form10-q.htm

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended December 31, 2008

¨	Transition Report Pursuant to Section 10 or 15(d) of the Securities Exchange Act of 1934

For The Transition Period from to

Commission File Number 0-15449

__________________

CALIFORNIA MICRO DEVICES CORPORATION

(Exact name of registrant as specified in its charter)

__________________


Delaware		94-2672609
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


490 N. McCarthy Boulevard #100 Milpitas, California		95035
(Address of principal executive offices)		(Zip Code)

(408) 263-3214

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address, and former fiscal year if changed since last report)

__________________

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

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

Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of January 30, 2009 was 23,553,019.

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California Micro Devices Corporation

Form 10-Q for the Quarter Ended December 31, 2008

INDEX

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2008 and 2007	3
	Condensed Consolidated Balance Sheets as of December 31, 2008 and March 31, 2008	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Submission of Matters to a Vote of Security Holders	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

	SIGNATURES	48

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

California Micro Devices Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
Net sales	$	9,659		$	14,955		$	40,101		$	44,201
Cost of sales		7,184			10,105			27,779			29,995
Gross margin		2,475			4,850			12,322			14,206
Operating expenses:
Research and development		2,668			1,670			7,838			5,080
Selling, general and administrative		3,509			3,533			11,205			11,170
Goodwill Impairment		5,258			-			5,258			-
Amortization/Impairment of intangible assets		71			41			127			124
Total operating expenses		11,506			5,244			24,428			16,374
Operating loss		(9,031	)		(394	)		(12,106	)		(2,168	)
Other income, net		130			628			1,617			1,911
Income (loss) before income taxes		(8,901	)		234			(10,489	)		(257	)
Provision for income taxes		10			4			1,305			12
Net income (loss)	$	(8,911	)	$	230		$	(11,794	)	$	(269	)

Net income (loss) per share–basic	$	(0.38	)	$	0.01		$	(0.51	)	$	(0.01	)
Weighted average common shares outstanding–basic		23,260			23,252			23,339			23,212

Net income (loss) per share–diluted	$	(0.38	)	$	0.01		$	(0.51	)	$	(0.01	)
Weighted average common shares and share equivalents outstanding–diluted		23,260			23,283			23,339			23,212

See Notes to Condensed Consolidated Financial Statements.

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California Micro Devices Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	December 31,			March 31,
	2008			2008
ASSETS
Current assets:
Cash and cash equivalents	$	33,945		$	32,925
Short-term investments		14,502			18,671
Accounts receivable, net		3,245			6,155
Inventories		7,889			6,434
Deferred tax assets		261			1,508
Prepaid expenses and other current assets		687			1,188
Total current assets		60,529			66,881
Property, plant and equipment, net		4,059			5,596
Goodwill		-			5,258
Intangible assets, net		29			267
Other long-term assets		93			83
TOTAL ASSETS	$	64,710		$	78,085

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,674		$	6,120
Accrued liabilities		1,505			2,165
Deferred margin on shipments to distributors		1,430			1,904
Current maturities of capital lease obligations		-			132
Total current liabilities		7,609			10,321
Other long-term liabilities		313			350
Total liabilities		7,922			10,671
Commitments and contingencies
Stockholders' equity:
Preferred stock - 10,000,000 shares authorized; none issued
and outstanding as of December 31, 2008 and March 31, 2008		-			-
Common stock and additional paid-in capital - $0.001 par value;
50,000,000 shares authorized; 23,553,019 shares issued and
23,097,994 shares outstanding as of December 31, 2008 and
23,302,274 shares issued and outstanding as of March 31, 2008		119,965			117,806
Accumulated other comprehensive income		15			48
Accumulated deficit		(62,234	)		(50,440	)
Total		57,746			67,414
Treasury stock, at cost; 455,025 shares as of December 31, 2008
and none as of March 31, 2008		(958	)		-
Total stockholders' equity		56,788			67,414
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	64,710		$	78,085

See Notes to Condensed Consolidated Financial Statements.

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California Micro Devices Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended December 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(11,794	)	$	(269	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,848			1,497
Accretion of investment purchase discounts		(72	)		(1,036	)
Amortization of intangible assets		72			124
Goodwill impairment		5,258			-
Impairment of intangible assets		55			-
Stock-based compensation		1,627			1,746
Tax benefit from stock-based payment arrangement		-			(22	)
(Gain) loss on sale of fixed assets and intangible assets		(960	)		-
Changes in assets and liabilities:
Accounts receivable, net		2,910			1,619
Inventories		(1,455	)		(1,804	)
Deferred tax assets		1,247			(68	)
Accounts payable and other current liabilities		(2,169	)		1,715
Deferred margin on shipments to distributors		(475	)		637
Other assets and liabilities		546			(375	)
Net cash provided by (used in) operating activities		(3,362	)		3,764

Cash flows from investing activities:
Purchases of short-term investments		(22,411	)		(104,154	)
Sales and maturities of short-term investments		26,619			104,577
Proceeds from sale of fixed assets and intangible assets		1,146			-
Payment related to acquisition		-			(1,031	)
Capital expenditures		(414	)		(1,906	)
Net cash provided by (used in) investing activities		4,940			(2,514	)

Cash flows from financing activities:
Proceeds from employee stock compensation plans		532			458
Repayments of capital lease obligations		(132	)		(132	)
Repurchase of outstanding common stock		(958	)		-
Tax benefit from stock-based payment arrangement		-			22
Net cash provided by (used in) financing activities		(558	)		348

Net increase in cash and cash equivalents		1,020			1,598
Cash and cash equivalents at beginning of period		32,925			1,908
Cash and cash equivalents at end of period	$	33,945		$	3,506

See Notes to Condensed Consolidated Financial Statements.

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California Micro Devices Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial statements should be read in conjunction with the financial statements included with our annual report on Form 10-K for the fiscal year ended March 31, 2008. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of California Micro Devices Corporation (the “Company”, “CMD”, “we”, “us” or “our”) as of December 31, 2008, and the results of operations for the three and nine month periods ended December 31, 2008 and 2007, and cash flows for the nine month periods ended December 31, 2008 and 2007. Results for the three or nine month periods are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending March 31, 2009. Certain prior year amounts in the financial statements and notes thereto have been reclassified to conform to the current 2009 presentation.

The unaudited condensed consolidated financial statements include the accounts of CMD and its wholly owned subsidiary. Intercompany accounts and transactions have been eliminated.

2. 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. Our estimates are based on historical experience, input from sources outside of the company, and other relevant facts and circumstances. Actual results could differ from those estimates.

3. Recent Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141(R), “Business Combinations” (SFAS 141(R)) which expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in earnings, not goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. In addition, acquired in-process research and development (IPR&D) is capitalized as an intangible asset and amortized over its estimated useful life. Adoption of SFAS 141(R) is required for fiscal years beginning after December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted. We believe that there is no impact of SFAS 141(R) on our financial position and results of operations.

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interest in Consolidated Financial Statements” (SFAS 160) which re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity. Under SFAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for SFAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and retroactive application of SFAS 160 to fiscal years preceding the effective date are not permitted. We believe that there is no impact of SFAS 160 on our financial position and results of operations.

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4. Cash, Cash Equivalents and Short-Term Investments

Cash and cash equivalents represent cash and money market funds as follows (in thousands);

	December 31,		March 31,
	2008		2008
Cash	$	684	$	602
Money market funds		33,261		32,323
Total cash and cash equivalents	$	33,945	$	32,925

Short-term investments represent investments in U.S Treasury bills, U.S. Agency notes, Asset-backed securities and Commercial papers with remaining maturities less than 360 days. We invest our excess cash in high quality financial instruments. We have classified our marketable securities as available for sale securities. Our available for sale securities are carried at fair value, with unrealized gains and losses reported in a separate component of stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary, if any, on available for sale securities are included in interest income. Interest on securities classified as available for sale is also included in interest and other income, net. The cost of securities sold is based on the specific identification method.

Short-term investments were as follows (in thousands):

	December 31,		March 31,
	2008		2008
U.S. Treasury bills	$	12,500	$	-
U.S. Agency notes		2,002		12,061
Asset-backed securities		-		5,124
Commercial papers		-		1,486
Total short-term investments	$	14,502	$	18,671

5. Fair Value

On April 1, 2008, we adopted Statement of Financial Accounting Standards 157, “Fair Value Measurements,” (SFAS No. 157). SFAS No. 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

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Fair Value Hierarchy

SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows models and similar techniques.

Determination of Fair Value

The Company’s cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, market prices received from industry standard pricing data providers or alternative pricing sources with reasonable levels of price transparency. Money market funds and U.S. Treasury bills are classified as Level 1 because these securities are valued based on unadjusted quoted market prices in active markets for identical securities. U.S. Agency notes are classified as Level 2 because markets for these securities are less active or valuations for such securities utilize significant inputs which are directly or indirectly observable.

The table below presents the balances of assets measured at fair value on a recurring basis (in thousands):

	As of December 31, 2008
Assets	Total		Level 1		Level 2		Level 3
Money market funds	$	33,261	$	33,261	$	-	$	-
Available for sale securities:
U.S. Treasury bills		12,500		12,500		-		-
U.S. Agency notes		2,002		-		2,002		-
	$	47,763	$	45,761	$	2,002	$	-

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6. Goodwill and Other Intangible Assets

Goodwill

In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets ("SFAS 142") goodwill is tested for impairment on annual basis, or earlier if events or circumstances indicate the carrying value may not be recoverable. We usually perform our annual test for impairment of goodwill during our fourth fiscal quarter. During the quarter ended December 31, 2008, the Company saw indicators of potential impairment of goodwill, including the current economic environment, our operating results, and the sustained decline in our market valuation, which caused the Company to perform an interim goodwill impairment analysis. The analysis indicated that the estimated fair value is less than the corresponding carrying amount and the full amount of goodwill is no longer recoverable. Our entity is deemed as a single reporting unit for our impairment analysis. The fair value was estimated using present value of estimated future cash flows which was consistent with a market-based approach. As such, we determined that goodwill of $5.3 million is fully impaired.

Intangible Assets

The components of intangible assets, net were as follows (in thousands):

	December 31,			March 31,
	2008			2008
Developed and core technology:
Gross carrying amount	$	260		$	520
Less accumulated amortization		(231	)		(255	)
Net carrying amount	$	29		$	265

Distributor relationships:
Gross carrying amount	$	-		$	70
Less accumulated amortization		-			(68	)
Net carrying amount	$	-		$	2

Intangible assets, net	$	29		$	267

Developed and core technology and distributor relationships were amortized on a straight-line basis over their estimated useful lives of four years and two years, respectively. The amortization expense for intangible assets was $16,000 and $72,000 for the three and nine months ended December 31, 2008, respectively as compared to $41,000 and $124,000 for the three and nine months ended December 31, 2007, respectively.

During third quarter of fiscal 2009, we have performed an annual review of our intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. We have assessed the recoverability of intangible assets by comparing the projected undiscounted net cash flows associated with the related assets over their remaining lives against their respective carrying amounts. The review indicated that the estimated fair value is less than its corresponding carrying amount. Therefore, we recognized $55,000 impairment charges during the three months ended December 31, 2008. It is reasonably possible that these estimates, or their related assumptions, may change in the future, in which case we may be required to record additional impairment charges for these assets.

Based on intangible assets recorded at December 31, 2008, and assuming no subsequent additions to, or impairment of, the underlying assets, the future estimated amortization expense is approximately $6,000, $23,000 in remainder of fiscal 2009 and fiscal 2010, respectively.

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7. Balance Sheet Components

Balance sheet components were as follows (in thousands):

	December 31,			March 31,
	2008			2008
Accounts receivable, net:
Accounts receivable	$	3,342		$	6,265
Less allowance for doubtful accounts		(5	)		(19	)
Less sales allowances and return reserves		(92	)		(91	)
	$	3,245		$	6,155

Inventories:
Work in process	$	3,128		$	1,819
Finished goods		4,761			4,615
	$	7,889		$	6,434

Property, plant and equipment:
Machinery and equipment	$	11,387		$	11,370
Computer equipment and related software		4,708			4,518
Construction in progress		144			405
		16,239			16,293
Less: accumulated depreciation and amortization		(12,180	)		(10,697	)
	$	4,059		$	5,596

Accrued liabilities:
Accrued salaries and benefits	$	951		$	1,183
Other accrued liabilities		554			982
	$	1,505		$	2,165

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8. Capital Lease Obligations

In October 2006, we entered into three year software lease agreements with two vendors for which the capitalized amounts were $362,000 and $34,000, respectively. The imputed interest rate for each of these leases is approximately 8%. Both leases have three year durations, with three annual lease payments in October 2006, October 2007 and October 2008, totaling to $132,000 annually. Interest expense on these leases during the three and nine months ended December 31, 2008 and 2007 was immaterial. There were no capital lease obligations as of December 31, 2008.

Total fixed assets purchased under capital leases and the associated accumulated amortization is classified in computer equipment and related software and was as follows (in thousands):

	December 31,			March 31,
	2008			2008
Capitalized cost	$	396		$	396
Accumulated amortization		(286	)		(187	)
Net book value	$	110		$	209

Amortization expense for fixed assets purchased under capital leases is included in the line item titled “depreciation and amortization” on our condensed consolidated statements of cash flows.

9. Employee Stock Benefit Plans

Our equity incentive program is a long-term retention program that is intended to attract and retain qualified management and technical employees and align stockholder and employee interests. Under our current equity incentive program, stock options have varying vesting periods typically over four years and are generally exercisable for a period of ten years from the date of issuance and are granted at prices equal to the fair market value of the Company’s common stock at the grant date. These plans are described fully in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended March 31, 2008.

Stock Options

Stock option activity for the nine months ended December 31, 2008, is as follows:

	Stockholder					Non-Stockholder
	Approved Plans					Approved Plan					All Plans
	Shares (in thousands)			Weighted Average Exercise Price		Shares (in thousands)			Weighted Average Exercise Price		Shares (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Balance at March 31, 2008		4,229		$	5.48		717		$	6.43		4,946		$	5.61
Granted		1,086			3.02		-			-		1,086			3.02
Exercised		-			-		-			-		-			-
Canceled/Forfeited/Expired		(355	)		4.94		(191	)		8.71		(546	)		6.26
Balance at December 31, 2008		4,960		$	4.98		526		$	5.60		5,486		$	5.04		7.02	$	4,640

Exercisable at December 31, 2008												3,031		$	6.11		5.57	$	0

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $1.86 as of December 31, 2008, which would have been received by the option holders had all option holders with in-the-money options exercised and sold their options as of that date.

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There were no exercises of stock options during the three and nine months ended December 31, 2008. Net cash proceeds from the exercise of stock options were $9,000 and $22,000 during the three and nine months ended December 31, 2007, respectively.

The following table summarizes the ranges of the exercise prices of outstanding and exercisable options at December 31, 2008:

					Options Outstanding						Options Exercisable
							Weighted
							Average		Weighted				Weighted
					Number		Remaining		Average		Number		Average
					Outstanding		Contractual		Exercise		Exercisable		Exercise
Range of Exercise Prices					(thousands)		Life		Price		(thousands)		Price
$	1.78	-	$	4.00		2,400		8.87	$	3.35		492	$	3.56
	4.01	-		6.00		1,458		6.47		4.96		1,080		5.14
	6.01	-		8.00		1,337		5.03		6.69		1,168		6.67
	8.01	-		10.00		147		3.17		8.27		147		8.27
	10.01	-		22.50		144		4.04		15.29		144		15.29
$	2.75	-	$	22.50		5,486		7.02	$	5.04		3,031	$	6.11

Employee Stock Purchase Plan (ESPP)

Our ESPP provides that eligible employees may contribute up to 15% of their eligible earnings, through accumulated payroll deductions, toward the semi-annual purchase of our common stock at 85% of the fair market value of the common stock at certain defined points in the plan offering periods. We issued 144,000 and 251,000 shares under the ESPP during the three and nine months ended December 31, 2008, respectively as compared to 77,000 and 126,000 shares issued under the ESPP during the three and nine months ended December 31, 2007, respectively. Net cash proceeds from the ESPP were $261,000 and $533,000 for the three and nine months ended December 31, 2008, respectively as compared to cash proceeds of $251,000 and $436,000 for the three and nine months ended December 31, 2007, respectively.

Shares Available for Future Issuance under Employee Benefit Plans

As of December 31, 2008, 1,092,000 shares were available for future issuance, which included 266,000 shares of common stock available for issuance under our ESPP, 9,000 under our UK Sub-Plan and 817,000 under our 2004 Omnibus Incentive Compensation Plan.

Stock-Based Compensation Expense

The following table sets forth the total stock-based compensation expense for the three and nine months ended December 31, 2008 and 2007 resulting from employee stock options and ESPP included in our condensed consolidated statements of operations in accordance with FAS 123(R) (in thousands):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2008		2007		2008		2007
Cost of sales	$	66	$	83	$	267	$	262
Research and development		120		144		437		441
Selling, general and administrative		285		359		923		1,043
Stock-based compensation expense before income taxes		471		586		1,627		1,746
Tax benefit		-		16		-		22
Stock-based compensation expense, net of tax	$	471	$	570	$	1,627	$	1,724

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The effect of recording employee stock-based compensation expense for the three and nine months ended December 31, 2008 and 2007 was as follows (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
Impact on income (loss) before income taxes	$	(471	)	$	(586	)	$	(1,627	)	$	(1,746	)
Impact on net income (loss)		(471	)		(570	)		(1,627	)		(1,724	)
Impact on basic and diluted net income (loss) per share	$	(0.02	)	$	(0.03	)	$	(0.07	)	$	(0.07	)

No income tax benefit was realized from ESPP purchases during the three and nine months ended December 31, 2008, as compared to income tax benefit of $16,000 and $22,000 from ESPP purchases during the three and nine months ended December 31, 2007, respectively.

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted average assumptions for the three and nine months ended December 31, 2008 and 2007:

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
Employee Stock Options:
Expected life in years		4.39			4.11			4.36			4.11
Volatility		63	%		64	%		63	%		64	%
Risk-free interest rate		1.70	%		3.49	%		2.82	%		4.28	%
Dividend Yield		0	%		0	%		0	%		0	%

ESPP:
Expected life in years		0.50			0.50			0.50			0.50
Volatility		47	%		59	%		53	%		48	%
Risk-free interest rate		0.91	%		3.64	%		1.33	%		4.32	%
Dividend Yield		0	%		0	%		0	%		0	%

We currently estimate our forfeiture rate to be 19%, which is based on an analysis of expected forfeiture data using our current demographics and probabilities of employee turnover. The weighted average fair value of employee stock options granted during the three and nine months ended December 31, 2008 was $0.90 and $1.50, respectively as compared to the weighted average fair value of $1.93 and $1.87 of employee stock options granted during the three and nine months ended December 31, 2007, respectively.

As of December 31, 2008, we had $1.5 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over the weighted average period of 2 years.

10. Stock Issuances

During the three and nine months ended December 31, 2008 and 2007, we issued the following shares of common stock under our employee stock option plan and ESPP (in thousands):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2008		2007		2008		2007
Shares issued		144		77		251		126
Total proceeds	$	261	$	251	$	533	$	436

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11. Stock Repurchase Program; Treasury Shares

In the second quarter of fiscal 2009, the company announced that its board of directors had authorized a program to repurchase up to 1 million shares of its outstanding common stock, the exact amount and timing of which will be subject to market conditions, legal requirements and management's judgment as well as other factors. The repurchase transactions may take place in the open market or via private negotiations. The repurchase program may be modified, extended or terminated by the board of directors at any time. During the three and nine months ended December 31, 2008, we repurchased 358,000 and 455,000 shares under this program for $661,000 and $958,000 respectively.

12. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2008			2007		2008			2007
Net income (loss)	$	(8,911	)	$	230	$	(11,794	)	$	(269	)
Weighted average common shares outstanding used in
the calculation of net income (loss) per share:
Basic Shares		23,260			23,252		23,339			23,212
Effect of dilutive securities:
Employee stock options		-			31		-			-
Dilutive shares		23,260			23,283		23,339			23,212
Net income (loss) per share:
Basic	$	(0.38	)	$	0.01	$	(0.51	)	$	(0.01	)
Diluted	$	(0.38	)	$	0.01	$	(0.51	)	$	(0.01	)

Basic income (loss) per share was computed using the net income (loss) and weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the additional shares issuable upon the assumed exercise of stock options.

Due to our net loss for the three and nine months ended December 31, 2008, all of our stock options outstanding to purchase 5,486,000 of the company’s common stock were excluded from the diluted net loss per share calculation because their inclusion would have been anti-dilutive.

During the three and nine months ended December 31, 2007, options to purchase 4,827,000 shares of company’s common stock were excluded in the computation of diluted earnings per share because the effect was anti-dilutive.

13. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and unrealized gain or loss on our available for sale securities. Comprehensive income (loss) for the three and nine months ended December 31, 2008 and 2007 was as follows (in thousands):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
Net income (loss)	$	(8,911	)	$	230		$	(11,794	)	$	(269	)
Unrealized gain (loss) on available for sale securities		(4	)		(3	)		(33	)		1
Comprehensive income (loss)	$	(8,915	)	$	227		$	(11,827	)	$	(268	)

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14. Income Taxes

Effective at the beginning of the first quarter of fiscal 2008, we adopted the Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold of more-likely-than-not to be sustained upon examination, specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions.

As a result of the implementation of FIN 48, we recognized a $149,000 increase in the liability for unrecognized tax benefits related to tax positions taken in prior periods. This increase was accounted for as a cumulative effect of a change in accounting principle that resulted in an increase to accumulated deficit.

The amount of unrecognized tax benefits as of April 1, 2008 was $218,000, including interest. For the nine months ended December 31, 2008, we recorded an additional $44,000 of unrecognized tax benefits, including interest.

Our policy is to include interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the amount of any accrued interest or penalties associated with any unrecognized tax positions was $49,000. The amount of interest and penalties as of April 1, 2008 was $51,000. The additional amount of interest and penalties for the nine months ended December 31, 2008 was $16,000.

We estimated that it is more likely than not that approximately $0.0 million and $1.2 million of the deferred tax assets as of December 31, 2008 and March 31, 2008, respectively, will be realized in the following year. As of December 31, 2008, a valuation allowance of approximately $27.6 million was recorded against the deferred tax assets. The valuation allowance is increased by approximately $4.6 million during the nine months ended December 31, 2008 primarily due to revisions in estimates of our ability to realize deferred tax assets.

We file income tax returns in the U.S. federal jurisdiction and in several states and foreign jurisdictions. As of December 31, 2008, the federal returns for the years ended March 31, 2006 through the current period and certain state returns for the years ended March 31, 2004 through the current period are still open to examination. However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years.

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15. Concentration and Segment Information

Our operations are classified into one operating segment. A significant portion of our net sales is derived from a relatively small number of customers. Our net sales from customers and distributors, individually representing more than 10% of total net sales during the three and nine months ended December 31, 2008 and 2007 were as follows:

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
Original Equipment Manufacturers:
Customer A		17	%		22	%		20	%		25	%
Customer B		26	%		17	%		22	%		18	%

Distributors:
Distributor A		*			15	%		11	%		13	%
Distributor B		10	%		12	%		*			12	%

* Distributor accounted for less than 10% of total net sales during the period.

Net sales to geographic regions reported below are based on the customers’ ship to locations (amounts in millions):

	Three Months Ended December 31,										Nine Months Ended December 31,
	2008					2007					2008					2007
			% of					% of					% of					% of
	Amount		Total			Amount		Total			Amount		Total			Amount		Total
United States	$	1.0		10	%	$	1.7		11	%	$	4.8		12	%	$	3.5		8	%
China		4.1		42	%		4.5		30	%		14.2		36	%		12.0		27	%
Korea		2.0		21	%		4.2		28	%		9.4		24	%		15.0		34	%
Taiwan		1.5		16	%		2.9		19	%		6.9		17	%		8.6		19	%
Singapore		0.4		4	%		1.0		7	%		2.2		6	%		3.3		8	%
Others		0.7		7	%		0.7		5	%		2.5		6	%		1.8		4	%
Total net sales	$	9.7		100	%	$	15.0		100	%	$	40.0		100	%	$	44.2		100	%

All Property and equipment including equipment on consignment are stated at cost and depreciated over their estimated useful lives using the straight-line method. For equipment on consignment, the Company also requires an agreement with the consignee. A detailed list of the consigned equipment, if any, must be included with the agreement. As of December, 31, 2008, we have 1.3 million of test and packaging equipment on consignment in India and $0.6 million of test equipment on consignment in Thailand. Property, plant and equipment by geographic location are summarized as follows (in millions):

	Net Book Value as of,
	December 31, 2008		March 31, 2008
United States	$	1.7	$	2.0
India		1.3		1.9
Thailand		0.6		1.2
Others		0.5		0.5
Total	$	4.1	$	5.6

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16. Contingencies

Environmental

We have been subject to a variety of federal, state and local regulations in connection with the discharge and storage of certain chemicals used in our manufacturing processes, which are now fully outsourced to independent contract manufacturers. We have obtained all necessary permits for such discharges and storage, and we believe that we have been in substantial compliance with applicable environmental regulations. Industrial waste generated at our facilities was either processed prior to discharge or stored in double-lined barrels until removed by an independent contractor. With the completion of our Milpitas site remediation and the closure of our Tempe facility during fiscal 2005, we now expect our environmental compliance costs to be minimal.

Indemnification Obligations

We enter into certain types of contracts from time to time that require us to indemnify parties against third party claims. These contracts primarily relate to (1) certain agreements with our directors and officers under which we may be required to indemnify them for the liabilities arising out of their efforts on behalf of the company; and (2) agreements under which we have agreed to indemnify our contract manufacturers and customers for claims arising from intellectual property infringement or in some instances from product defects, product recalls or other issues. The conditions of these obligations vary and generally a maximum obligation is not explicitly stated. Because the obligated amounts under these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. We have not recorded any associated obligations at December 31, 2008 and March 31, 2008. We carry coverage under certain insurance policies to protect ourselves in the case of any unexpected liability; however, this coverage may not be sufficient.

Product Warranty

We typically provide a one-year warranty that our products will be free from defects in material and workmanship and will substantially conform in all material respects to our most recently published applicable specifications although sometimes we provide shorter or longer warranties, especially to some of our larger OEM customers. We have experienced minimal warranty claims in the past, and we accrue for such contingencies in our sales allowances and return reserves.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this discussion, “CMD,” “we,” “us” and “our” refer to California Micro Devices Corporation. All trademarks appearing in this discussion are the property of their respective owners. This discussion should be read in conjunction with the other financial information and financial statements and related notes contained elsewhere in this report.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in this report include statements regarding the following: (1) our expectation that our ASP (“Average Selling Prices”) for similar products, based on a constant mix of products, will decline at the rate of 12% to 15% per year; (2) our having a target gross margin of 38% to 40%; (3) our expectation that our future environmental compliance costs will be minimal; (4) our anticipation that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs over the next 12 months; (5) our having a long term target for research and development expenses of 9% to 10% of sales but such expenses representing more than 20% of sales especially during the balance of fiscal 2009 driven by continuing development efforts for our serial interface display controller line of products and declines in sales; (6) our having a long term target for selling, general and administrative expenses of 15% to 16% of sales but expecting to exceed this target until our sales increase substantially; (7) our belief that due to the short duration and investment grade credit ratings of our investment portfolio, there is no material exposure to interest rate risk in our investment portfolio and (9) our expectation of future interest income to continue to be at a reduced level or even decline unless interest rates increase materially in the near future. These statements are only predictions, are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, whether our target markets continue to experience their forecasted growth and whether such growth continues to require the devices we supply; whether we will be able to increase our market penetration; whether our product mix changes, our unit volume decreases materially, we experience price erosion due to competitive pressures, or our contract manufacturers and assemblers raise their prices to us or we experience lower yields from them or we are unable to realize expected cost savings in certain manufacturing and assembly processes; whether there will be any changes in tax accounting rules; whether we will be successful developing new products which our customers will design into their products and whether design wins and bookings will translate into orders; whether we encounter any unexpected environmental clean-up issues with our former Tempe facility; whether we discover any further contamination at our former Topaz Avenue Milpitas facility; and whether we will have large unanticipated cash requirements, as well as other risk factors detailed in this report, especially under Item 1A, Risk Factors. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

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Executive Overview

We design and sell application specific protection devices and display electronics devices for high volume applications in the mobile handset, digital consumer electronics and personal computer markets as well as application specific protection devices in diversified markets such as high brightness light emitting diodes (HBLED), communication and industrial. These protection devices provide Electromagnetic Interference (EMI) filtering and Electrostatic Discharge (ESD) protection. The display electronic devices include serial interface display controllers. End customers for our semiconductor products are original equipment manufacturers (OEMs). We sell to some of these end customers through original design manufacturers (ODMs) and contract electronics manufacturers (CEMs). We use a direct sales force, manufacturers’ representatives and distributors to sell our products. Our manufacturing is completely outsourced and we use merchant foundries to fabricate our wafers and subcontractors to do backend processing and to ship to our customers. We have one operating segment and most of our physical assets are located outside the United States. Assets located outside the United States include product inventories and manufacturing equipment consigned to our wafer foundries and backend subcontractors.

Third Quarter Key Financial Highlights

The following are key financial highlights of third quarter of fiscal 2009:

Net Sales: Our net sales were $9.7 million in the third quarter of fiscal 2009, down 35% from $15.0 million in the same period a year ago.

Gross Margin: Our gross margin was $2.5 million (26% of our net sales) in the third quarter of fiscal 2009 as compared to gross margin of $4.9 million (32% of our net sales) in the same period a year ago.

Net Income or Loss per Share: Our net loss per share, basic and diluted, was $0.38 in the third quarter of fiscal 2009 as compared to net income per share, basic and diluted, of $0.01 in the same period a year ago.

Cash Provided by or Used in Operating Activities: We used $3.4 million of cash in operating activities during the nine months ended December 31, 2008 as compared to $3.8 million of cash generated by operating activities in the same period a year ago.

Cash* Position: We ended the third quarter of fiscal 2009 with a cash position of $48.4 million as compared to $51.6 million, as of March 31, 2008.

___________________

* Cash = Cash and cash equivalents + Short-term investments

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Results of Operations

The table below shows our net sales, cost of sales, gross margin, expenses and net loss, both in dollars and as a percentage of net sales, for the three and nine months ended December 31, 2008 and 2007 (amounts in thousands):

	Three Months Ended												Nine Months Ended
	December 31,												December 31,
	2008						2007						2008						2007
				% of						% of						% of						% of
				Net						Net						Net						Net
	Amount			Sales			Amount			Sales			Amount			Sales			Amount			Sales
Net sales	$	9,659			100	%	$	14,955			100	%	$	40,101			100	%	$	44,201			100	%
Cost of sales		7,184			74	%		10,105			68	%		27,779			69	%		29,995			68	%
Gross margin		2,475			26	%		4,850			32	%		12,322			31	%		14,206			32	%
Research and development		2,668			28	%		1,670			11	%		7,838			20	%		5,080			11	%
Selling, general and administrative		3,509			36	%		3,533			24	%		11,205			28	%		11,170			25	%
Goodwill impairment		5,258			54	%		-			0	%		5,258			13	%		-			0	%
Amortization of intangible assets		71			1	%		41			0	%		127			0	%		124			0	%
Operating loss		(9,031	)		(93	%)		(394	)		(3	%)		(12,106	)		(30	%)		(2,168	)		(5	%)
Other income, net		130			1	%		628			4	%		1,617			4	%		1,911			4	%
Income (loss) before income taxes		(8,901	)		(92	%)		234			2	%		(10,489	)		(26	%)		(257	)		(1	%)
Provision (benefit) for income taxes		10			0	%		4			0	%		1,305			3	%		12			0	%
Net income (loss)	$	(8,911	)		(92	%)	$	230			2	%	$	(11,794	)		(29	%)	$	(269	)		(1	%)

Net sales

Net sales by market for the three months ended December 31, 2008 and 2007 were as follows (amounts in millions):

	Three Months Ended December 31,
	2008					2007
			As % of					As % of
			Total					Total
	Amount		Sales			Amount		Sales			$ Change			% Change
Mobile handset	$	6.2		64	%	$	9.0		60	%	$	(2.8	)		(31	%)
Digital consumer electronics and personal computers		2.4		25	%		4.4		29	%		(2.0	)		(45	%)
Diversified		1.1		11	%		1.6		11	%		(0.5	)		(31	%)
Total	$	9.7		100	%	$	15.0		100	%	$	(5.3	)		(35	%)

Net sales for third quarter of fiscal 2009 were $9.7 million, a decrease of $5.3 million or 35% from $15.0 million of net sales in the same period a year ago. Lower sales were experienced across all product lines largely as a result of the weak global economy. Sales from products for the mobile handset market decreased by $2.8 million or 31% in third quarter of fiscal 2009 as compared to the same period a year ago. Sales from products for the digital consumer electronics and personal computer market decreased to $2.4 million in the third quarter of fiscal 2009 from $4.4 million in the same period a year ago, down $2.0 million or 45%. The decreases in sales for above product lines were driven by lower shipments and price declines. Sales from products for the diversified market decreased to $1.1 million in the third quarter of fiscal 2009 from $1.6 million in the same period a year ago, down $0.5 million or 31%, which was primarily driven by inventory adjustment at a major customer.

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Net sales by market for the nine months ended December 31, 2008 and 2007 were as follows (amounts in millions):

	Nine Months Ended December 31,
	2008					2007
			As % of					As % of
			Total					Total
	Amount		Sales			Amount		Sales			$ Change			% Change
Mobile handset	$	24.8		62	%	$	27.9		63	%	$	(3.1	)		(11	%)
Digital consumer electronics and personal computers		10.2		25	%		12.4		28	%		(2.2	)		(18	%)
Diversified		5.1		13	%		3.9		9	%		1.2			31	%
Total	$	40.1		100	%	$	44.2		100	%	$	(4.1	)		(9	%)

Net sales for nine months ended December 31, 2008 were $40.1 million, a decrease of $4.1 million or 9% from $44.2 million of net sales in the same period a year ago. Sales from products for the mobile handset market decreased by $3.1 million or 11% during nine months ended December 31, 2008, as compared to the same period a year ago. Sales from products for the digital consumer electronics and personal computer market decreased to $10.2 million during nine months ended December 31, 2008 from $12.4 million in the same period a year ago, down $2.2 million or 18%. Sales from products for the diversified market increased to $5.1 million during nine months ended December 31, 2008 from $3.9 million in the same period a year ago, up $1.2 million primarily benefited from increasing sales of our HBLED ESD products.

Gross Margin

Gross margin decreased by $2.4 million during the three months ended December 31, 2008, as compared to the same period a year ago due to the following reasons:

Gross margin increase (decrease) compared to prior period (in millions):
Price change of products based on a constant mix for target markets	$	(1.5	)
Cost reductions of our products on a constant mix		0.6
Volume, mix and other factors		(1.5	)
	$	(2.4	)

The gross margin decrease was primarily driven by lower shipments, price declines of our products and a $238,000 inventory write off, partially offset by product cost reductions. Our ASP declined 13% based on a constant mix of products in the third quarter of fiscal 2009 as compared to the same period a year ago. The cost reductions of our products were primarily due to outsourcing with lower cost subcontractors.

As a percentage of sales, gross margin decreased to 26% for the three months ended December 31, 2008, compared to 32% for the same period a year ago.

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Gross margin decreased by $1.9 million during the nine months ended December 31, 2008, as compared to the same period a year ago due to the following reasons:

Gross margin increase (decrease) compared to prior period (in millions):
Price change of products based on a constant mix for target markets	$	(4.6	)
Cost reductions of our products on a constant mix		3.2
Volume, mix and other factors		(0.5	)
	$	(1.9	)

The gross margin decrease was primarily driven by price declines of our products and lower shipments partially offset by cost reductions and change in our product mix. Our ASP declined 11% based on a constant mix of products in the nine months ended December 31, 2008 as compared to the same period a year ago. In the future we expect our ASP for similar products, based on a constant mix of products, to decline at the rate of 12% to 15% per year. The cost reductions of our products were primarily due to outsourcing with lower cost subcontractors.

As a percentage of sales, gross margin decreased to 31% for the nine months ended December 31, 2008, compared to 32% for the same period a year ago. Our long-range gross margin target remains 38% to 40%. However, our gross margin could fail to achieve this target range or could decline.

Research and Development

Research and development expenses consist primarily of compensation and related costs for employees, prototypes, masks and other expenses for the development of new products, process technology and packages. The increase in research and development expenses for the three and nine months ended December 31, 2008, compared to the same periods a year ago, was due to the following reasons:

	Three Months Ended		Nine Months Ended
Expense increase compared to prior period (in thousands):	December 31, 2008		December 31, 2008
Outside services	$	160	$	901
Salaries and benefits and other costs		28		201
Engineering supplies and product related costs		810		1,656
	$	998	$	2,758

Research and development expenses increased by $1.0 million and $2.8 million, respectively during the three and nine months ended December 31, 2008, as compared to the same periods a year ago, primarily due to increased spending for the serial interface display controller line of products which is anticipated to continue during the remainder of fiscal 2009.

As a percentage of sales, research and development expenses increased to 28% and 20%, respectively during the three and nine months ended December 31, 2008 from 11% during the same periods a year ago. Our long term target for research and development expenses is 9% to 10% of sales. However, research and development expenses will continue to exceed our target range and represent more than 20% of sales especially during the balance of fiscal 2009 driven by continuing development efforts for our serial interface display controller line of products and declines in sales.

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Selling, General and Administrative

Selling, general and administrative expenses consist primarily of compensation and other employee related costs, sales commissions, marketing expenses, legal, accounting, other professional fees and information technology expenses. The increase in selling, general, and administrative expenses for the three and nine months ended December 31, 2008, compared to the same periods a year ago, is as follows:

	Three Months Ended			Nine Months Ended
Expense increase (decrease) compared to prior period (in thousands):	December 31, 2008			December 31, 2008
Salaries and benefits	$	71		$	203
Sales Commissions		(110	)		(205	)
Other expenses		15			37
	$	(24	)	$	35

Selling, general and administrative expenses decreased by $24,000 and increased by $35,000 during the three and nine months ended December 31, 2008, respectively, as compared to the same periods a year ago primarily driven by reduction in sales commission partially offset by increase in employee salaries and benefits.

As a percentage of sales, selling, general and administrative expenses were 36% and 28% during the three and nine months ended December 31, 2008 as compared to 24% and 25% during the same periods a year ago. Our long term target for selling, general and administrative expenses is 15% to 16% of sales. However, selling, general and administrative expenses will continue to exceed our target range and represent more than 16% of sales until our sales increase substantially.

Goodwill Impairment

Goodwill impairment was $5.3 million during the three months ended December 31, 2008. As a result of current economic environment, our operating results, and the sustained decline in our market valuation, we performed an interim goodwill analysis during the third quarter ended December 31, 2008. The analysis indicated that the estimated fair value is less than the corresponding carrying amount and the full amount of goodwill is no longer recoverable. Our entity is deemed as a single reporting unit for our impairment analysis. The fair value was estimated using present value of estimated future cash flows which was consistent with a market-based approach. For additional information regarding goodwill, see Note 6 in the notes to condensed financial statement of the Form 10-Q.

Amortization and Impairment of Intangible Assets

Amortization of intangible assets was $16,000 and $72,000, respectively during the three and nine months ended December 31, 2008 as compared to $41,000 and $124,000 respectively during the same periods a year ago. The intangible assets were related to the Arques acquisition in fiscal 2007. The decrease in amortization expense was primarily due to the sale of intangible assets, related to our line of LED Drivers in the second quarter of fiscal 2009. An impairment charge of $55,000 was recorded during the third quarter of fiscal 2009. For additional information regarding intangible assets, see Note 6 in the notes to condensed consolidated financial statements of this Form 10-Q.

Other Income, Net

Other income, net, mainly includes interest income, interest expense, gain/loss on sale of intangibles and fixed assets and other expenses.

The decrease in other income is primarily driven by decline in interest rates this year in part due to our moving the bulk of our short-term investments into treasury bills. Interest income decreased by $0.6 million and $1.3 million during the three and nine months ended December 31, 2008, respectively as compared to the same periods a year ago. We expect interest income, in the near future, to remain at this reduced level or even decline unless interest rates increase materially or we change the instruments in which we invest.

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Income Taxes

During the three and nine months ended December 31, 2008, income tax provision was $10,000 and 1.3 million, respectively, as compared to $5,000 and $12,000, respectively, during the same periods a year ago. Our income tax provision increased during the three and nine months ended December 31, 2008 compared to the same periods a year ago, primarily as a result of the decrease in our estimates to utilize loss carryforwards, and the resulting increase in the valuation allowance of the deferred tax assets. See Note 14 in the notes to condensed consolidated financial statements of this Form 10-Q for further discussion.

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Critical Accounting Policies and Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and the known facts and circumstances that we believe are relevant. We have not made any material change in the accounting methodology used to establish our estimates and assumptions during the third quarter of fiscal 2009. We do not believe there is a reasonable likelihood that there will be a material change in the accounting methodology used to establish our estimates or assumptions. However, actual results may differ materially from our estimates. Our significant accounting policies are described in Note 2 of notes to consolidated financial statements in our Annual Report on Form 10-K for fiscal 2008. The significant accounting policies that we believe are critical, either because they relate to financial line items that are key indicators of our financial performance such as revenue or because their application requires significant management judgment, are described in the following paragraphs.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed or determinable, and collection is reasonably assured.

Revenue from product sales to end user customers, or to distributors that do not receive price concessions and do not have return rights, is recognized upon shipment and transfer of risk of loss, if we believe collection is reasonably assured and all other revenue recognition criteria are met. We assess the probability of collection based on a number of factors, including past transaction history and the customer’s creditworthiness. If we determine that collection of a receivable is not probable, we defer recognition of revenue until the collection becomes probable, which is generally upon receipt of cash. Reserves for sales returns and allowances from end user customers are estimated based on historical experience and management judgment, and are provided for at the time of shipment. The sufficiency of the reserves for sales return and allowances is assessed at the end of each reporting period.

Revenue from sales of our standard products to distributors whose terms provide for price concessions or for product return rights is recognized when the distributor sells the product to an end customer. For our custom products and end of life products, if we believe that collection is probable, we recognize revenue upon shipment to the distributor, because our contractual arrangements provide for no right of return or price concessions for those products. When we sell products to distributors, we defer our gross selling price of the product shipped and its related cost and reflect such net amounts on our balance sheet as a current liability entitled “deferred margin on shipments to distributors”. We receive periodic reports from our distributors of their inventory of our products and when we test our inventory in order to determine the extent, if any, to which we have excess or obsolete inventory, we also test the inventory held by our distributors.

We typically have written agreements with our distributors which provide that (1) if we lower our distributor list price, our distributors may request for a limited time period a credit for the differential of eligible product in the distributor's inventory and (2) periodically, our distributors have the right to return eligible product to us, provided that the amount returned must be limited to a certain agreed percentage of the value of our shipments to them during such period. Product over a certain age may not be returned and there is a restocking charge if the distributor has not placed a recent commensurate replacement stocking order.

Inventories

Forecasting customer demand is the factor in our inventory policy that involves significant judgments and estimates. We estimate excess and obsolete inventory based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand for the next twelve months. In forecasting customer demand, we make estimates as to, among other things, the timing of sales, the mix of products sold to customers, the timing of design wins and related volume purchases by new and existing customers, and the timing of existing customers’ transition to new products. We also use historical trends as a factor in forecasting customer demand, especially that from our distributors. We review our excess and obsolete inventory on a quarterly basis considering the known facts. Once inventory is written down, it is valued as such until it is sold or otherwise disposed of. To the extent that our forecast of customer demand materially differs from actual demand, our cost of sales and gross margin could be impacted.

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Impairment of long lived assets

Long lived assets are reviewed for impairment whenever events indicate that their carrying value may not be recoverable. An impairment loss is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value.

We have accounted for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at the reporting unit level at least annually and more frequently if there are indicators of impairment. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value. An impairment loss for an intangible asset is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. Significant judgment required to estimate the fair value of an intangible asset includes estimating future cash flows and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value.

Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value was estimated using present value of estimated future cash flows which was consistent with a market-based approach. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Because the Company has one reporting unit under SFAS No. 142, it utilizes the entity-wide approach to assess goodwill for impairment. Due to the current economic environment, our operating results, and the sustained decline in our market valuation, we have performed an interim goodwill impairment analysis during the third quarter of fiscal 2009 pursuant to the steps and requirements under SFAS No. 142. The analysis indicated that the estimated fair value of the reporting unit is less than the corresponding carrying amount and the goodwill is no longer recoverable. Therefore, we determined that goodwill is fully impaired.

Stock-based Compensation

In accordance with the fair value recognition provisions of SFAS 123(R), we estimate the stock-based compensation cost at the grant date based on the fair value of the award and recognize it as an expense on a graded vesting schedule over the requisite service period of the award.

We estimate the value of employee stock options on the date of grant using the Black-Scholes model. The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate and expected dividends.

Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our computation of expected life is based on a combination of historical exercise patterns and certain assumptions regarding the exercise life of unexercised options adjusted for job level and demographics. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on our history and expectation of dividend payouts.

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As stock-based compensation expense recognized in the condensed consolidated statements of operations for the three and nine months ended December 31, 2008 and 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on an average of historical forfeitures. The expense that we recognize in future periods could differ significantly from the current period and/or our forecasts due to adjustments in assumed forfeiture rates or change in our assumptions.

Income Taxes

We account for income taxes under the asset and liability method, which requires significant judgments in making estimates for determining certain tax liabilities and recoverability of certain deferred tax assets, including the tax effects attributable to net operating loss carryforwards and temporary differences between the tax and financial statement recognition of revenue and expenses, as well as the interest and penalties relating to these uncertain tax positions.

On a quarterly basis, we evaluate our ability to recover our deferred tax assets, including but not limited to our past operating results, the existence of cumulative losses in the most recent fiscal years, and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In the event that actual results differ from our estimates in the future, we will adjust the amount of the valuation allowance that may result in a decrease or increase in income tax expense in those periods.

In the first quarter of fiscal 2008, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (FIN 48). As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on a two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on examination, including resolution of any related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We will evaluate these uncertain tax positions on a quarterly basis. A change in recognition or measurement in the future may result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

See Note 14 in the notes to condensed consolidated financial statements of this Form 10-Q for further discussion.

Litigation

We are, on occasion, a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being addressed in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the known relevant facts and circumstances, we recognize any loss that we consider probable and estimable as of the balance sheet date. For these purposes, we consider settlement offers we may make to be indicative of such a loss under certain circumstances. As of December 31, 2008, there was no accrual for litigation related matters.

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Liquidity and Capital Resources

We have historically financed our operations through a combination of debt and equity financing and cash generated from operations. As highlighted in the condensed consolidated statements of cash flows, the Company’s liquidity and available capital resources are impacted by the following key components: (i) cash and cash equivalents, (ii) operating activities, (iii) investing activities, and (iv) financing activities.

	Nine Months Ended December 31,
(In thousands)	2008			2007
Cash provided by (used in) operating activities	$	(3,362	)	$	3,764
Cash provided by (used in) investing activities		4,940			(2,514	)
Cash provided by (used in) financing activities		(558	)		348
Net increase in cash and cash equivalents	$	1,020		$	1,598

Cash, cash equivalents and short-term investments

Total cash, cash equivalents and short-term investments were $48.4 million as of December 31, 2008 compared to $51.6 million as of March 31, 2008, a decrease of $3.2 million primarily due to cash used in operating activities and repurchase of company’s outstanding common stock under the stock repurchase program partially offset by proceeds from the sale of LED Driver assets including patents, related fixed assets and inventory and proceeds from the issuance of common stock under our employee stock benefit plans.

Operating activities

Cash provided by operating activities consists of net loss adjusted for certain non-cash items and changes in assets and liabilities.

During nine months ended December 31, 2008, cash used in operating activities was $3.4 million. The net loss of $11.8 million during the nine months ended December 31, 2008 included non-cash items, such as employee stock-based compensation expense of $1.6 million, goodwill impairment loss of $5.3 million and depreciation of fixed assets and amortization of intangible assets aggregating to $1.9 million. Accounts receivable decreased to $3.2 million at December 31, 2008 compared to $6.2 million at March 31, 2008, mainly attributable to lower shipments. Receivables days of sales outstanding were 31 days and 38 days at December 31, 2008 and March 31, 2008, respectively. Net inventory was $7.9 million as of December 31, 2008, compared to $6.4 million as of March 31, 2008 also mainly attributable to lower shipments. Annualized inventory turns decreased to 5.2 at December 31, 2008 as compared to 6.8 at March 31, 2008 resulted from lower sales of our products. Accounts payable and accrued liabilities totaled $6.2 million at December 31, 2008 compared to $8.3 million at March 31, 2008. Annualized days payable outstanding decreased to 42 at December 31, 2008 from 50 at March 31, 2008. Deferred margin on shipments to distributors decreased to $0.5 million as of December 31, 2008 from $1.9 million as of March 31, 2008.

Cash provided by operating activities was $3.8 million during the nine months ended December 31, 2007. The net loss of $0.3 million for the nine months ended December 31, 2007, included non-cash items such as employee stock based compensation expense of $1.7 million and depreciation and amortization of $1.5 million. Accounts receivable decreased to $5.9 million at December 31, 2007 compared to $7.5 million at March 31, 2007, mainly as a result of faster collections and change in our customer mix. Receivables days of sales outstanding were 36 days and 44 days as of quarters ended December 31, 2007 and March 31, 2007, respectively. Net inventory was $7.0 million as of December 31, 2007, compared to $5.2 million as of March 31, 2007. Annualized inventory turns were 6.6 at December 31, 2007 as compared to 8.0 at March 31, 2007. Accounts payable and accrued liabilities totaled $8.8 million at December 31, 2007 compared to $7.9 million at March 31, 2007.

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Investing activities

Investing activities during the nine months ended December 31, 2008 provided $4.9 million of cash, primarily due to net maturities of short-term investments and $1.2 million of proceeds from the sale of LED Driver intellectual property and related fixed assets partially offset by payment towards capital expenditures.

Investing activities during the nine months ended December 31, 2007 used $2.5 million of cash, mainly due to our payment towards the purchase of manufacturing capital equipment and the final Arques escrow payment.

Financing activities

Net cash used in financing activities for the nine months ended December 31, 2008 was $0.6 million, primarily as a result of repurchase of $1.0 million of company’s outstanding common stock under the stock repurchase program partially offset by proceeds from the issuance of common stock under the ESPP.

Net cash provided by financing activities for the nine months ended December 31, 2007 was $0.3 million and was the result of net proceeds from the issuance of common stock under our employee stock benefit plans partially offset by the repayment of capital lease obligations.

Contractual Obligations and Cash Requirements

The following table summarizes our contractual obligations as of December 31, 2008 (in thousands):

	Payments due by period
	Remainder of		Fiscal		Fiscal		Beyond
	Fiscal 2009		2010		2011		2011		Total
Operating lease obligations		175		385		194		-		754
Purchase obligations		200		-		-		-		200
	$	375	$	385	$	194	$	-	$	954

Effective April 1, 2007, we adopted the provisions of FIN 48 as described in Note 14 of notes to condensed consolidated financial statements in this Form 10-Q. As of December 31, 2008, the liability for uncertain tax positions was approximately $195,000 in addition to the interest and tax penalties of $67,000, of which none is expected to be paid within one year. We are unable to estimate when cash settlement with a taxing authority may occur.

We expect to fund all of these obligations with cash on hand or cash provided from operations.

We anticipate that our existing cash, cash equivalents and short-term investments of $48.4 million as of December 31, 2008 will be sufficient to meet our anticipated cash needs for the next twelve months. Should we desire to expand our level of operations more quickly, either through increased internal development or through the acquisition of product lines from other entities, we may need to raise additional funds through public or private equity or debt financing. The funds may not be available to us, or if available, we may not be able to obtain them on terms favorable to us.

Recent Accounting Pronouncements

Refer to Note 3 in the notes to condensed consolidated financial statements in this Form 10-Q for a discussion of the expected impact of recently issued accounting pronouncements.

Off-Balance Sheet Arrangements

We do not have off balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K that have, or are reasonably likely to have, a current or future effect upon our financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors, other than contractual obligations shown above.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

As of December 31, 2008 we held $14.5 million of investments in short term, liquid debt securities. Due to the short duration and investment grade credit ratings of these instruments, we do not believe that there is a material exposure to interest rate risk in our investment portfolio. We do not own derivative financial instruments nor do we own auction rate securities.

We have evaluated the estimated fair value of our financial instruments. The amounts reported as cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short term maturities. Historically, the fair values of our short-term investments are estimated based on quoted market prices.

We have little exposure to foreign currency risk as all our sales are denominated in US dollars as is most of our spending.

ITEM 4. Controls and Procedures

(a) Disclosure Controls and Procedures.

(i) Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(ii) Limitations on the Effectiveness of Disclosure Controls. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met, taking into account the totality of the circumstances. Our disclosure controls and procedures have been designed to meet the reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(iii) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer have evaluated our disclosure controls and procedures as of December 31, 2008, and have determined that they were effective at the reasonable assurance level.

(b) Changes in Internal Control over Financial Reporting

Our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There was no change in our internal control over financial reporting identified in connection with the evaluation described in Item 4(a)(iii) above that occurred during our third quarter of fiscal 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None

ITEM 1A. Risk Factors

A revised description of the risk factors associated with our business is set forth below. This description supersedes the description of the risk factors associated with our business previously disclosed in Part II, Item 1A of our Form 10-Q for the quarter ended September 30, 2008. Because of these risk factors, as well as other factors affecting the Company’s business and operating results and financial condition, including those set forth elsewhere in this report, our actual future results could differ materially from the results contemplated by the forward-looking statements contained in this report and our past financial performance should not be considered to be a reliable indicator of future performance, so that investors should not use historical trends to anticipate results or trends in future periods.

Our operating results may fluctuate significantly because of a number of factors, many of which are beyond our control and are difficult to predict. These fluctuations may cause our stock price to decline.

Our operating results may fluctuate significantly for a variety of reasons, including some of those described in the risk factors below, many of which are difficult to control or predict. While we believe that quarter to quarter and year to year comparisons of our revenue and operating results are not necessarily meaningful or accurate indicators of future performance, our stock price historically has been susceptible to large swings in response to short term fluctuations in our operating results. Should our future operating results fall below our guidance or the expectations of securities analysts or investors, the likelihood of which is increased by the fluctuations in our operating results, the market price of our common stock may decline.

We had losses in seven out of the last eleven most recent fiscal quarters, including the first quarters of fiscal 2009, 2008 and 2007 and fourth quarters of fiscal 2008 and 2007, and second and third quarter of fiscal 2009, although we were profitable during the second and third quarters of fiscal 2008 and 2007. We may not be able to attain or sustain profitability in the future.

We were profitable for the four quarters during fiscal 2006 until we sustained a substantial loss of nine cents per share during the first quarter of fiscal 2007. This loss would have been a one cent per share profit but for the one time in-process research and development (IPR&D) charge we incurred due to our acquisition of Arques Technology, Inc. We returned to profitability during the second and third quarters of fiscal 2007, followed by losses during fourth quarter of fiscal 2007 and first quarter of fiscal 2008. We were then profitable during the second and third quarters of fiscal 2008 followed by a loss during fourth quarter of fiscal 2008 and first, second and third quarters of fiscal 2009. There are many factors that affect our ability to sustain profitability including the health of the mobile handset, digital consumer electronics and personal computer markets on which we focus, continued demand for our products from our key customers, availability of capacity from our manufacturing subcontractors, ability to reduce manufacturing costs faster than price decreases thereby attaining a healthy gross margin, continued product innovation and design wins, competition, interest rates and our continued ability to manage our operating expenses. In order to obtain and sustain profitability in the long term, we will need to continue to grow our business in our target markets and to reduce our product costs rapidly enough to maintain our gross margin. The semiconductor industry has historically been cyclical, and we may be subject to such cyclicality, which could lead to our incurring losses again.

We currently are concentrated in terms of product types (protection devices), markets (mobile handsets), and customers (certain top tier OEMs). Our revenue could suffer materially if the demand or price for protection devices decreases, if the market for mobile handsets stops growing, or if our key customers lose market share.

Our revenues in recent periods have been derived almost exclusively from sales of circuit protection devices. For example, during the third quarter of fiscal 2009, 83% of our revenue was derived from such sales. With the introduction of our new serial interface display controller, we have several products which could help us reduce our dependence upon circuit protection devices; although for the next several years we expect to derive most of our revenues from circuit protection devices. Should the need for such devices decline, for example because of changes in input and output circuitry, our revenues could decline.

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During the third quarter of fiscal 2009, 64% of our revenue was from sales to the mobile handset market, with the balance coming from digital consumer electronics and personal computers and peripherals and diversified market. In order for us to be successful, we must continue to penetrate these markets, both by obtaining more business from our current customers and by obtaining new customers. Due to our narrow market focus, we are susceptible to materially lower revenues due to material

adverse changes to one of these markets, particularly the mobile handset market. We expect much of our future revenue growth to be in the mobile handset market where more complex mobile handsets have meant increased adoption of and demand for protection devices. Should the rate of adoption of protection devices decelerate in the mobile handset market, our planned rate of increase in penetration of that market would also decrease, thereby reducing our future growth in that market. In addition, a reduction in our market share of protection devices sold into that market would also decrease our future growth and could even lead to declining revenue from that market.

Our sales strategy has been to focus on customers with large market share in their respective markets. As a result, we have several large customers. During the third quarter of fiscal 2009, two customers primarily in the mobile handset market represented 43% of our net sales and in the future we expect to increase net sales to a top five OEM customer we begun selling to during the second half of fiscal 2008. There can be no assurance that these customers will purchase our products in the future in the quantities we have forecasted, or at all.

During the third quarter of fiscal 2009, one distributor represented 10% of our net sales. If we were to lose the distributor, we might not be able to obtain other distributors to represent us or the new distributors might not have sufficiently strong relationships with the current end customers to maintain our current level of net sales. Additionally, the time and resources involved with the changeover and training could have an adverse impact on our business in the short term.

The markets in which we participate are intensely competitive and our products are not sold pursuant to long term contracts, enabling our customers to replace us with our competitors if they choose. In addition, our competitors have in the past and may in the future reverse engineer our most successful products and become second sources for our customers, which could decrease our revenues and gross margins.

Our target markets are intensely competitive. Our ability to compete successfully in our target markets depends upon our being able to offer attractive, high quality products to our customers that are properly priced and dependably supplied. Our customer relationships do not generally involve long term binding commitments making it easier for customers to change suppliers and making us more vulnerable to competitors. Our customer relationships instead depend upon our past performance for the customer, their perception of our ability to meet their future need, including price and delivery and the timely development of new devices, the lead time to qualify a new supplier for a particular product, and interpersonal relationships and trust. Furthermore, many of our customers are striving to limit the number of vendors they do business with and because of our small size and limited product portfolio they could decide to stop doing business with us.

Our most successful products are not covered by patents and have in the past and may in the future be reverse engineered. Thus, our competitors can become second sources of these products for our customers or our customers’ competitors, which could decrease our unit sales or our ability to increase unit sales and also could lead to price competition. This price competition could result in lower prices for our products, which would also result in lower revenues and gross margins. Certain of our competitors have announced products that are pin compatible with some of our most successful products, especially in the mobile handset market, where many of our largest revenue generating products have been second sourced. To the extent that the revenue secured by these competitors exceeds the expansion in market size resulting from the availability of second sources, this decreases the revenue potential for our products. Furthermore, should a second source vendor attempt to increase its market share by dramatic or predatory price cuts for large revenue products, our revenues and margins could decline materially.

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Because we operate in different semiconductor product markets, we generally encounter different competitors in our various market areas. With respect to the protection devices for the mobile handset, digital consumer electronics and personal computer markets, we compete with ON Semiconductor Corporation, NXP, Semtech Corporation and STMicroelectronics, N.V. as well as other smaller companies. For EMI filter devices used in mobile handsets, we also compete with ceramic devices based on high volume Multi-Layer Ceramic Capacitor (MLCC) technology from companies such as Amotek Company, Ltd., AVX Corporation, Innochip Technology, Inc., Murata Manufacturing Co., Ltd., and TDK Corp. MLCC devices are generally low cost and our revenues would suffer if their features and performance meet the requirements of our customers and we are unable to reduce the cost of our protection products sufficiently to be competitive. We have seen ceramic filters obtain significant design wins for low end applications in the mobile handset market and we focused on high end applications as a result. However, we have also begun to see the use of higher performance ceramic filters and if we are not able to demonstrate superior performance at an acceptable price with our devices then our revenues would also suffer. With respect to serial interface display controllers, our competitors include Toshiba Corporation, Samsung, Sharp Electronics Corporation, Renesas Technology, and Solomon Systech. Many of our competitors are larger than we are, have substantially greater financial, technical, marketing, distribution and other resources than we do and have their own facilities for the production of semiconductor components.

Deficiencies in our internal controls could cause us to have material errors in our financial statements, which could require us to restate them. Such restatement could have adverse consequences on our stock price, potentially limiting our access to financial markets.

As of March 31, 2005, management identified, and the auditors attested to, material weaknesses in the Company’s internal control over financial reporting in the operating effectiveness within a portion of the revenue cycle and in the controls over the proper recognition of subcontractor invoices related to inventory and accounts payable. Although management believed it had subsequently remediated these material weaknesses, it was later discovered that they continued through the third quarter of fiscal 2006. Management subsequently assessed and determined, and the auditors attested, that these material weaknesses had been remediated as of March 31, 2006, 2007 and 2008. However, should we or our auditors discover that we have a material weakness in our internal control over financial reporting at another time in the future, especially considering that we have had material weaknesses in the past which we incorrectly believed had been remediated, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Within the past five years, we have also had to restate our financial statements twice because of these material weaknesses. In part due to our new ERP system, and new personnel and training regimen, we believe that we will not have a material weakness in our internal control over financial reporting which would lead to material errors in our financial statements. Nonetheless, there can be no assurance that we will not have errors in our financial statements. Such errors, if material, could require us to restate our financial statements, having adverse effects on our stock price, potentially causing additional expense, and could limit our access to financial markets.

Adverse and uncertain global economic conditions make forecasting demand difficult and may harm our business

Unfavorable global economic conditions, including the recession and recent disruptions to the credit and financial markets, could cause consumer and capital spending to continue to slow down, which may decrease demand for our customers’ products and hence our products and our revenues would be adversely affected. In addition, during challenging economic times, our customers may face issues gaining timely access to sufficient credit, which may impair the ability of our customers to pay for products they have purchased which could cause us to increase our allowance for doubtful accounts and write-offs of accounts receivable. Furthermore, the uncertainty in when the global economy will recover means uncertain demand for our products which makes it more difficult to manage inventories so that we can timely respond to our customers if and when their demand for our products increases and may lead to greater write-offs of inventory. In addition, such uncertainty in demand makes planning more difficult and subject to error which could impact our decision-making and have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our revenues are subject to macroeconomic cycles and therefore are more likely to decline if there is an economic downturn.

As our mobile handset protection devices penetration have increased, our revenues have become increasingly susceptible to macroeconomic cycles because our revenue growth has become more dependent on growth in the overall market rather than primarily on increased penetration, as had been the case in the past.

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Our reliance on foreign customers could cause fluctuations in our operating results.

During the third quarter of fiscal 2009, international sales accounted for 90% of our net sales. International sales include sales to U.S. based customers if the product was delivered outside the United States.

International sales subject us to the following risks:

•

changes in regulatory requirements;

•

tariffs and other barriers;

•

timing and availability of export licenses;

•

political and economic instability;

•

the impact of regional and global illnesses such as severe acute respiratory syndrome infections (SARS);

•

difficulties in accounts receivable collections;

•

difficulties in staffing and managing foreign operations;

•

difficulties in managing distributors;

•

difficulties in obtaining foreign governmental approvals, if those approvals should become required for any of our products;

•

limited intellectual property protection;

•

foreign currency exchange fluctuations;

•

the burden of complying with and the risk of violating a wide variety of complex foreign laws and treaties; and

•

potentially adverse tax consequences.

Because sales of our products have been denominated in United States dollars, increases in the value of the U.S. dollar could increase the relative price of our products so that they become more expensive to customers in the local currency of a particular country. Furthermore, because some of our customer purchase orders and agreements are influenced, if not governed, by foreign laws, we may be limited in our ability to enforce our rights under these agreements and to collect damages, if awarded.

If our distributors experience financial difficulty and become unable to pay us or choose not to promote our products, our business could be harmed.

During the third quarter of fiscal 2009, 38% of our sales were through distributors, primarily in Asia. Our distributors could reduce or discontinue sales of our products or sell our competitors’ products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we are dependent on their continued financial viability, and some of them are small companies with limited working capital. If our distributors experience financial difficulties and become unable to pay our invoices, or otherwise become unable or unwilling to promote and sell our products, our business could be harmed.

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We have outsourced our wafer fabrication, and assembly and test operations. Due to our size, we depend on a limited number of foundry partners and assembly and test subcontractors and there is limited available capacity for plastic assembly and test contractors which limits our choices. As a result, we are exposed to a risk of manufacturing disruption or uncontrolled price changes and we may encounter difficulties in expanding our capacity.

We have adopted a fabless manufacturing model that involves the use of foundry partners and assembly and test subcontractors to provide our production capacity. We chose this model in order to reduce our overall manufacturing costs and thereby increase our gross margin, reduce the impact of fixed costs when volume is low, provide us with upside capacity in case of short-term demand increases and provide us with access to newer process technology, production facilities and equipment. During the past four years we have outsourced our wafer manufacturing and assembly and test operations overseas in Asia and we continue to seek additional foundry and assembly and test capacity to provide for growth and lower cost. If we experience delays in securing additional or replacement capacity at the time we need it, we may not have sufficient product to fully meet the demand of our customers.

Given the current size of our business, we believe it is impractical for us to use more than a limited number of foundry partners and assembly and test subcontractors as it would lead to significant increases in our costs. Currently, we have five foundry partners and rely on limited number of subcontractors. Some of our products are sole sourced at one of our foundry partners in China, Japan or Taiwan. There is also a limited capacity of plastic assembly and test contractors, especially for Thin Dual Flat No-Lead Plastic Package (TDFN) and Ultra-Thin Dual Flat No-Lead Plastic Package (UDFN), for which customer demand is increasing. Our ability to secure sufficient plastic assembly and test capacity, especially the fast ramping TDFN and UDFN offerings, may limit our ability to satisfy our customers’ demand. If the operations of one or more of our partners or subcontractors should be disrupted, or if they should choose not to devote capacity to our products in a timely manner, our business could be adversely impacted as we might be unable to manufacture some of our products on a timely basis. In addition, the cyclicality of the semiconductor industry has periodically resulted in shortages of wafer fabrication, assembly and test capacity and other disruption of supply. We may not be able to find sufficient capacity at a reasonable price or at all if such disruptions occur. As a result, we face significant risks, including:

•

reduced control over delivery schedules and quality;

•

longer lead times;

•

the impact of regional and global illnesses such as SARS or Avian flu pandemic;

•

the potential lack of adequate capacity during periods when industry demand exceeds available capacity;

•

difficulties finding and integrating new subcontractors;

•

limited warranties on products supplied to us;

•

potential increases in prices due to capacity shortages, currency exchange fluctuations and other factors; and

•

potential misappropriation of our intellectual property.

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We rely upon foreign suppliers and have consigned substantial equipment at our foreign subcontractors in order to obtain price concessions. This exposes us to risks associated with international operations, including the risk of losing this equipment should the foreign subcontractor go out of business.

We use foundry partners and assembly and test subcontractors in Asia, primarily in China, India, Japan, Korea, Philippines, Taiwan and Thailand for our products. Our dependence on these foundries and subcontractors involves the following substantial risks:

•

political and economic instability;

•

changes in our cost structure due to changes in local currency values relative to the U.S. dollar;

•

potential difficulty in enforcing agreements and recovering damages for their breach;

•

inability to obtain and retain manufacturing capacity and priority for our business, especially during industry-wide times of capacity shortages;

•

exposure to greater risk of misappropriation of intellectual property;

•

disruption to air transportation from Asia; and

•

changes in tax laws, tariffs and freight rates.

These risks may lead to delayed product delivery or increased costs, which would harm our profitability, financial results and customer relationships. In addition, we maintain significant inventory at our foreign subcontractors that could be at risk.

We also drop ship product from some of these foreign subcontractors directly to customers. This increases our exposure to disruptions in operations that are not under our direct control and may require us to continue to enhance our computer and information systems to coordinate this remote activity.

In order to obtain price concessions, we have consigned substantial equipment at our foreign contractors. For example, we have $1.3 million of test and packaging equipment on consignment in India and $0.8 million of test equipment on consignment in Thailand as of December 31, 2008. Should our business relationship with these partners cease, whether due to our switching to alternate lower cost suppliers, quality or capacity issues with our current partners, or if they experience a natural disaster or financial difficulty, we may have trouble repossessing this equipment. Even if we are able to repossess this equipment, it may not be in good condition and we may not be able to realize the dollar value of this equipment then recorded on our books. Any such inability to repossess consigned equipment or to realize its recorded value on our books would reduce our assets.

Our markets are subject to rapid technological change. Therefore, our success depends on our ability to develop and introduce new products. It is possible that a significant portion our research and development expenditures will not yield products with meaningful future revenue.

The markets for our products are characterized by:

•

rapidly changing technologies;

•

changing customer needs;

•

evolving industry standards;

•

frequent new product introductions and enhancements;

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•

increased integration with other functions; and

•

rapid product obsolescence.

Our competitors or customers may offer new products based on new technologies, industry standards or end user or customer requirements, including products that have the potential to replace or provide lower cost or higher performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable. In addition, our competitors and customers may introduce products that eliminate the need for our products. Our customers are constantly developing new products that are more complex and miniature, increasing the pressure on us to develop products to address the increasingly complex requirements of our customers’ products in environments in which power usage, lack of interference with neighboring devices and miniaturization are increasingly important.

To develop new products for our target markets, we must develop, gain access to, and use new technologies in a cost effective and timely manner, and continue to expand our technical and design expertise. In addition, we must have our products designed into our customers’ future products and maintain close working relationships with key customers in order to develop new products that meet their changing needs.

We may not be able to identify new product opportunities, to develop or use new technologies successfully, to develop and bring to market new products, or to respond effectively to new technological changes or product announcements by our competitors. There can be no assurance even if we are able to do so that our customers will design our products into their products or that our customers’ products will achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense and involve engineering risk. Failure in any of these areas could harm our operating results.

We are attempting to develop one or more new display controller products which are mixed signal integrated circuit products which have a higher development cost than our protection device products. This limits how many of such products we can undertake at any one time increasing our risk that such efforts will not result in a working product for which there is a substantial demand at a price which will yield good margins. We are becoming increasingly engaged with third parties to assist us with these developments, in particular through our India design center, and have also added personnel with new skills to our engineering group. These third parties and new personnel may not be successful and we have less control over outsourced personnel in a remote location. These new product developments involve technology in which we have less expertise which also increases the risk of failure. On the other hand, we believe that the potential payoff from these products makes it reasonable for us to take such risks. Even if our devices work as planned, we may not have success with them in the market. This risk is greater than with our protection device products because many of these new devices are product types for which we don't have material customer traction or market experience.

We may be unable to reduce the costs associated with our products quickly enough for us to meet our margin targets or to retain market share.

In the mobile handset market our competitors have been second sourcing many of our products and as a result this market has become more price competitive. We are seeing the same trend develop in our low capacitance ESD devices for digital consumer electronics, personal computers and peripherals. We need to be able to reduce the costs associated with our products in order to achieve our target gross margins. We have in the past achieved and may attempt in the future to achieve cost reductions by obtaining reduced prices from our manufacturing subcontractors, using larger sized wafers, adopting simplified processes, and redesigning parts to require fewer pins or to make them smaller. There can be no assurance that we will be successful in achieving cost reductions through any of these methods, in which case we will experience lower margins and/or we will experience lower sales as our customers switch to our competitors.

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Our future success depends in part on the continued service of our key engineering and management personnel and our ability to identify, hire and retain additional personnel.

There is intense competition for qualified personnel in the semiconductor industry, in particular for the highly skilled design, applications and test engineers involved in the development of new analog integrated circuits. Competition is especially intense in the San Francisco Bay area, where our corporate headquarters and a portion of our engineering group is located. For that reason, in part, we have opened a design center in India focused on VLSI products and in Phoenix focused on protection devices. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employment, or the employment of our India design center in the future. This is especially true for analog chip designers since competition is fierce for experienced engineers in this discipline. Growth is expected to place increased demands on our resources and will likely require the addition of management and engineering personnel, and the development of additional expertise by existing management personnel. The loss of services and/or changes in our management team, in particular our CEO, or our key engineers, or the failure to recruit or retain other key technical and management personnel, could cause additional expense, potentially reduce the efficiency of our operations and could harm our business. We also recruited a new Vice President of Sales during the fourth quarter of fiscal 2008 and whether he is well-suited for the position and performs well will be critical to our success as well.

Due to the volatility of demand for our products, our inventory may from time to time be in excess of our needs, which could cause write downs of our inventory or of inventory held by our distributors.

Generally our products are sold pursuant to short-term releases of customer purchase orders and some orders must be filled on an expedited basis. Our backlog is subject to revisions and cancellations and anticipated demand is constantly changing. Because of the short life cycles involved with our customers’ products, the order pattern from individual customers can be erratic, with inventory accumulation and liquidation during phases of the life cycle for our customers’ products. We face the risk of inventory write-offs if we manufacture products in advance of orders. However, if we do not make products in advance of orders, we may be unable to fulfill some or all of the demand to the detriment of our customer relationships because we have insufficient inventory on hand and at our distributors to fill unexpected orders and because the time required to make the product may be longer than the time that certain customers will wait for the product.

We typically plan our production and our inventory levels, and the inventory levels of our distributors, based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Therefore, we often order materials and at least partially fabricate product in anticipation of customer requirements. Furthermore, due to long manufacturing lead times, in order to respond in a timely manner to customer demand, we may also make products or have products made in advance of orders to keep in our inventory, and we may encourage our distributors to order and stock products in advance of orders that are subject to their right to return them to us.

In the last few years, there has been a trend toward vendor managed inventory among some large customers. In such situations, we do not recognize revenue until the customer withdraws inventory from stock or otherwise becomes obligated to retain our product. This imposes the burden upon us of carrying additional inventory that is stored on or near our customers’ premises and is subject in many instances to return to our premises if not used by the customer.

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We value our inventories on a part by part basis to appropriately consider excess inventory levels and obsolete inventory primarily based on backlog and forecasted customer demand, and to consider reductions in sales price. For the reasons described above, we may end up carrying more inventory than we need in order to meet our customers’ orders, in which case we may incur charges when we write down the excess inventory to its net realizable value, if any, should our customers for whatever reason not order the product in our inventory.

Our design wins may not result in customer products utilizing our devices and our backlog may not result in future shipments of our devices. During a typical quarter, a substantial portion of our shipments are not in our backlog at the start of the quarter, which limits our ability to forecast in the near term.

We count as a design win each decision by one of our customers to use one of our parts in one of their products that, based on their projected usage, will generate more than $100,000 of sales annually for us when their product is in production. Not all of the design wins that we recognize will result in revenue as a customer may cancel an end product for a variety of reasons or subsequently decide not to use our part in it. Even if the customer’s end product does go into production with our part, it may not result in annual product sales of $100,000 by us and the customer’s product may have a shorter life than expected. In addition, the length of time from design win to production will vary based on the customer’s development schedule. Finally, the revenue from design wins varies significantly. Consequently, the number of design wins we obtain is not a quantitative indicator of our future sales.

Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular point in time is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future shipments, could harm our business. Much of our revenue is based upon orders placed with us that have short lead time until delivery or sales by our distributors to their customers (in most cases, we do not recognize revenue on sales to our distributors until the distributor sells the product to its customers). As a result, our ability to forecast our future shipments and our ability to increase manufacturing capacity quickly may limit our ability to fulfill customer orders with short lead times.

The majority of our operating expenses cannot be reduced quickly in response to revenue shortfalls without impairing our ability to effectively conduct business.

The majority of our operating expenses are labor related and therefore cannot be reduced quickly without impairing our ability to effectively conduct business. Much of the remainder of our operating costs such as rent is relatively fixed. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our operating results will be harmed if our revenues do not meet our projections. We may experience revenue shortfalls for the following and other reasons:

•

significant pricing pressures that occur because of competition or customer demands;

•

sudden shortages of raw materials or fabrication, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers and, in turn, harm our ability to meet our sales obligations; and

•

rescheduling or cancellation of customer orders due to a softening of the demand for our customers’ products, replacement of our parts by our competitors or other reasons.

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We may not be able to protect our intellectual property rights adequately and we may be harmed by litigation involving our intellectual property rights.

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and nondisclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, the steps we take to protect our proprietary information may not be adequate to prevent misappropriation of our technology, and our competitors may independently develop technology that is substantially similar or superior to our technology.

To the limited extent that we are able to seek patent protection for our products or processes, our pending patent applications or any future applications may not be approved. Any issued patents may not provide us with competitive advantages and may be challenged by third parties. If challenged, our patents may be found to be invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes, or design around any patents that may be issued to us.

As a general matter, the semiconductor and related industries are characterized by substantial litigation regarding intellectual property rights, and in particular patents. We may be accused of infringing the intellectual property rights of third parties. Furthermore, we may have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products. Infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims may be asserted in the future and such assertions, if proven to be true, may harm our business.

Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms, or at all.

By supplying parts in the past which were used in medical devices that help sustain human life, we are vulnerable to product liability claims.

We have in the past supplied products predominantly to Guidant and to a much lesser extent to Medtronic for use in implantable defibrillators and pacemakers, which help sustain human life. While we have not sold products into the Medical market since fiscal year 2005, large numbers of our products are or will be used in implanted medical devices, which could fail and expose us to claims. Should our products cause failure in the implanted devices, we may be sued and ultimately have liability, although under federal law Guidant and Medtronic would be required to defend and take responsibility in such instances until their liability was established, in which case we could be liable for that part of those damages caused by our willful misconduct or, in the case of Medtronic only, our negligence.

If our products contain defects, fail to achieve industry reliability standards, or infringe third party intellectual rights or if there are delays in delivery or other unforeseen events which lead to our customers incurring damages, then our reputation may be harmed, and we may incur significant unexpected expenses and lose sales.

We face an inherent business risk of exposure to claims in the event that our products fail to perform as warranted or expected or if we are late in delivering them. Our customers might seek to recover from us any perceived losses, both direct and indirect, which could include their lost sales or profit, a recall of their products, or defending them against third party intellectual property claims. Such claims might be for dollar amounts significantly higher than the revenues and profits we receive from the sale of our products involved as we are usually a component supplier with limited value content relative to the value of the ultimate end-product.

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We attempt to protect ourselves through a combination of quality controls, contractual provisions, business insurance, and self insurance. We are sometimes not able to limit our liability contractually as much as we desire and believe is reasonable and there can be no assurances that any such limits that we negotiate will be enforceable. There can be no assurance that we will obtain the insurance coverage we seek, both in terms of dollar amount insured or scope of exclusions to the coverage, or that our insurers will handle any claims on the basis we desire, or that the self insured claims will not be larger than we expect. A successful claim against us could have material adverse effects on our results of operations and financial condition. Beyond the potential direct cost, loss of confidence by major customers could cause sales of our other products to drop significantly and harm our business.

Our failure to comply with environmental regulations or the discovery of contaminants at our prior manufacturing sites could result in substantial liability to us.

We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment. These include laws, rules and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations, as well as the maintenance of healthy and environmentally sound conditions within our facilities. If we fail to comply with applicable requirements, we could be subject to substantial liability for cleanup efforts, property damage, personal injury and fines or suspension or cessation of our operations. Should contaminants be found at either of our prior manufacturing sites at a future date, a government agency or future owner could attempt to hold us responsible, which could result in material expenses.

Earthquakes, other natural disasters and shortages, or man-caused disasters such as future terrorist activity, may damage our business.

Our California facilities and some of our suppliers are located near major earthquake faults that have experienced earthquakes in the past. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be harmed. Similarly, a major earthquake or other natural disaster near one or more of our major suppliers, like the ones that occurred in Taiwan in September 1999 and in Japan in October 2004, could disrupt the operations of those suppliers, limit the supply of our products and harm our business. The October 2004 earthquake in Japan temporarily shut down operations at one of the wafer fabrication facilities at which our products were being produced. We have since transferred that capacity to other fabs. Power shortages have occurred in California in the past and a wafer fabrication contractor of ours in China experienced a power outrage during 2007. We cannot assure that if power interruptions or shortages occur in the future, they will not adversely affect our business. The September 11, 2001 attack may have adversely affected the demand for our customers’ products, which in turn reduced their demand for our products. In addition, terrorist activity interfered with communications and transportation networks, which adversely affected us. Future terrorist activity or war could similarly adversely impact our business.

Implementation of the new FASB rules and the issuance of new laws or other accounting regulations, or reinterpretation of existing laws or regulations, could materially impact our business or stated results.

From time to time, the government, courts and financial accounting boards issue new laws or accounting regulations, or modify or reinterpret existing ones. For example, starting with the first quarter of fiscal 2007, we implemented Financial Accounting Standards Board (“FASB”) financial accounting standard 123(R) for the accounting for share based payments which caused us to recognize an expense associated with our employee equity awards that decreased our earnings. There may be other future changes in FASB rules or in laws, interpretations or regulations that would affect our financial results or the way in which we present them. Additionally, changes in the laws or regulations could have adverse effects on our business that would affect our ability to compete, both nationally and internationally.

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Our stock price may continue to be volatile, and our trading volume may continue to be relatively low and limit liquidity and market efficiency. Should significant stockholders desire to sell their shares within a short period of time, our stock price could decline.

The market price of our common stock has fluctuated significantly. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter to quarter variations in:

•

our anticipated or actual operating results;

	•		announcements or introductions of new products by us or our competitors;

	•		decreased market share of our major customers;

•

technological innovations or setbacks by us or our competitors;

•

conditions in the semiconductor and passive components markets;

•

the commencement of litigation;

•

changes in estimates of our performance by securities analysts;

•

announcements of merger or acquisition transactions; and

•

general economic and market conditions.

In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies, that have often been unrelated or disproportionate to the operating performance of the companies. These fluctuations, as well as general economic and market conditions, may harm the market price of our common stock. Furthermore, our trading volume is often small, meaning that a few trades have disproportionate influence on our stock price. In addition, someone seeking to liquidate a sizable position in our stock may have difficulty doing so except over an extended period or privately at a discount. Thus, if a stockholder were to sell or attempt to sell a large number of its shares within a short period of time, this sale or attempt could cause our stock price to decline. Our stock is followed by a relatively small number of analysts and any changes in their rating of our stock could cause significant swings in its market price.

Our stockholder rights plan, together with the anti-takeover provisions of our certificate of incorporation, may delay, defer or prevent a change of control.

Our board of directors adopted a stockholder rights plan in autumn 2001 to encourage third parties interested in acquiring us to work with and obtain the support of our board of directors. The effect of the rights plan is that any person who does not obtain the support of our board of directors for its proposed acquisition of us would suffer immediate dilution upon achieving ownership of more than 15% of our stock. Under the rights plan, we have issued rights to purchase shares of our preferred stock that are redeemable by us prior to a triggering event for a nominal amount at any time and that accompany each of our outstanding common shares. These rights are triggered if a third party acquires more than 15% of our stock without board of director approval. If triggered, these rights entitle our stockholders, other than the third party causing the rights to be triggered, to purchase shares of the company’s preferred stock at what is expected to be a relatively low price. In addition, these rights may be exchanged for common stock under certain circumstances if permitted by the board of directors.

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In addition, our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future, including the preferred shares covered by the stockholder rights plan. The issuance of preferred stock may delay, defer or prevent a change in control. The terms of the preferred stock that might be issued could potentially make more difficult or expensive our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.

Further, our stockholders must give written notice delivered to our executive offices no less than 120 days before the one year anniversary of the date our proxy statement was released to stockholders in connection with the previous year’s annual meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action.

Our largest stockholder has requested that the Company’s board of directors take actions which the board does not believe are in the Company’s best interests. This could lead to a more active dispute, such as for example a proxy fight, which could detract management time and attention from the business of the Company, which could cost the Company substantial monies to resolve, and which , if successful, could result in the Company being compelled to take actions which the Board currently does not believe are in the Company’s best interests.

Our largest stockholder, funds managed by Dialectic Capital Management, LLC (“Dialectic”), made an SEC filing in which it expressed its displeasure with the Company’s management and board of directors and requested that the Company pay a substantial cash dividend and then engage an investment banker to sell the Company. Dialectic also requested that the Board restructure management’s economic incentives to be more aligned with the interests of all of the Company's stockholders. The Company’s board of directors has responded that it believes the Company should retain its cash and that now is not the time to explore a sale of the Company when the stock market and its stock price is close to its low point over the past several years and when the Company has solid plans for growth, driven by new products under development and potentially by acquisition of synergistic product lines or companies. The Company’s management has met with representatives of Dialectic and has been unable to resolve their differences of opinion. Dialectic in its SEC filing reserved the right, based on all relevant factors and subject to applicable law, to take such actions as Dialectic saw fit to implement plans or a proposal with respect to its requested actions. Potential Dialectic actions could include by way of example a proxy fight or encouraging third parties to make hostile offers to acquire the Company. Because our board of directors believes it would not be in the interests of the Company or its stockholders to pursue the courses of action recommended by Dialectic, we would expect to vigorously contest any such efforts by Dialectic to further its agenda. Any such actions by Dialectic therefore could detract management time and attention from the business of the Company, could cost the Company substantial monies to resolve, and , if successful, could result in the Company being compelled to take actions which its board of directors currently does not believe are in the Company’s best interests.

We may incur increased costs as a result of future changes in laws and regulations relating to corporate governance matters and public disclosure.

There have been and continue to be changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, rules adopted or proposed by the SEC and by the NASDAQ National Market and new accounting pronouncements. These often have in the past and may in the future result in increased costs to us as we evaluate the implications of these laws, regulations and standards and respond to their requirements. To maintain high standards of corporate governance and public disclosure, we have invested substantial resources to comply with evolving standards and may be required to do so in the future. Any such future investment may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities. For example, we spent approximately an incremental $800,000 versus our prior financial audit only fees on internal control documentation, testing, and auditing to complete our first annual review associated with filing of 10-K for the year ended March 31, 2005 to comply with section 404 of the Sarbanes-Oxley Act. We also spent a significant but not separately determinable amount in fiscal 2008, fiscal 2007 and fiscal 2006 in internal control documentation, testing, and auditing. In addition, these new laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as executive officers. We expect to take steps to comply with future enacted laws and regulations and accounting pronouncements in accordance with the deadlines by which compliance is required, but cannot predict or estimate the amount or timing of additional costs that we may incur to respond to their requirements.

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In the future we may make strategic acquisitions of technology, product lines, or companies and any future acquisitions and strategic alliances may harm our operating results or cause us to incur debt or assume contingent liabilities.

We may in the future acquire, or form strategic alliances relating to, other businesses, product lines or technologies. Successful acquisitions and alliances in the semiconductor industry are difficult to accomplish because they require, among other things, efficient integration and alignment of product offerings and manufacturing operations and coordination of sales and marketing and research and development efforts. We have no recent successful experience in making such acquisitions or alliances. The difficulties of integration and alignment may be increased by the necessity of coordinating geographically separated organizations, the complexity of the technologies being integrated and aligned and the necessity of integrating personnel with disparate business backgrounds and combining different corporate cultures. The integration and alignment of operations following an acquisition or alliance requires the dedication of management resources that may distract attention from the day to day business, and may disrupt key research and development, marketing or sales efforts. In connection with future acquisitions and alliances, we may not only acquire assets which need to be expensed or amortized, but we may also incur debt or assume contingent liabilities which could harm our operating results. Without strategic acquisitions and alliances we may have difficulty meeting future customer product and service requirements.

A decline in our stock price could result in securities class action litigation against us which could divert management attention and harm our business.

In the past, securities class action litigation has often been brought against public companies after periods of volatility in the market price of their securities. Due in part to our historical stock price volatility, we could in the future be a target of such litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could harm our ability to execute our business plan.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities
					Total Number of
					Shares Purchased as		Maximum Number of
					Part of Publicly		Shares that May Yet be
	Total Number of		Average Price		Announced Plans or		Purchased Under the
Period	Shares Purchased (1)		Paid Per Share		Programs		Plans or Programs
10/01/08 - 10/31/08		53,055	$	2.66		53,055		850,000
11/01/08 - 11/30/08		114,755	$	1.72		114,755		735,245
12/01/08 - 12/31/08		190,270	$	1.69		190,270		544,975
		358,080	$	2.11		358,080		544,975

(1)

Our current share repurchase program, under which we repurchased 358,080 and 455,025 shares during the three and nine months ended December 31, 2008, respectively, has been in place since August 21, 2008, when it was adopted by our board of directors and was publicly announced. These shares were purchased in open market transactions. This repurchase program has no expiration date, other than, unless extended, when an aggregate of 1,000,000 shares have been repurchased. Neither this program nor any other repurchase program or plan has expired during the third fiscal quarter ended December 31, 2008 nor have we decided to terminate any repurchase plan or program prior to expiration. There are no existing repurchase plans or programs under which we do not intend to make further purchases.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

The following documents are filed as Exhibits to this report:

10.33		Lease with The Irvine Company dated May 13, 2005

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32.1		Section 1350 Certification of Principal Executive Officer

32.2		Section 1350 Certification of Principal Financial Officer

The following documents are hereby incorporated by reference as Exhibits to this report:

Exhibit Number	Description	Incorporated by reference from
3(i)	Amended and Restated Certificate of Incorporation as most recently amended on September 15, 2006.	Exhibit 3.1 to our Current Report on Form 8-K dated September 15, 2006, filed on September 21, 2006.

3(ii)	Amended and Restated By-laws as most recently amended on August 21, 2008.	Exhibit 3.3 to our Current Report on Form 8-K dated August 21, 2008, filed on August 28, 2008

4.1*	1995 Employee Stock Option Plan and 1995 Non-Employee Directors’ Stock Option Plan, both as most recently amended August 8, 2003 and August 7, 2002, respectively.	Exhibit 4.1 to Registration Statement on Form S-8, filed on September 2, 2003.

4.2*	1995 Employee Stock Purchase Plan, as most recently amended August 21, 2008	Appendix B to Definitive Proxy Statement on Schedule 14A, filed on July 2, 2008.

4.3	Sample Common Stock Certificate of Registrant	Exhibit 4.1 to our Current Report on Form 8-K dated April 27, 2004, filed on April 28, 2004.

4.4*	2004 Omnibus Incentive Compensation Plan as most recently amended on August 21, 2008	Exhibit 10.32 to our Current Report on Form 8-K dated August 21, 2008, filed on August 28, 2008.

10.12	Wafer Manufacturing Agreement between the Company and Advanced Semiconductor Manufacturing Corporation, dated February 20, 2002.**	Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2002 filed on June 25, 2002.

10.18	Wafer Manufacturing Agreement with Sanyo Electric Co., Ltd. Semiconductor Company**	Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed on August 6, 2004.

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Exhibit Number			Description	Incorporated by reference from

10.25*			Memo to Employees and Consultants, including David Casey and David Sear, Accelerating Their Underwater Unvested Options and Imposing Resale Restrictions.	Exhibit 10.25 to our Current Report on Form 8-K dated March 28, 2006, filed on April 3, 2006.

10.26*			Letter Agreement dated as of July 7, 2006, between Registrant and Kevin Berry.	Exhibit 10.26 to our Current Report on Form 8-K dated July 7, 2006, filed on July 10, 2006.

10.27*		Supplemental Employment Terms Agreement during November 2006 between Registrant and an employee of the registrant		Exhibit 10.27 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006, filed on February 9, 2007

10.28*		Executive Severance Plan dated November 9, 2006		Exhibit 10.28 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006, filed on February 9, 2007

10.29**	Equipment Acquisition Agreement, as amended, and Post-Consignment Services Pricing Agreement, with SPEL			Exhibit 10.29 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 9, 2007

10.30*	Amendment to Supplemental Employment Terms Agreement dated February 6, 2008			Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2008 filed on June 11, 2008

10.31*	Amended and Restated Executive Severance Plan dated February 6, 2008			Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2008 filed on June 11, 2008

_________-

*	Denotes a management contract or compensatory plan or arrangement.
**		Portions were omitted pursuant to a request for confidential treatment.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CALIFORNIA MICRO DEVICES CORPORATION
	(Registrant)

Date: February 9, 2009	By:	/S/ ROBERT V. DICKINSON __________________________________________
		Robert V. Dickinson, President and Chief Executive Officer (Principal Executive Officer)

		/S/ KEVIN J. BERRY __________________________________________
		Kevin J. Berry, Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Exhibit Index

Exhibit Number	Description	Incorporated by reference from
3(i)	Amended and Restated Certificate of Incorporation as most recently amended on September 15, 2006.	Exhibit 3.1 to our Current Report on Form 8-K dated September 15, 2006, filed on September 21, 2006.

3(ii)	Amended and Restated By-laws, as most recently amended on August 21, 2008.	Exhibit 3.3 to our Current Report on Form 8-K dated August 21, 2008, filed on August 28, 2008.

4.1*	1995 Employee Stock Option Plan and 1995 Non-Employee Directors’ Stock Option Plan, both as most recently amended August 8, 2003 and August 7, 2002, respectively.	Exhibit 4.1 to Registration Statement on Form S-8, filed on September 2, 2003.

4.2*	1995 Employee Stock Purchase Plan, as most recently amended August 21, 2008	Appendix B to Definitive Proxy Statement on Schedule 14A, filed on July 2, 2008.

4.3	Sample Common Stock Certificate of Registrant	Exhibit 4.1 to our Current Report on Form 8-K dated April 27, 2004, filed on April 28, 2004.

4.4*	2004 Omnibus Incentive Compensation Plan, as most recently amended on August 21, 2008.	Exhibit 10.32 to our Current Report on Form 8-K dated August 21, 2008, filed on August 28, 2008.

10.12	Wafer Manufacturing Agreement between the Company and Advanced Semiconductor Manufacturing Corporation, dated February 20, 2002.**	Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2002 filed on June 25, 2002.

10.18	Wafer Manufacturing Agreement with Sanyo Electric Co., Ltd. Semiconductor Company**	Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed on August 6, 2004.

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Exhibit Number		Description	Incorporated by reference from

10.25*		Memo to Employees and Consultants, including David Casey and David Sear, Accelerating Their Underwater Unvested Options and Imposing Resale Restrictions.	Exhibit 10.25 to our Current Report on Form 8-K dated March 28, 2006, filed on April 3, 2006.

10.26*		Letter Agreement dated as of July 7, 2006, between Registrant and Kevin Berry.	Exhibit 10.26 to our Current Report on Form 8-K dated July 7, 2006, filed on July 10, 2006.

10.27*	Supplemental Employment Terms Agreement during November 2006 between Registrant and an employee of the registrant		Exhibit 10.27 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006, filed on February 9, 2007

10.28*	Executive Severance Plan dated November 9, 2006		Exhibit 10.28 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006, filed on February 9, 2007

10.29**	Equipment Acquisition Agreement, as amended, and Post-Consignment Services Pricing Agreement, with SPEL		Exhibit 10.29 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 9, 2007

10.30*	Amendment to Supplemental Employment Terms Agreement dated February 6, 2008		Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2008 filed on June 11, 2008

10.31*	Amended and Restated Executive Severance Plan dated February 6, 2008		Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2008 filed on June 11, 2008

10.33		Lease with The Irvine Company dated May 13, 2005, is filed herewith.

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer is filed herewith.

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer is filed herewith.

32.1		Section 1350 Certification of Principal Executive Officer is filed herewith.

32.2		Section 1350 Certification of Principal Financial Officer is filed herewith.

__________

*	Denotes a management contract or compensatory plan or arrangement.

**	Portions were omitted pursuant to a request for confidential treatment.

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