Table of Contents

 

 

 

**UNITED STATESSECURITIES 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  June 30, 2009.**                                                                      |
|                                                                                                                         |
| **OR**                                                                                                                       |
|                                                                                                                         |
| o                                                                                                                            | ** ** | **Transition report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|                                                                                                                         |
| **For the transition period from                  to** |

 

**Commission file number 000-51560**

 

**MathStar, Inc.**

(Exact name of registrant 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’s telephone number, including area code)

 

**N/A**

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

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

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

 

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

 

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

 

Shares outstanding of the Registrant’s common stock:

 

| **Class**                     | ** ** | **Outstanding at July 31,  2009** |
|-------------------------------|------------|--------------------------------------------------|
| Common stock, $0.01 par value |       | 9,181,497                                        |

 

 

 

----

Table ofContents

 

Table of Contents

 
| PART I  FINANCIAL INFORMATION | 2                                                                                                   |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                    |                                                                                                |
| Item 1.                                 | Consolidated  Financial Statements (Unaudited)                                                      | 2 |
|                                    | Condensed  Balance Sheets as of December 31, 2008 and June 30, 2009                       | 2 |
|                                    | Condensed  Statements of Operations for the Three and Six Months Ended June 30,  2008 and 2009 | 3 |
|                                    | Condensed  Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2009            | 4 |
|                                    | Notes to Condensed Consolidated Financial Statements                                                | 5 |
|                                    |                                                                                                |   |
| Item 2                                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations         | 11 |
| Item 3                                  | Quantitative and Qualitative Disclosures  about Market Risk                                         | 14 |
| Item 4                                  | Controls and Procedures                                                                             | 14 |
|                                    |                                                                                                |
| PART II   OTHER INFORMATION   | 15                                                                                                  |
|                                    |                                                                                                |
| Item 1.                                 | Legal Proceedings                                                                                   | 15 |
| Item 1A.                                | Risk Factors                                                                                        | 15 |
| Item 2.                                 | Unregistered Sales of Equity Securities  and Use of Proceeds                                        | 15 |
| Item 3.                                 | Defaults Upon Senior Securities                                                                     | 15 |
| Item 4.                                 | Submission of Matters to a Vote of  Security Holders                                                | 15 |
| Item 5.                                 | Other Information                                                                                   | 16 |
| Item 6.                                 | Exhibits                                                                                            | 16 |
|                                    |                                                                                                |
| Signatures                              | 17                                                                                                  |

 

1

----

Table of Contents

 

**Part I**

**Financial Information**

 

**Item 1.  Financial Statements**

 

**MathStar, Inc.**

**Condensed Consolidated BalanceSheets**

**(Unaudited)**

**(in thousands, except per share data)**

 
| ** **                                                                                                                                      | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
|                                                                                                                                            |       |                        |       |                    |       |
| **Assets**                                                                                                                                      |       |                        |       |                    |       |
| Current assets                                                                                                                                  |       |                        |       |                    |       |
| Cash and cash equivalents                                                                                                                       |       | $                           | 11,767     |                    | $          | 13,671 |   |
| Investments in marketable  securities – short term                                                                                         |       | 2,530                       |       | —                  |       |
| Accounts receivable                                                                                                                             |       | 176                         |       | —                  |       |
| Prepaid expenses and other current  assets                                                                                                      |       | 222                         |       | 105                     |       |
| Total current assets                                                                                                                            |       | 14,695                      |       | 13,776                  |       |
| Property and equipment, net                                                                                                                     |       | 60                          |       | 56                      |       |
| Investments in marketable  securities – long term                                                                                          |       | 785                         |       | 793                     |       |
| Put option                                                                                                                                      |       | 26                          |       | 11                      |       |
| Other assets                                                                                                                                    |       | 23                          |       | 19                      |       |
| Total assets                                                                                                                                    |       | $                           | 15,589     |                    | $          | 14,655 |   |
|                                                                                                                                            |       |                        |       |                    |       |
| **Liabilities and  Stockholders’ Equity**                                                                                                  |       |                        |       |                    |       |
| Current liabilities                                                                                                                             |       |                        |       |                    |       |
| Accounts payable                                                                                                                                |       | $                           | 16         |                    | $          | 48 |   |
| Accrued expenses                                                                                                                                |       | 519                         |       | 621                     |       |
| Total current liabilities                                                                                                                       |       | 535                         |       | 669                     |       |
| Other long term liabilities                                                                                                                     |       | 151                         |       | —                  |       |
| Total liabilities                                                                                                                               |       | 686                         |       | 669                     |       |
|                                                                                                                                            |       |                        |       |                    |       |
| Stockholders’ equity                                                                                                                       |       |                        |       |                    |       |
| Preferred stock, $0.01 par value;  10,000 shares authorized; no shares issued and outstanding                                                   |       | —                      |       | —                  |       |
| Common stock, $0.01 par value;  18,000 shares authorized; 9,181 shares issued and outstanding at  December 31, 2008 and June 30, 2009 |       | 92                          |       | 92                      |       |
| Additional paid-in capital                                                                                                                      |       | 155,924                     |       | 155,954                 |       |
| Accumulated deficit                                                                                                                             |       | (141,113                    | )          | (142,060                | )          |
| Total stockholders’ equity                                                                                                                 |       | 14,903                      |       | 13,986                  |       |
|                                                                                                                                            |       |                        |       |                    |       |
| Total liabilities and  stockholders’ equity                                                                                                |       | $                           | 15,589     |                    | $          | 14,655 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

2

----

Table of Contents

 

**MathStar, Inc.**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

**(in thousands, except per share data)**

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Revenue                                                |       | $                                               | 54         |                                          | $          | — |   | $ | 280 |   | $ | — |   |
| Cost of sales                                          |       | 904                                             |       | —                                        |       | 1,195 |   | — |   |
| Gross profit (loss)                                    |       | (850                                            | )          | —                                        |       | (915 | ) | — |   |
| Operating expenses:                                    |       |                                            |       |                                          |       |   |   |   |   |
| Research and development                               |       | 3,542                                           |       | —                                        |       | 7,094 |   | — |   |
| Selling, general and  administrative                   |       | 1,469                                           |       | 538                                           |       | 3,562 |   | 996 |   |
| Restructuring and impairment  charges                  |       | 2,601                                           |       | —                                        |       | 2,601 |   | — |   |
|                                                   |       | 7,612                                           |       | 538                                           |       | 13,257 |   | 996 |   |
| Operating loss                                         |       | (8,462                                          | )          | (538                                          | )          | (14,172 | ) | (996 | ) |
| Interest income                                        |       | 210                                             |       | 18                                            |       | 490 |   | 53 |   |
| Other income (loss), net                               |       | (11                                             | )          | —                                        |       | 26 |   | (4 | ) |
| Net loss                                               |       | $                                               | (8,263     | )                                             | $          | (520 | ) | $ | (13,656 | ) | $ | (947 | ) |
|                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted loss per share                       |       | $                                               | (0.90      | )                                             | $          | (0.06 | ) | $ | (1.49 | ) | $ | (0.10 | ) |
|                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average basic and diluted  shares outstanding |       | 9,181                                           |       | 9,181                                         |       | 9,181 |   | 9,181 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

----

Table ofContents

 

**MathStar, Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                      | ** ** | **2009** | ** ** |
|                                                                        |       |                                          |       |   |   |
| **Cash flows from  operating activities**                                   |       |                                          |       |   |   |
| Net loss                                                                    |       | $                                             | (13,656    | ) | $ | (947 | ) |
| Adjustments to reconcile net loss  to net cash used in operating activities |       |                                          |       |   |   |
| Depreciation and amortization                                               |       | 111                                           |       | 4 |   |
| Loss on asset disposal                                                      |       | 48                                            |       | — |   |
| Asset impairment charges                                                    |       | 1,006                                         |       | — |   |
| Amortization of discount on  held-to-maturity securities                    |       | 39                                            |       | 3 |   |
| Loss on sale of available-for-sale  securities                              |       | 7                                             |       | — |   |
| Mark to market, trading securities                                          |       | —                                        |       | (8 | ) |
| Mark to market, put option                                                  |       | —                                        |       | 15 |   |
| Non-cash changes in inventory  reserves                                     |       | 734                                           |       | — |   |
| Stock-based compensation                                                    |       | (9                                            | )          | 30 |   |
| Restructuring charges                                                       |       | 563                                           |       | — |   |
| Gain on sale of marketable  securities                                      |       | (42                                           | )          | — |   |
| Foreign currency remeasurement                                              |       | 7                                             |       | 4 |   |
| Change in operating assets and  liabilities                                 |       |                                          |       |   |   |
| Accounts receivable                                                         |       | 214                                           |       | 176 |   |
| Inventory                                                                   |       | (111                                          | )          | — |   |
| Prepaid expenses and other assets                                           |       | 703                                           |       | 121 |   |
| Accounts payable                                                            |       | (692                                          | )          | 32 |   |
| Deferred revenue                                                            |       | (162                                          | )          | — |   |
| Accrued expenses                                                            |       | (785                                          | )          | (53 | ) |
| Net cash used in operating  activities                                      |       | (12,025                                       | )          | (623 | ) |
|                                                                        |       |                                          |       |   |   |
| **Cash flows from  investing activities**                                   |       |                                          |       |   |   |
| Purchase of property and equipment                                          |       | (50                                           | )          | — |   |
| Proceeds from sale of equipment                                             |       | 21                                            |       | — |   |
| Proceeds from sale of  held-to-maturity securities                          |       | 13,058                                        |       | 2,527 |   |
| Proceeds from sale of  available-for-sale securities                        |       | 4,460                                         |       | — |   |
| Purchase of held-to-maturity  securities                                    |       | (2,931                                        | )          | — |   |
| Purchase of available-for-sale  securities                                  |       | (2,685                                        | )          | — |   |
| Restricted cash                                                             |       | (2                                            | )          | — |   |
| Net cash provided by investing  activities                                  |       | 11,871                                        |       | 2,527 |   |
|                                                                        |       |                                          |       |   |   |
| **Cash flows from  financing activities**                                   |       | —                                        |       | — |   |
|                                                                        |       |                                          |       |   |   |
| Effect of exchange rate changes on  cash                                    |       | (3                                            | )          | — |   |
| Net (decrease) increase in cash  and cash equivalents                       |       | (157                                          | )          | 1,904 |   |
| **Cash and cash  equivalents**                                              |       |                                          |       |   |   |
| Beginning of period                                                         |       | 4,339                                         |       | 11,767 |   |
| End of period                                                               |       | $                                             | 4,182      |   | $ | 13,671 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

4

----

Table of Contents

 

**MathStar, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(in thousands, except per share data)**

 

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

 

The accompanying interim condensed consolidated financialstatements of MathStar, Inc. (“MathStar” or the “Company”) have beenprepared in conformity with generally accepted accounting principles in theUnited States (U.S. GAAP), consistent in all material respects with thoseapplied in the Company’s Annual Report on Form 10-K for the year ended December 31,2008 filed with the Securities and Exchange Commission (“SEC”) on March 31,2009. The year-end condensed consolidated balance sheet was derived fromaudited financial statements, but does not include all disclosure required byU.S. GAAP. The preparation of financial statements in conformity with U.S. GAAPrequires management to make estimates and assumptions that affect the reportedamounts of 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. During the quarter ended March 31, 2009, MathStar, Inc.closed its two wholly-owned subsidiaries, MathStar Holdings B.V. and MathStarLimited.

 

The interim financial information is unaudited, but itreflects all normal adjustments that are, in the opinion of management,necessary to provide a fair statement of results for the interim periodspresented. The interim financial results are not necessarily indicative ofresults to be expected in future interim or annual periods. The interimfinancial statements should be read in conjunction with the financialstatements in the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 2009.

 

During the three months ended March 31, 2008, sales didnot materialize as expected, and our development of the next generation of FPOAchips fell even further behind schedule. As a result, on May 20, 2008, theBoard of Directors voted to suspend research and development activities andongoing operations while analyzing strategic alternatives to protectshareholder value. The Board of Directors continues to explore these strategicalternatives, which could include merger, acquisition, increasing operations inanother structure or liquidation. MathStar has engaged third partyinvestment banking firms to explore the sale of intellectual property andpatents and potential merger and acquisition alternatives.

 

The accompanying financial statements have been prepared ona basis which assumes that the Company will continue as a going concern andwhich contemplates the realization of assets and the satisfaction ofliabilities and commitments in the normal course of business.  Although the Company has incurred recurringlosses and negative cash flows from operations, we have met all financialobligations with vendors, key suppliers, and strategic partners, both prior andsubsequent to curtailing operations. We have sufficient cash and investments tomeet all known obligations as well as projected expenditures for the nexttwelve months at current spending levels. However, because we have notdefinitively committed to any of the strategic alternatives being evaluated, wecannot predict our long-term cash needs or ultimate cash requirements. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

Basic earnings per share are computed by dividing the netloss available to common shareholders by the weighted average number of sharesoutstanding during the period. The diluted earnings per share calculationdiscloses the impact of all potential dilutive common shares outstanding duringthe period, including stock options and warrants using the treasury stockmethod. For the three months and six months ended June 30, 2008 and June 30,2009, options and warrants totaling 693,903 to purchase shares of common stockwere not included in the computation of net loss per share, as their effect wasantidilutive.

 

5

----

Table of Contents

 

**2.             Restructuringand Impairment Charges**

 

During the three months ended June 30, 2008, theCompany announced a curtailment of operations as it evaluated strategicalternatives to preserve shareholder value.  This decision resulted inrestructuring and impairment charges of $3,500 in 2008.  Managementdetermined that it was highly likely that certain operational assets would notbe used and no alternatives existed. In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*” issued by theFinancial Accounting Standards Board (“FASB”), these assets were deemed to beimpaired and either held-for-sale or abandoned and written down to their fairmarket value.  A plan to locate potential buyers was put in place fortheir disposal, and no further depreciation expense will be charged to theCompany’s operating activity for these assets. In addition, the Companyevaluated assets that were not abandoned or held-for-sale and determined thatthe estimated useful lives of these assets should be shortened.  As well,in accordance with SFAS No. 146 issued by the FASB, “*Accounting for Costs Associated with Exit or DisposalActivities”*, certain one-time charges relating to severance toterminated employees, and fees associated with early contract terminations nolonger used and giving economic benefit to the Company, were recorded. As theliabilities for these charges were settled, payment was made against theliability, and there will not be any further impact on the Company’s operatingresults.

 
| ** **                                                             | ** ** | **Twelve Months  Ended  December 31,  2008** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| Inventory abandoned                                                    |       | $                                                 | 349        |   |
| Increase in excess and obsolete  reserve                               |       | 533                                               |       |
| Charged to cost of sales                                               |       | 882                                               |       |
| Severance                                                              |       | 1,506                                             |       |
| Fair market adjustment of assets  held-for-sale                        |       | 328                                               |       |
| Contract termination                                                   |       | 57                                                |       |
| Assets abandoned                                                       |       | 727                                               |       |
| Charged to operating expenses as  restructuring and impairment charges |       | 2,618                                             |       |
| Total charges for restructuring  and impairment                        |       | $                                                 | 3,500      |   |

 

Below is the detail of restructuring and impairment chargesfor the six months ended June 30, 2009.

 
| ** **                              | ** ** | **Restructuring  Liability** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| Liability as of December 31,  2008 |       | $                            | 4          |   |
|                                    |       |                         |       |
| Additions                               |       | —                       |       |
| Payments                                |       | (4                           | )          |
| Liability as of June 30, 2009      |       | $                            | —     |   |

 

Management believes that no further charges will be incurredfor this activity, except for potential termination of non-cancellable leaseliabilities for the Hillsboro, Oregon facility, which will depend on thestrategic direction chosen by the Company. The amount of the potential leasetermination liability will not be known until the strategic direction isidentified. Total future lease commitments remaining under this lease are $725as of June 30, 2009.

 

**3.             NewAccounting Pronouncements**

 

In April 2009, the FASB issuedStaff Position No. 157-4, *“DeterminingFair Value When Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly”*(“FSP 157-4”). FSP 157-4 provides guidance on how to determine the fair valueof assets and liabilities when the volume and level of activity for theasset/liability has significantly decreased. FSP 157-4 also provides guidanceon identifying circumstances that indicate a transaction is not orderly. Inaddition, FSP 157-4 requires disclosure in interim and annual periods of theinputs and valuation techniques used to measure fair value and a discussion ofchanges in valuation techniques. FSP 157-4 was effective for the Companybeginning in the second quarter of fiscal year 2009. The adoption of FSP 157-4did not have a material impact on its consolidated financial position, resultsof operations or cash flows.

 

6

----

Table of Contents

 

In April 2009, the FASB issuedStaff Position No. 115-2 and 124-2, *“Recognitionand Presentation of Other-Than-Temporary Impairment”*(“FSP115-2/124-2”). FSP 115-2/124-2 amends the requirements for the recognition andmeasurement of other-than-temporary impairments for debt securities bymodifying the pre-existing “intent and ability” indicator. Under FSP115-2/124-2, an other-than-temporary impairment is triggered when there isintent to sell the security, it is more likely than not that the security willbe required to be sold before recovery, or the security is not expected torecover the entire amortized cost basis of the security. Additionally, FSP115-2/124-2 changes the presentation of other-than-temporary impairment in theincome statement for those impairments involving credit losses. The credit losscomponent will be recognized in earnings, and the remainder of the impairmentwill be recorded in other comprehensive income. FSP 115-2/124-2 was effectivefor the Company beginning in the second quarter of fiscal year 2009. Theadoption of FSP 115-2/124-2 did not have a material impact on its consolidatedfinancial position, results of operations or cash flows.

 

In April 2009, the FASB issuedStaff Position No. 107-1 and APB 28-1, *“InterimDisclosure about Fair Value of Financial Instruments”*(“FSP107-1/APB 28-1”). FSP 107-1/APB 28-1 requires interim disclosures regarding thefair values of financial instruments that are within the scope of FAS 107, *“Disclosures about the Fair Value of Financial Instruments.”*Additionally, FSP 107-1/APB 28-1 requires disclosure of the methodsand significant assumptions used to estimate the fair value of financialinstruments on an interim basis as well as changes of the methods andsignificant assumptions from prior periods. FSP 107-1/APB 28-1 does not changethe accounting treatment for these financial instruments and was effective forthe Company beginning in the second quarter of fiscal year 2009. For the sixmonths ended June 30, 2009 the change in the fair value of financialinstruments was $8,000.

 

In May 2009, the FSAB issued StatementNo. 165, “*Subsequent Events*” (FAS 165). FAS165 requires management to evaluate events or transactions that took placeafter the balance sheet date and prior to release of the financial statementsfor potential recognition or disclosure in the financial statements.  FAS 165 is to be applied to all periodsfollowing June 15, 2009.  There wereno such events or transactions which occurred through August 14, 2009, the datethese financial statements were issued.

 

**4.     SelectedBalance Sheet Information**

 

**Investment Securities**

 
| ** **                   | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Short-term                   |       |                        |       |                    |       |
| Held-to-maturity             |       |                        |       |                    |       |
| Corporate bonds and notes    |       | $                           | 2,530      |                    | $          | — |   |
| Total short-term investments |       | 2,530                       |       | —                  |       |
|                         |       |                        |       |                    |       |
| Long-term                    |       |                        |       |                    |       |
| Trading                      |       |                        |       |                    |       |
| Auction preferred securities |       | 785                         |       | 793                     |       |
| Total long-term investments  |       | 785                         |       | 793                     |       |
|                         |       |                        |       |                    |       |
| Total investments            |       | $                           | 3,315      |                    | $          | 793 |   |

 
| ** **         | ** ** | ** **  | ** ** | **Fair Value Measurement at Reporting Date**           | ** ** |
|--------------------|------------|-------------|------------|---------------------------------------------------------------------------------|------------|
| ** **         | ** ** | ** **  | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets** | ** ** | **Using  Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**    | ** ** | **6/30/09** | ** ** | **(Level 1)**                                                              | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Put option         |       | $           | 11         |                                                                            | —     |   | — |   | $ | 11 |   |
| Trading securities |       | 793         |       | —                                                                          |       | — |   | 793 |   |
| Total              |       | $           | 804        |                                                                            | —     |   | — |   | $ | 804 |   |

 

7

----

Table ofContents

 

The Company has auction preferred securities (APS), whichare preferred equity instruments in a closed-end mutual fund that provideliquidity through an auction process conducted by an independent auction agentthat resets the applicable dividend rate at pre-determined calendar intervals,generally every 28 days.  These instruments are senior equity securitiesthat have a liquidation preference of $25,000 per share plus the amount ofaccumulated but unpaid dividends. Upon the liquidation, dissolution or windingup of the fund, APS holders are entitled to receive their liquidationpreference before any distribution or payment is made to holders of the fund’scommon shares. Dividends declared and payable on the APS have a priority overdividends on the fund’s common shares. Outstanding APS may be redeemed at theoption of the fund upon giving notice to APS holders.

 

The Company generally invested in these securities as partof its overall cash management program. During the first quarter of 2008, theCompany’s APS failed to auction due to sell orders exceeding buyorders. The funds associated with failed auctions will not be accessibleuntil a successful auction occurs, the fund redeems outstanding APS or anactive secondary market is created and a buyer is identified outside of theauction process.

 

At June 30, 2009, there was insufficient observable APSmarket information available to determine the fair value of the Company’sinvestments in APS. Therefore, the Company estimated Level 3 fair valuesfor the APS by incorporating assumptions that market participants would use intheir estimates of fair value. Despite the failed auctions, the Company’s APScontinue to be highly rated by the rating agencies. Of the original $2,680 inAPS purchased, $1,852 was redeemed on May 27, 2008 at face value.

 

As further required by SFAS No. 157, provided below isa reconciliation of the beginning and ending balances for each type of securityvalued using a Level 3 valuation at June 30, 2009.

 

8

----

Table of Contents

 
| ** **                                                     | ** ** | **Fair Value Measurement Using Significant  Unobservable Inputs (Level 3)** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **Put Option**                                                                   | ** ** | **Auction  Preferred  Securities** | ** ** |
| Beginning balance as of  December 31, 2008                |       | $                                                                                | 26         |   | $ | 785 |   |
| Total gains (losses)  realized/unrealized included in earnings |       | —                                                                           |       | (7 | ) |
| Purchases                                                      |       | —                                                                           |       | — |   |
| Settlements                                                    |       | —                                                                           |       | — |   |
| Issuance of put option                                         |       | —                                                                           |       | — |   |
| Ending balance as of  March 31, 2009                 |       | $                                                                                | 26         |   | $ | 778 |   |
| Total gains (losses)  realized/unrealized included in earnings |       | (15                                                                              | )          | 15 |   |
| Purchases                                                      |       | —                                                                           |       | — |   |
| Settlements                                                    |       | —                                                                           |       | — |   |
| Issuance of put option                                         |       | —                                                                           |       | — |   |
| Ending balance as of June 30,  2009                       |       | $                                                                                | 11         |   | $ | 793 |   |

 

On November 14, 2008, we accepted an offer from UBS AG(“UBS”), providing us with rights related to our APS (the “Rights”). The Rightspermit us to require UBS to purchase our APS at any time during the period fromJune 30, 2010 until July 2, 2012 at par value, which is defined asthe price equal to the liquidation preference of the APS plus accrued butunpaid dividends or interest. Conversely, UBS has the right, in its discretion,to purchase or sell our APS at any time until July 2, 2012 so long as wereceive payment at par value upon any sale or disposition. We expect to sellour APS under the Rights. However, if the Rights are not exercised before July 2,2012, they will expire, and UBS will have no further rights or obligation tobuy our APS. So long as we hold our APS, they will continue to accrue interestas determined by the auction process or the terms of the APS if the auctionprocess fails. UBS’s obligations under the Rights are not secured by its assetsand do not require UBS to obtain any financing to support its performanceobligations under the Rights. UBS has disclaimed any assurance that it willhave sufficient financial resources to satisfy its obligations under theRights.

 

The Rights represent a firm agreement in accordance withSFAS No. 133, which defines a firm agreement as an agreement with anunrelated party, binding on both parties and usually legally enforceable, withthe following characteristics: a) the agreement specifies all significantterms, including the quantity to be exchanged, the fixed price, and the timingof the transaction; and b) the agreement includes a disincentive fornonperformance that is sufficiently large to make performance probable. Theenforceability of the Rights results in a put option and should be recognizedas a free-standing asset separate from the APS. Upon acceptance of the offerfrom UBS, we recorded $26 as the fair value of the put option asset with acorresponding credit to interest income, net. The put option does not meet thedefinition of a derivative instrument under SFAS No. 133. Therefore, wehave elected to measure the put option at fair value under SFAS No. 159,which permits an entity to elect the fair value option for recognized financialassets, in order to match the changes in the fair value of the APS. As aresult, gains and losses will be included in earnings in future periods. Weexpect that future changes in the fair value of the put option will approximatefair value movements in the related APS; during the quarter ended June 30,2009, the fair value of the put option decreased by $15. Prior to accepting theUBS offer, we recorded our APS as investments available-for-sale. We recordedunrealized gains and losses on our available-for-sale debt securities, net of atax benefit, in accumulated other comprehensive income in the shareholders’equity section of our balance sheets. Such an unrealized loss did not reducenet income for the applicable accounting period.

 

**Inventory**

 
| ** **                                       | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Finished goods                                   |       | $                           | 446        |                    | $          | 446 |   |
| Less: reserve for excess and  obsolete inventory |       | (446                        | )          | (446                    | )          |
| Total inventory, net                             |       | $                           | —     |                    | $          | — |   |

 

9

----

Table ofContents

 

**Prepaid and Other Current Assets**

 
| ** **                              | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Prepaid insurance                       |       | $                           | 105        |                    | $          | 48 |   |
| Prepaid rent                            |       | 26                          |       | 27                      |       |
| Interest receivable                     |       | 61                          |       | —                  |       |
| Other                                   |       | 30                          |       | 30                      |       |
| Total prepaid and other current  assets |       | $                           | 222        |                    | $          | 105 |   |

 

**Property and Equipment**

 
| ** **                        | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Computer equipment                |       | $                           | 50         |                    | $          | 50 |   |
| Purchased software                |       | 91                          |       | 91                      |       |
| Furniture and fixtures            |       | 198                         |       | 198                     |       |
|                              |       | $                           | 339        |                    | $          | 339 |   |
| Less: Accumulated depreciation    |       | (279                        | )          | (283                    | )          |
| Total property and equipment, net |       | $                           | 60         |                    | $          | 56 |   |

 

Depreciation expense was $50 and $2 for the three monthsended June 30, 2008 and 2009, respectively, and $80 and $4 for the sixmonths ended June 30, 2008 and 2009, respectively.

 

Under SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets”,*assets thatare no longer used in operations and held for sale should be written down tothe expected fair market value and depreciation ceased as of the determinationdate.

 

**Other Assets**

 
| ** **         | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|--------------------|------------|-----------------------------|------------|-------------------------|------------|
| Deposits           |       | $                           | 23         |                    | $          | 19 |   |
| Total other assets |       | $                           | 23         |                    | $          | 19 |   |

 

**Accrued Expenses**

 
| ** **                    | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------|------------|
|                          |       |                        |       |                    |       |
| Accrued license contracts     |       | $                           | 302        |                    | $          | 302 |   |
| Accrued severance expense     |       | —                      |       | 149                     |       |
| Accrued professional fees     |       | 148                         |       | 110                     |       |
| Accrued rent                  |       | 47                          |       | 43                      |       |
| Accrued compensation          |       | 9                           |       | —                  |       |
| Accrued restructuring charges |       | 4                           |       | —                  |       |
| Other                         |       | 9                           |       | 17                      |       |
| Total accrued expenses        |       | $                           | 519        |                    | $          | 621 |   |

 

10

----

Table of Contents

 

**Subsequent Event**

 

The subsequent event test in accordance with FAS 165 wasperformed as of August 14, 2009. There were no transactions or eventsdiscovered that required recognition or disclosure.

 

**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*This Quarterly Report on Form 10-Qcontains forward-looking statements, which are being provided under the “safeharbor” protection of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are generally written in the future tense and/or arepreceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,”“believe,” “anticipate,” “intend,” “plan,” or other similar words.Forward-looking statements are not guarantees of future performance and involverisks and uncertainties. The forward-looking statements contained in thisreport are based on information that is currently available to us andexpectations and assumptions that we deem reasonable at the time the statementswere made. We do not undertake any obligation to update any forward-lookingstatements in this report or in any of our other communications, except asrequired by law. All such forward-looking statements should be read as of thetime the statements were made and with the recognition that theseforward-looking statements may not be complete or accurate at a later date.*

 

*Many factors may cause actual results todiffer materially from those expressed or implied by the forward-lookingstatements contained in this report. These factors include, but are not limitedto, those risks described in our Annual Report on Form 10-K filed on March 31,2009.*

 

**Business Overview**

 

Until we curtailed operations in the second quarter of 2008,we were a fabless semiconductor company engaged in the development, marketingand selling of our high-performance, programmable platform field programmableobject array, or FPOA, chips and design tools required to program our chips.During the three months ended March 31, 2008, sales did not materialize asexpected, and our development of the next generation of FPOA chips fell behindschedule. As a result, on May 20, 2008, the Board of Directors voted tosuspend research and development activities and curtail ongoing operationswhile analyzing strategic alternatives. The Board of Directors continues toexplore these strategic alternatives, which could include merging with oracquiring another company, increasing operations in another structure orliquidation. We have engaged third party investment banking firms to explorethe sale of intellectual property and patents and potential merger andacquisition alternatives.

 

**Recently Issued Accounting Pronouncements**

 

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

 

**Critical Accounting Policies**

 

There were no changes in critical accounting policies in thethree months ended June 30, 2009.

 

**Results ofOperations**

 

***ThreeMonths Ended June 30, 2008 and 2009***

 

*Revenue*. There wasno revenue**for the three monthsended June 30, 2009 compared to $54,000 for the same period last year. Revenue for the three months ended June 30,2008 was from the sale of production FPOA chips of $50,000 and the sale ofevaluation products of $4,000. Futureshort-term revenue could be generated from sales of production chips we have ininventory. Long-term revenue opportunities will be based on the strategicdirection chosen by our Board of Directors and the timing for executing theplan.

 

*Cost of Sales.*There was no cost of sales for the three months ended June 30, 2009compared to $904,000 for the three months ended June 30, 2008. Costs of sales in the second quarter of2008 include external chip costs of $5,000, costs for development products of$2,000, a non-cash charge of $533,000 for excess and obsolete inventorycomprised primarily of current generation chips held in inventory, $353,000 forscrapping tool licenses and raw material, and other charges of $11,000.

 

11

----

Table of Contents

 

*Research and Development.*All research and development activity has been suspended, and no expenses wereincurred during the three months ended June 30, 2009.  For the threemonths ended June 30, 2008, there were research and development expensesof $3,542,000.  Any future research and development costs will depend onthe strategic direction chosen by our Board of Directors and the timing forexecuting the plan.

 

*Selling, General and Administrative. *For the three months ended June 30, 2009, selling,general and administrative expenses were $538,000 compared to $1,469,000 forthe three months ended June 30, 2008. The $538,000 consisted of personnelexpenses of $126,000, outside services, legal and accounting fees of $183,000,facility costs of $87,000, insurance costs of $29,000, payments to investmentbankers and consultants associated with the sale of the IP and strategicopportunities of $83,000, and other costs of $30,000.  For the threemonths ended June 30, 2008, expenses included personnel costs of $705,000,consulting, professional fees and outside services of $393,000, travel of$102,000, facility and depreciation of $84,000, advertising and promotions of$71,000, insurance of $39,000 and other expenses related to operations of$75,000.  Excluding expenses associated with investigating strategicalternatives and IP sales, we believe our expenses are at the lowestsustainable level possible while still meeting the requirements of a publiccompany.  Any changes in this level will depend on the strategic directionof the Company chosen by our Board of Directors and the timing for executingthe plan.

 

*Restructuring and Impairment Charges.*Forthe three months ended June 30, 2009, we did not record any restructuringand impairment charges. In the three months ended June 30, 2008, werecorded a restructuring and impairment charge of $2,601,000. See furtherdiscussion of these restructuring and impairment charges in Note 2 of thefinancial statements.

 

*Other Income (Loss).*Forthe three months ended June 30, 2009, other income decreased by $181,000or 91% to $18,000 compared to $199,000 for the three months ended June 30,2008. The decrease was the result of $192,000 less interest income earned onlower investment balances and loss on asset sale of $11,000.

 

***SixMonths Ended June 30, 2008 and 2009***

 

*Revenue.*There was no revenue reported for the**six months ended June 30, 2009 compared to $280,000 forthe same period last year. Revenue for the six months ended June 30, 2008was from the sale of production FPOA chips of $276,000 and development productsof $4,000.

 

*Cost of Sales.*There was no cost of sales for the six months ended June 30, 2009. For thesix months ended June 30, 2008 the cost of sales was $1,195,000. Cost ofsales for the six months ended June 30, 2008 included product costs of$36,000, a non-cash charge of $776,000 for excess and obsolete inventory, scrapcosts associated with tool licenses and raw material write-offs of $363,000,and other costs of $20,000.

 

*Research and Development.*For the six months ended June 30, 2009, all research and developmentactivities were curtailed and no expenses were incurred. For the six monthsended June 30, 2008, research and development costs were $7,094,000. The$7,094,000 included employee related expenses of $2,698,000, consulting andcontractor expense of $1,550,000, development tool expense of $614,000, chargesfor application IP development of $515,000 because technological feasibilityhad not been established on the development projects, external developmentcosts associated with the completion of the next generation FPOA of $1,456,000,and other costs of $261,000.

 

*Selling, General and Administrative. *For the six months ended June 30, 2009, selling,general and administrative expenses were $996,000 compared to $3,562,000 forthe six months ended June 30, 2008. The $996,000 in expenses for the sixmonths ended June 30, 2009 included employee related expenses of $237,000,outside services and professional fees of $309,000, facility charges of$167,000, insurance of $57,000, other operating expenses of $50,000, andpayment related to investment banking activities of $176,000.  The$3,562,000 in expenses for the six months ended June 30, 2008 includedemployee related expenses of $2,161,000, outside services and professional feesof $633,000, marketing and advertising of $110,000, travel expenses of$228,000, facility charges and depreciation of $164,000, insurance of $77,000,and other operating expenses of $189,000. Our selling, general andadministrative infrastructure is reduced to key individuals necessary tosustain the corporate structure and activities and plan our strategicdirection. Should we choose to increase operations, there will be significantone-time and recurring expenses required to grow our organizationalinfrastructure.

 

12

----

Table of Contents

 

*Restructuring and Impairment Charges*. For the six months ended June 30, 2009, wedid not record any restructuring or impairment charges*.*For the sixmonths ended June 30, 2008, we recorded restructuring and impairmentcharges of $2,601,000.  See further discussion of these restructuringcharges in Note 2 of the financial statements.

 

*Other Income (Loss).*Forthe six months ended June 30, 2009, other income decreased by $467,000 or 91%to $49,000 compared to $516,000 for the six months ended June 30, 2008.The decrease was the result of $437,000 less interest income and a $30,000 losson asset sale.

 

**Liquidity andCapital Resources**

 

In response to the Board of Director’s decision to curtailoperations and evaluate our strategic alternatives, staff was reduced to twokey individuals in the second quarter of 2008, Mr. Douglas M. Pihl, afull-time Chief Executive Officer/Chief Financial Officer, and Mr. John M.Jennings, a part-time Chief Accounting Officer, and support contractors on anas-needed basis to sustain the Company’s corporate structure and activities andplan its strategic direction. As set forth in our Current Report on Form 8-Kfiled on July 15, 2009, Mr. Pihl resigned as Chief Executive Officer,Chief Financial Officer and a Director on July 14, 2009.  On August 5, 2009, theCompany and Mr. Pihl entered into a Severance and Release Agreement (the“Agreement”), the form of which was included as Exhibit A to Exhibit 10.2 ofthe Company’s Current Report on Form 8-K filed May 8, 2009.  Pursuant to the Agreement, the Company hasagreed to make a severance payment of $216,286 to Mr. Pihl. All costs associatedwith the Agreement were accrued as of June 30, 2009. As set forth in ourCurrent Report on Form 8-K filed on August 14, 2009, effective as of August 1,2009, the Company engaged Alex H. Danzberger, Jr. to serve as Chief ExecutiveOfficer and Chief Financial Officer.  We have sufficient cash and investments tosatisfy all outstanding obligations and to initiate actions based on thestrategic direction when determined by the Board of Directors.

 

In January 2008, we purchased $2,680,000 of investmentscomprised of auction preferred securities (APS). All of our APS are AAA ratedby one of the major credit rating agencies.  Since mid-February 2008,we have experienced failed auctions for our entire APS portfolio, resulting inour inability to sell these securities. A failed auction results in a lackof liquidity in the securities but does not signify a default by theissuer.  Upon an auction failure, the interest rates on the APS do notreset at a market rate but instead reset based on a formula contained in theAPS, which generally is higher than the current market rate. The issuer ofthe APS redeemed $1,852,000 of the APS on May 27, 2008 and is activelyputting a plan in place to redeem the remainder. Our APS were purchased throughUBS Financial Services. On August 8, 2008, UBS announced that it reached asettlement with the New York Attorney General, the Massachusetts SecuritiesDivision, the Securities and Exchange Commission and other regulatory agenciesto restore liquidity to holders of APS.  We do not currently need thesefunds to satisfy outstanding obligations or meet short-term operatingrequirements.

 

We classified our APS as trading securities, which has resultedin a $35,000 cumulative adjustment to the carrying value of our APS to markthem to fair value. If uncertainties in the credit and capital marketscontinue, if the credit worthiness of the issuer deteriorates, if UBS does notcomply with the settlement provisions or if we no longer have the ability tohold these investments, we may be required to recognize additional impairmentcharges on our APS holdings or a loss on their disposition.

 

Our future capital requirements will depend on many factors,including the strategic direction the Company chooses, the amount of any sales,the type and structure of any strategic transaction into which we enter, andworking capital needs. We believe that our cash on hand and our investmentsecurities will be sufficient to meet our current obligations as well asprojected expenditures for the next twelve months at current spending levels.However, our long-term financing requirements will depend significantly on thestrategic direction we choose to take and the timing for executing the plan. Wecannot quantify our long-term cash requirements until a strategic alternativeis decided. Should cash and investments and revenues generated from a strategicalternative not meet our needs, we may need to raise funds though the issue ofdebt or equity securities. These securities may have rights senior to thosecurrently associated with our common stock and could contain covenants thatwould restrict our operations. If we are unable to obtain additional financing,we may be unable to continue our operations.

 

13

----

Table of Contents

 

***NetCash Used in Operating Activities***

 

Net cash used in operating activities was $623,000 and$12,025,000 for the six months ended June 30, 2009 and 2008, respectively.Net cash used for operating activities for the six months ended June 30,2009 was to pay outstanding liabilities and ongoing expenses of the company of$447,000 and $176,000 in investment banking fees used in evaluating strategicalternatives.  Net cash used for operating activitiesfor the six months ended June 30, 2008 was to fund the completion of thedesign of our next generation of FPOA chip, pay our selling, general andadministrative costs, pay severance payments to employees whose employment wasterminated, and fund contract termination expenses.

 

***NetCash Provided by Investing Activities***

 

Net cash provided by investing activities was $2,527,000 and$11,871,000 for the six months ended June 30, 2009 and 2008,respectively.  Net cash provided by investing activities for the sixmonths ended June 30, 2009 was from the proceeds from the sale ofinvestments.  Netcash provided by investing activities for the six months ended June 30,2008 was from the proceeds from the sale of investments of $11,902,000, $21,000from the sale of equipment, $50,000 used to purchase capital equipment and$2,000 in the increase of restricted cash.

 

***NetCash Provided by Financing Activities***

 

There were no financing activities for the six months ended June 30,2009 and 2008.

 

**Off-Balance Sheet Arrangements**

 

We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. In addition, we do not engagein trading activities involving non-exchange traded contracts. As such, we arenot materially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in these relationships.

 

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

 

Our exposure to market risk is confined to our cashequivalents and investments. We have invested in high-quality financialinstruments, primarily money market funds, federal agency notes andasset-backed securities, which we believe are subject to limited credit risks.Included in our investments are APS. The APS auctions have historicallyprovided a liquid market for these securities, as investors could readily selltheir investments at auction. With the liquidity issues experienced in globalcredit and capital markets, the APS held by us have experienced failedauctions, beginning on February 19, 2008, as the amount of securitiessubmitted for sale exceeded the amount of purchase orders, making the liquidityof the APS questionable. Despite the failed auctions, our APS continue to behighly rated by the rating agencies. We believe we will have full redemption ofall APS at par. If all APS are not redeemed, it could have a negative effect onthe liquidity of our funds available for strategic alternatives.

 

**Item 4. Controlsand Procedures**

 

*Evaluation of Disclosure Controls andProcedures*

 

During the fiscal period covered by this report, ourmanagement, with the participation of the Chief Executive Officer and ChiefFinancial Officer, completed an evaluation of the effectiveness of the designand operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”). Basedupon this evaluation, our Chief Executive Officer and Chief Financial Officerhas concluded that, as of the end of the fiscal period covered by this report,our disclosure controls and procedures were effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified by the rules and forms of the Securities andExchange Commission and that such information is accumulated and communicatedto management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

14

----

Table of Contents

 

*Changes inInternal Control Over Financial Reporting*

 

        There wereno changes in the Company’s internal control over financial reporting duringthe most recently completed quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**Part II**

 

**Other Information**

 

**Item 1.  Legal Proceedings**

 

We are currently not a party to any legal proceedings.

 

**Item 1A.  Risk Factors**

 

There are many factors that may affect our future operatingresults and financial condition. Some of these risk factors are described inthe section entitled “Risk Factors” beginning on page 7 of our AnnualReport on Form 10-K for the year ended December 31, 2008 filed withthe SEC on March 31, 2009 (“2008 Form 10-K”). Other informationincluded in this Quarterly Report on Form 10-Q also should be carefullyconsidered. The risks and uncertainties described in our 2008 Form 10-K arenot the only risks we face. Additional risks and uncertainties not presentlyknown to us or that our management currently deems immaterial also may impairour business operations and financial condition. If any of the risks describedwere to occur, our business, financial condition, operating results and cashflows could be materially adversely affected.

 

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3.   DefaultsUpon Senior Securities**

 

None.

 

**Item 4.   Submissionof Matters to a Vote of Security Holders**

 

On July 10,2009, at our Annual Meeting of Stockholders, our stockholders voted on threeproposals.  The vote on each of those proposals is described below.

 

*Proposal No. 1*

 

The following incumbent directors were re-elected to ourBoard of Directors by the following votes:

 
| **Nominee**             | ** ** | **For**   | ** ** | **Withheld/Against** | ** ** | **Broker Non-Votes** | ** ** |
|-------------------------|------------|-----------|------------|----------------------|------------|---------------------------|------------|
|                    |       |      |       |                 |       |                      |       |
| Douglas M. Pihl         |       | 6,703,034 |       | 1,957,406            |       | —                    |       |
| Benno G. Sand           |       | 6,745,972 |       | 1,914,468            |       | —                    |       |
| Merrill A. McPeak       |       | 6,738,572 |       | 1,921,868            |       | —                    |       |
| Richard C. Perkins, Jr. |       | 6,836,066 |       | 1,824,374            |       | —                    |       |

 

As described above, Mr. Pihl resigned as ChiefExecutive Officer, Chief Financial Officer and a Director on July 14,2009.

 

15

----

Table of Contents

 

*Proposal No. 2*

 

The stockholders ratified the selection ofPricewaterhouseCoopers LLP as our independent registered public accounting firmby the following vote:

 
| **For**   | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|--------------|------------|---------------------------|------------|
|      |       |        |       |         |       |                      |       |
| 8,583,073 |       | 69,139      |       | 8,228        |       | —                    |       |

 

*Proposal No. 3*

 

The stockholders voted against the stockholder proposal toliquidate MathStar, Inc. and distribute the net proceeds to thestockholders.

 
| **For**   | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|--------------|------------|---------------------------|------------|
|      |       |        |       |         |       |                      |       |
| 1,632,210 |       | 2,782,369   |       | 71,105       |       | 4,174,956                 |       |

 

**Item 5.   OtherInformation**

 

None

 

**Item 6.   Exhibits**

 

The exhibits are described on the Exhibit Index to thisQuarterly Report on Form 10-Q.

 

16

----

Table of Contents

 

**SIGNATURES**

 

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

 
|                       | MathStar, Inc. |
|----------------------------|---------------------|
|                       | (Registrant)        |
|                       |                |
|                       |                |
| Date: August 14, 2009 | By:                 | /s/ Alex H. Danzberger, Jr. |
|                       |                | Alex H. Danzberger, Jr. |
|                       |                | Chief Executive Officer and Chief Financial Officer |

 

17

----

Table of Contents

 

**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 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  and Chief Financial Officer (filed herewith electronically).                                                                                                                                                                                                                      |

 

18

----