**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM10-Q**

**(MarkOne)**

**x****        Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For thequarterly period ended March 31, 2007.**

 

**OR**

 

**o**** ****Transition report pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934**

**For the transition period from              to               **

**Commissionfile number 000-51560**

**MathStar,Inc.**

(Exact name ofregistrant as specified in its charter)
| **Delaware**                                             | **41-1881957**       |
|----------------------------------------------------------|----------------------|
| (State or other  jurisdiction of                         | (I.R.S. Employer     |
| incorporation or  organization)                          | Identification  No.) |
|                                                     |                 |
| **19075  NW Tanasbourne, Suite 200, Hillsboro,  Oregon** | **97124**            |
| (Address of  principal executive offices)                | (Zip  Code)     |

 

**(503)726-5500**

(Registrant’stelephone number, including area code)

**N/A**

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

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  x  Yes    o  No

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one.)

| Large Accelerated Filer | o |   | Accelerated Filer | x |   | Non-Accelerated Filer | o |
|-------------------------|---|--------|-------------------|---|--------|-----------------------|---|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  o  Yes    x  No

Shares outstandingof the Registrant’s common stock:
| Class                          | ** ** | **Outstanding at April 30, 2007** |
|--------------------------------|------------|---------------------------------------------|
| Common stock,  $0.01 par value |       | 20,936,890                                  |

 

 

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| PART I  FINANCIAL INFORMATION |      |
|------------------------------------|-----------|
|                               |      |   |   |
|                               | Item 1.   | Financial Statements  (Unaudited) |   |
|                               |      | Condensed  Balance Sheets as of December 31, 2006 and March 31, 2007 |   |
|                               |      | Condensed Statements of Operations for the Three  Months Ended March 31, 2006 and 2007 |   |
|                               |      | Condensed Statements of Cash Flows for the Three  Months Ended March 31, 2006 and 2007 |   |
|                               |      | Notes  to Condensed Consolidated Financial Statements |   |
|                               |      |   |   |
|                               | Item 2    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                               | Item 3    | Quantitative  and Qualitative Disclosures about Market Risk |   |
|                               | Item 4    | Controls and  Procedures |   |
|                               |      |   |   |
| PART II  OTHER INFORMATION    |      |
|                               | Item 1.   | Legal Proceedings |   |
|                               | Item  1A. | Risk  Factors |   |
|                               | Item 2.   | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
|                               | Item 3.   | Defaults Upon  Senior Securities |   |
|                               | Item 4.   | Submission of  Matters to a Vote of Security Holders |   |
|                               | Item 5.   | Other Information |   |
|                               | Item  6.  | Exhibits |   |
|                               |      |   |   |
| Signatures                         |      |   |

 

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**Part I**

**FinancialInformation**

**Item1.  Financial Statements**

**MathStar, Inc.**

**Condensed Balance Sheets**

**(Unaudited)**
| ** **                                                                                                                                                            | ** ** | **December 31,  2006**                                   | ** ** | **March 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **(in thousands,  except per share  amounts)** | ** ** |
| **Assets**                                                                                                                                                            |       |                                                          |       |                     |       |
| Current assets                                                                                                                                                        |       |                                                          |       |                     |       |
| Cash and cash  equivalents                                                                                                                                            |       | $                                                             | 12,891     |                     | $          | 6,531 |   |
| Restricted cash                                                                                                                                                       |       | 103                                                           |       | 104                      |       |
| Accounts  receivable                                                                                                                                                  |       | 14                                                            |       | 61                       |       |
| Inventory                                                                                                                                                             |       | 610                                                           |       | 671                      |       |
| Prepaid expenses  and other current assets                                                                                                                            |       | 1,231                                                         |       | 1,004                    |       |
| Total current  assets                                                                                                                                                 |       | 14,849                                                        |       | 8,371                    |       |
| Property and equipment,  net                                                                                                                                          |       | 621                                                           |       | 648                      |       |
| Other assets                                                                                                                                                          |       | 144                                                           |       | 85                       |       |
| Total assets                                                                                                                                                          |       | $                                                             | 15,614     |                     | $          | 9,104 |   |
|                                                                                                                                                                  |       |                                                          |       |                     |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                        |       |                                                          |       |                     |       |
| Current liabilities                                                                                                                                                   |       |                                                          |       |                     |       |
| Accounts payable                                                                                                                                                      |       | $                                                             | 1,791      |                     | $          | 783 |   |
| Accrued expenses                                                                                                                                                      |       | 1,206                                                         |       | 1,113                    |       |
| Total  liabilities                                                                                                                                                    |       | 2,997                                                         |       | 1,896                    |       |
| Commitments and  contingencies                                                                                                                                        |       |                                                          |       |                     |       |
| Stockholders’ equity                                                                                                                                             |       |                                                          |       |                     |       |
| Preferred stock,  $0.01 par value; 10,000 shares authorized; no shares issued and outstanding                                                                         |       | —                                                        |       | —                   |       |
| Common stock,  $0.01 par value; 90,000 shares authorized; 20,922 and 20,937 shares issued  and outstanding at December 31, 2006 and March 31, 2007, respectively |       | 209                                                           |       | 209                      |       |
| Additional  paid-in capital                                                                                                                                           |       | 118,545                                                       |       | 118,583                  |       |
|                                                                                                                                                                  |       |                                                          |       |                     |       |
| Accumulated  deficit                                                                                                                                                  |       | (106,137                                                      | )          | (111,584                 | )          |
| Total  stockholders’ equity                                                                                                                                      |       | 12,617                                                        |       | 7,208                    |       |
| Total  liabilities and stockholders’ equity                                                                                                                      |       | $                                                             | 15,614     |                     | $          | 9,104 |   |

 

The accompanying notes are an integral part of these financialstatements.

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**MathStar, Inc.**

**Condensed Statements of Operations**

**(Unaudited)**
| ** **                                             | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                          | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(in thousands,  except per share amounts)** | ** ** |
|                                                   |       |                                                              |       |   |   |
| Revenue                                                |       | $                                                                 | 8          |   | $ | 92 |   |
| Cost of goods  sold                                    |       | 2                                                                 |       | 69 |   |
| Gross margin                                           |       | 6                                                                 |       | 23 |   |
| Operating  expenses:                                   |       |                                                              |       |   |   |
| Research and development                               |       | 2,826                                                             |       | 3,125 |   |
| Selling, general and administrative                    |       | 2,202                                                             |       | 2,462 |   |
|                                                   |       | 5,028                                                             |       | 5,587 |   |
| Operating loss                                         |       | (5,022                                                            | )          | (5,564 | ) |
| Interest income                                        |       | 190                                                               |       | 119 |   |
|                                                   |       |                                                              |       |   |   |
| Other expense,  net                                    |       | —                                                            |       | (2 | ) |
|                                                   |       |                                                              |       |   |   |
| Net loss                                               |       | $                                                                 | (4,832     | ) | $ | (5,447 | ) |
|                                                   |       |                                                              |       |   |   |
| Basic and  diluted net loss per share                  |       | $                                                                 | (0.28      | ) | $ | (0.26 | ) |
| Weighted average basic  and diluted shares outstanding |       | 16,972                                                            |       | 20,897 |   |

 

The accompanying notes are an integral part of these financialstatements.

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**MathStar, Inc.**

**Condensed Statements of Cash Flows**

**(Unaudited)**
| ** **                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**                          | ** ** |
| **Cash flows  from operating activities**                                   |       |                                             |       |   |   |
| Net loss                                                                    |       | $                                                | (4,832     | ) | $ | (5,447 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities |       |                                             |       |   |   |
| Depreciation                                                                |       | 27                                               |       | 41 |   |
| Stock-based compensation                                                    |       | 728                                              |       | 8 |   |
|                                                                        |       |                                             |       |   |   |
| Change in operating assets and liabilities, net of effects  of acquisition  |       |                                             |       |   |   |
| Accounts receivable                                                         |       | 75                                               |       | (47 | ) |
|                                                                        |       |                                             |       |   |   |
| Inventories                                                                 |       | (27                                              | )          | (61 | ) |
| Prepaid expenses and other assets                                           |       | 117                                              |       | 286 |   |
| Accounts payable                                                            |       | (271                                             | )          | (1,008 | ) |
| Accrued expenses                                                            |       | (219                                             | )          | (93 | ) |
| Net cash used in operating activities                                       |       | (4,402                                           | )          | (6,321 | ) |
| **Cash flows  from investing activities**                                   |       |                                             |       |   |   |
|                                                                        |       |                                             |       |   |   |
| Purchase of property  and equipment                                         |       | (91                                              | )          | (68 | ) |
| Restricted cash                                                             |       |                                             |       | (1 | ) |
| Net cash used in investing activities                                       |       | (91                                              | )          | (69 | ) |
| **Cash flows  from financing activities**                                   |       |                                             |       |   |   |
| Proceeds from exercise  of warrants, net of costs                           |       | 8                                                |       | 21 |   |
| Proceeds from exercise  of stock options                                    |       | —                                           |       | 9 |   |
| Net cash provided by financing activities                                   |       | 8                                                |       | 30 |   |
| Net (decrease) increase in cash and cash equivalents                        |       | (4,485                                           | )          | (6,360 | ) |
| **Cash and  cash equivalents**                                              |       |                                             |       |   |   |
| Beginning of period                                                         |       | 20,149                                           |       | 12,891 |   |
| End of period                                                               |       | $                                                | 15,664     |   | $ | 6,531 |   |

 

The accompanying notes are an integral part of these financialstatements.

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**MathStar, Inc.**

**Notes to Financial Statements**

**(inthousands, except per share data)**

**1.****             Basis of Presentation and Going Concern**

The accompanyinginterim condensed financial statements of MathStar, Inc. (“MathStar” or the “Company”)have been prepared in conformity with United States (U.S.) generally acceptedaccounting principles, consistent in all material respects with those appliedin the Company’s Annual Report on Form 10-K filed with the Securities andExchange Commission (“SEC”) on March 14, 2007. The year-end condensed balancesheet was  derived from audited financialstatements , but does not include all disclosure required by accountingprinciples generally accepted in the United States of America (U.S. GAAP). Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

The interimfinancial information is unaudited, but it reflects all normal adjustments thatare, in the opinion of management, necessary to provide a fair statement ofresults for the interim periods presented. The interim financial results arenot necessarily indicative of results to be expected in future interim orannual periods. The interim financial statements should be read in conjunctionwith the financial statements in the Company’s Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 14, 2007.

In prior filings,MathStar reported as a “development stage company” as prescribed in Statementof Financial Accounting Standards (SFAS) No.7, *Accountingand Reporting by Development Stage Enterprises.*During that time,MathStar’s major emphasis was on planning, research and development,recruitment and development of a management and technical staff, and raisingcapital. MathStar has its management team and organizational structure in placeand now  its primary focus is on the saleand commercialization of its current product. MathStar has production productsplaced within its distribution channel and has sold production chips anddevelopment systems to end customers. As such, MathStar is no longer adevelopment stage company and will not report as such.

The accompanying financial statements have beenprepared on a basis which assumes that the Company will continue as a goingconcern and which contemplates the realization of assets and the satisfactionof liabilities and commitments in the normal course of business. The Companyhas a limited operating history and has incurred losses and negative cash flowsfrom operations since inception. The Company expects to incur additional lossesand will require additional funding to continue its operations. Thesecircumstances raise substantial doubt about the Company’s ability to continueas a going concern. Management intends to seek additional financing during2007. However, there can be no assurance that such additional funding will beavailable on terms acceptable to the Company or at all.

**2.****             New Accounting Pronouncements**

The Company adopted the provisions of the FinancialAccounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*,on January 1, 2007.  This adoption did not have a material effect on theCompany’s consolidated financial position or results of operations.  As ofMarch 31, 2007, the Company has $38,304of deferred tax assets; however, valuation allowances have beenestablished to fully offset these deferred tax assets due to the uncertaintyabout the Company’s ability to generate the future taxable income necessary torealize these deferred tax assets, particularly in light of the Company’srecent history of significant operating losses.

In February 2007, the FASB issued Statement ofFinancial Accounting Standard (“SFAS”) No. 159, “*The Fair Value Option for Financial Assets and Liabilities—includingAmendment of FAS No. 115”.*SFAS No. 159 gives companiesthe option of recording certain financial assets and liabilities at fair value.SFAS No. 159 is effective for the Company in the first quarter of 2008.The Company is still evaluating the potential impact of the standard.

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InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes aframework for measuring fair value in U.S. GAAP, and expands disclosures aboutfair value measurements. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years. Earlier application is encouraged, providedthat the reporting entity has not yet issued financial statements for thatfiscal year, including financial statements for an interim period within thatfiscal year. The Company will be required to adopt SFAS No. 157 in the firstquarter of 2008. Management is currently evaluating the requirements of SFASNo, 157 and has not yet determined the impact on the Company’s consolidatedfinancial statements

**3.****             Selected Balance Sheet Information**

**Restricted Cash**

The Company haspledged $100 plus accrued interest to a bank as collateral to secure thebalances on Company issued credit cards. The Company cannot use the restrictedcash in the normal course of business until the credit cards are cancelled orthe bank releases the funds. The credit cards are issued to certain Companyemployees for the purpose of Company-related travel and purchases.

**Inventory**
|                                                  | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Raw materials                                    |       | $                           | 49         |                     | $          | 85 |   |
| Finished goods                                   |       | 662                         |       | 690                      |       |
|                                             |       | $                           | 711        |                     | $          | 775 |   |
| Less: reserve  for excess and obsolete inventory |       | (101                        | )          | (104                     | )          |
| Total inventory, net                             |       | $                           | 610        |                     | $          | 671 |   |

 

The increase inthe valuation reserve was charged to cost of sales.

**Prepaidand Other Current Assets**
|                                         | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
|                                    |       |                        |       |                     |       |
| EDA licenses                            |       | $                           | 695        |                     | $          | 599 |   |
| Prepaid  insurance                      |       | 239                         |       | 165                      |       |
| Prepaid rent                            |       | 111                         |       | 112                      |       |
| Other                                   |       | 186                         |       | 128                      |       |
| Total prepaid and other  current assets |       | $                           | 1,231      |                     | $          | 1,004 |   |

 

 

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**Property and Equipment**
|                                    | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
|                               |       |                        |       |                     |       |
| Computer  equipment                |       | $                           | 1,003      |                     | $          | 1,018 |   |
| Purchased  software                |       | 533                         |       | 533                      |       |
| Equipment                          |       | 106                         |       | 106                      |       |
| Furniture and  fixtures            |       | 499                         |       | 552                      |       |
|                               |       | $                           | 2,141      |                     | $          | 2,209 |   |
| Less:  Accumulated depreciation    |       | (1,520                      | )          | (1,561                   | )          |
| Total property and  equipment, net |       | $                           | 621        |                     | $          | 648 |   |

 

Depreciationexpense was $27 and $41 for the three months ended March 31, 2006 and 2007,respectively.

**Accrued Expenses**
|                            | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|----------------------------|------------|-----------------------------|------------|--------------------------|------------|
|                       |       |                        |       |                     |       |
| Accrued rent               |       | $                           | 77         |                     | $          | 54 |   |
| Accrued  compensation      |       | 480                         |       | 477                      |       |
| Accrued  professional fees |       | 226                         |       | 209                      |       |
| Other                      |       | 423                         |       | 373                      |       |
| Total accrued expenses     |       | $                           | 1,206      |                     | $          | 1,113 |   |

 

**Item 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*ThisQuarterly Report on Form 10-Q contains forward-looking statements, which arebeing provided under the “safe harbor” protection of the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements are generally writtenin the future tense and/or are preceded by words such as “will,” “may,” “should,”“could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” orother similar words. Forward-looking statements include statements regardingthe commercial success of our new products; the growth prospects of thesemiconductor industry and programmable logic market, including the fieldprogrammable object array (“FPOA”) and field programmable gate array (“FPGA”)product sub-segments; and trends in our future sales, including ouropportunities for growth by displacing FPGAs, application-specific integratedcircuits (“ASICs”) and other semiconductor alternatives.*

*Forward-lookingstatements are not guarantees of future performance and involve risks anduncertainties. The forward-looking statements contained in this report arebased on information that is currently available to us and expectations andassumptions that we deem reasonable at the time the statements were made. We donot undertake any obligation to update any forward-looking statements in thisreport or in any of our other communications, except as required by law. Allsuch forward-looking statements should be read as of the time the statementswere made and with the recognition that these forward-looking statements maynot be complete or accurate at a later date.*

*Manyfactors may cause actual results to differ materially from those expressed orimplied by the forward-looking statements contained in this report. Thesefactors include, but are not limited to, those risks described in our AnnualReport on Form 10-K filed on March 14, 2007.*

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**BusinessOverview**

We are a fabless semiconductor company engaged in thedevelopment, marketing and selling of our high-performance, programmableplatform chips and design tools required to program our chips. We haveestablished a sales network and distribution channel, sold and shipped alimited quantity of our first production field programmable object array, orFPOA, chip, and provided a second release of our design tools tocustomers.  Current activities arefocused on the sale of current products and developing enhanced and follow-onproducts.

Our sales cycle begins when a prospective customerdecides to introduce a new product or change or upgrade an existingproduct.  Generally, the prospectivecustomer will do a survey of new and existing technology to determine if thereare technological advances that it needs need to integrate into its productlines. At this point, if there appears to be a fit, the prospective customerwill engage with us to determine if our FPOA can solve its product needs.  Typically, one of our FAEs (Field ApplicationEngineers) will work with the prospective customer’s engineers to create anapplication assessment that documents the advantages of using a FPOA in thecustomer’s product.  At this point, theprospective customer will make a technology decision.  If the decision is to use an FPOA, thecustomer will buy an FPOA evaluation system and FPOA Design Software toolslicense to develop a prototype of its application on our FPOA.  Once the customer has developed and testedits FPOA design, it will develop prototypes of its new product.  The customer will then sell prototypes orlimited production versions of its new product to its customers.  Assuming the customer achieves marketacceptance, it will ramp its design in production and start purchasingproduction quantities of FPOAs. Our sales cycle can be as short as six monthsand as long as 18 months, except in the case of the military/aerospace markets,in which the development cycle can be three to five years.

Our production FPOA is currently in inventory and forsale at our warehouse, a worldwide electronics component distributor and ane-commerce distributor.  Our revenues forthe first half of 2007 will be primarily from sales of evaluation systems,tools and application licenses.  As moreand more of our customers move their products into production, more of ourrevenues will be from the sale of FPOAs.

**FinancialOperations Overview**

***Revenue**and Costs***

The Companyrecognizes revenue for products when persuasive evidence of an arrangementexists, delivery has occurred, the sales price is fixed or determinable, collectionis reasonably assured and there are no post-delivery obligations. Costsassociated with product revenue consist of the manufacturing costs of the evaluationunits and chips and software license fees and captured in cost of sales.  Revenue and costs associated with sales todistributors are deferred until MathStar receives notice from the distributorthat the product has been sold to an end user. The amount reflected on MathStar’s balance sheet is the net margin fromthe deferred revenue and associated costs

***Research and Development***

Research anddevelopment expenses represent costs incurred for designing and engineering ourFPOA chip and developing design tools and applications to enable customers tomore easily program our chip. Research and development expenses consistprimarily of salaries and related costs of our engineering organization; feespaid to third party consultants; an allocation of facilities; and depreciationexpenses. We expense all research and development costs related to thedevelopment of our FPOA. Development of certain design tools and applicationsinclude the development of software. Such research and development expenses arerequired to be expensed until the technological feasibility of the software isestablished. We determine technological feasibility based upon completion of aworking model of the software. To date, the period between technologicalfeasibility and general release of the software has been short, so virtuallyall of our software development costs relate to software development during theperiod before technological feasibility. Accordingly, all such costs have beencharged to operations as incurred. We expect to incur significant additionalresearch and development costs as we develop more chips using our FPOAtechnology.

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***Selling, General and Administrative Expenses***

Selling, general and administrative expenses consistprimarily of salaries and related costs of our sales and marketing andadministrative staff, commissions paid to direct sales staff and manufacturingrepresentatives, general corporate activities and an allocation of facilitiesand depreciation expenses. We anticipate that our selling, general and administrativecosts will increase as a result of increasing our sales and marketing andadministrative staff and commissions to support sales of FPOA chips inworldwide markets and to support our growth and operation as a public company.

**Recently issued Accounting Pronouncements**

See Note 2 ofNotes to Financial Statements included in Part I, Item 1 of this QuarterlyReport on Form 10-Q.

**CriticalAccounting Policies**

There were nochanges in critical accounting policies in the three months ended March 31,2007.

**Results of Operations**

***Three Months Ended March 31, 2006 and 2007***

*Revenueand Cost of Goods Sold.*For the three months ended March 31,2007, we generated revenue of $92,000 compared to $8,000 for the same periodlast year. Revenue for the three months ended March 31, 2007 was from the saleof production FPOA chips, development systems, licensed software andnon-recurring engineering fees. Revenue for the three months ended March 31,2006 was from the sale of FPOA development boards and non-recurring engineeringfees. Costs of goods sold for the three months ended March 31, 2007 and2006 were $69,000 and $2,000, respectively. Costs of goods sold in the firstquarter of 2007 include external chip and evaluation system manufacturing costsand the cost of third party software licenses. Costs of goods sold for the first quarter of 2006 consist of the cost ofthird party software licenses.

*Researchand Development.* For the three months ended March 31, 2007,research and development expenses increased $299,000 or 11% to $3,125,000 from$2,826,000 for the three months ended March 31, 2006. The increase is theresult of increased payroll costs ($180,000, which includes $47,000 of charges relatedto compensation costs related to stock options) and engineering material ($337,000).The increase was offset by lower EDA (electronic design automation) licenses($76,000) and contracted engineering services ($142,000).

*Selling,General and Administrative. *Forthe three months ended March 31, 2007, selling, general and administrativeexpenses increased $260,000 or 12% to $2,462,000, compared to $2,202,000 forthe three months ended March 31, 2006. The increase was primarily the result ofadvertising and promotional costs ($96,000), consulting ($76,000), travel($52,000), recruiting fees primarily in our sales force ($63,000), taxes andfees ($49,000), and infrastructure, facility and depreciation charges of($122,000).  These increases were offsetby a reduction of employee related expenses ($198,000).

*OtherIncome (Expense).*For the three months ended March 31, 2007,we had interest income of $119,000 compared to interest income of $190,000 forthe three months ended March 31, 2006. The decrease in interest income is theresult of lower average cash balances available to invest.

**Liquidityand Capital Resources**

Our future capitalrequirements will depend on many factors, including our sales growth, themarket acceptance of our existing and new FPOA chips, the amount and timing ofour research and development expenditures, the timing of our introduction ofnew chips, the expansion of our sales and marketing efforts and working capitalneeds. We believe that our cash on hand, combined with our existing capitalresources, will be sufficient to meet our capital and operating needs for atleast six months. We anticipate seeking additional financing

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during the first half of2007. Our long-term financing requirements will depend significantly on ourability to penetrate the market with our FPOA chip technology. If additionalfunds are raised through the issuance of debt or equity securities, thesesecurities may have rights senior to those associated with our common stock,and they could contain covenants that would restrict our operations. If we areunable to obtain additional financing or successfully market our products on atimely basis, we would have to slow our product development and marketingefforts and may be unable to continue our operations.

***Net Cash Used in Operating Activities***

Net cash used inoperating activities was $6,321,000 and $4,402,000 for the three months endedMarch 31, 2007 and 2006, respectively. Net cash used for operating activitiesfor the three months ended March 31, 2006 and 2007 was to fund our on-goingresearch and development activities and our selling, general and administrativecosts.

***Net Cash Provided (Used) by Investing Activities***

Net cash used byinvesting activities for the three months ended March 31, 2007 was $69,000.Investing activities for the three months ended March 31, 2006 was $91,000.Investing activities in both quarters were for the purchase of property andequipment.

***Net Cash Provided by Financing Activities***

Net cash providedby financing activities was $30,000 and $8,000 for the three months ended March31, 2007, and 2006, respectively. For both periods, the cash provided byfinancing activities was proceeds from exercise of options and warrants.

**Off-BalanceSheet Arrangements**

We do not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. Inaddition, we do not engage in trading activities involving non-exchange tradedcontracts. As such, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in theserelationships.

**Item3. Quantitative and Qualitative Disclosures about Market Risk**

Our exposure tomarket risk is confined to our cash equivalents. We have invested inhigh-quality financial instruments, primarily money market funds, federalagency notes and asset-backed securities, which we believe are subject tolimited credit risks. The effective duration of the portfolio is less thanthree months, and no individual investment has an effective duration in excessof one year. We currently do not hedge interest rate exposure. Due to theshort-term nature of our investments, we do not believe we have any materialexposure to interest rate risk arising from our investments.

**Item4. Controls and Procedures**

*Evaluation of Disclosure Controlsand Procedures*

During the fiscalperiod covered by this report, the Company’s management, with the participationof the Chief Executive Officer and Chief Financial Officer, completed anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”). Based uponthis evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the end of the fiscal period covered by thisreport, the Company’s disclosure controls and procedures were effective toensure that information required to be disclosed by the Company in reports thatit files or submits under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified by the rules and forms of theSecurities and Exchange Commission and that such information is accumulated andcommunicated to management, including the Chief Executive Officer and

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Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosures.

*Changes in Internal Control Over Financial Reporting*

Therewere no changes in the Company’s internal control over financial reportingduring the fiscal quarter covered by this report that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

**Part II**

**Other Information**

**Item 1.   Legal Proceedings**

We are currentlynot a party to any legal proceedings.

**Item1A.   Risk Factors**

The semiconductorindustry is characterized by rapid technological change, intense competitionand cyclical market patterns which contribute to create factors that may affectour future operating results. The risk factors are described in the sectionentitled “Risk Factors” beginning on page 4 of our Annual Report on Form10-K filed with the Securities and Exchange Commission on March 14, 2007. Otherinformation included in this Quarterly Report on Form 10-Q also should becarefully considered. The risks and uncertainties described in our AnnualReport are not the only risks the Company faces. Additional risks anduncertainties not presently known to the Company or that the Company’smanagement currently deems immaterial also may impair its business operations.If any of the risks described were to occur, our business, financial condition,operating results and cash flows could be materially adversely affected.

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**Item3.****   Defaults Upon Senior Securities**

None.

**Item4.****   Submission of Matters to a Vote of Security Holders.**

None.

**Item5.****   Other Information**

None.

**Item6.****   Exhibits**

The exhibits aredescribed on the Exhibit Index to this Quarterly Report on Form 10-Q.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                    | Mathstar, Inc. |
|--------------------|----------------|
|               | (Registrant)   |
|               |           |   |
|               |           |   |
| Date: May 10, 2007 | By:            | /s/ James W. Cruckshank |   |
|               |           | James W. Cruckshank |
|               |           | Vice President of Administration and  Chief Financial Officer |
|               |           | (Principal Financial Officer and Principal  Accounting Officer) |

 

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**EXHIBITINDEX**
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                     | ** ** | **Page**   |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                                               | ** ** | ** ** |
| 3.1              |       | Certificate of Incorporation of MathStar, Inc.  (incorporated by reference to Exhibit 3.1 to the Registration Statement  on Form S-1 filed by MathStar, Inc. with the Securities and Exchange  Commission (“SEC”) on August 3, 2005 (File No. 333-127164) (the  “Registration Statement”)). |       |       |
|             |       |                                                                                                                                                                                                                                                                                                                                     |       |       |
| 3.2              |       | By-laws of MathStar, Inc. (incorporated by  reference to Exhibit 3.2 to the Registration Statement).                                                                                                                                                                                                                           |       |       |
|             |       |                                                                                                                                                                                                                                                                                                                                     |       |       |
| 4.1              |       | Form of common stock certificate of  MathStar, Inc. (incorporated by reference to Exhibit 4.1 to the  Registration Statement).                                                                                                                                                                                                 |       |       |
|             |       |                                                                                                                                                                                                                                                                                                                                     |       |       |
| 31.1             |       | Certification of Chief Executive Officer pursuant to  Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 (filed  herewith electronically).                                                                                                                                                                              |       |       |
|             |       |                                                                                                                                                                                                                                                                                                                                     |       |       |
| 31.2             |       | Certification of Chief Financial Officer pursuant to  Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 (filed  herewith electronically).                                                                                                                                                                              |       |       |
|             |       |                                                                                                                                                                                                                                                                                                                                     |       |       |
| 32.1             |       | Section 1350 Certification of Chief Executive  Officer (filed herewith electronically).                                                                                                                                                                                                                                                  |       |       |
|             |       |                                                                                                                                                                                                                                                                                                                                     |       |       |
| 32.2             |       | Section 1350 Certification of Chief Financial  Officer (filed herewith electronically).                                                                                                                                                                                                                                                  |       |       |

 

 

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