higher margin products from the Adtron Segment for the full year in fiscal 2009, as well as a favorable shift in mix towards our memory products and away from display products.
Research and Development Expenses and Write-off of Acquired In-process Research and Development. Research and development, or R&D expenses, for fiscal 2009 were $19.8 million, a 2% decrease from $20.2 million for fiscal 2008. This decrease was primarily due to a $3.1 million decrease in payroll and other employee-related expenses resulting from a 23% headcount reduction in R&D, as well as reductions in salaries and bonuses implemented during fiscal 2009. This decrease was offset by a $2.7 million increase in R&D expenses for the Adtron segment. During fiscal 2008, we also wrote off $4.4 million of in-process R&D related to the acquisition of Adtron.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses for fiscal 2009 were $55.5 million, representing a $4.3 million decrease from $59.8 million in fiscal 2008. This decrease was primarily due to a $5.2 million decrease in payroll and other employee-related expenses resulting from a 16% headcount reduction in SG&A and other cost-cutting initiatives implemented during fiscal 2009, an $0.8 million decrease in facility expenses, and a $0.6 million decrease in computer-related costs. These decreases were partially offset by an $0.8 million increase in stock-based compensation expense, a $0.7 million increase in our bad debt expense and a $0.4 million increase in professional services. The $0.8 million increase in stock-based compensation expense in fiscal 2009 includes a $1.1 million impact to SG&A due to an out of period adjustment recorded in the fourth quarter of fiscal 2009. See Note 1(u) of Notes to the Consolidated . . .