Table of Contents

** **

 

** **

**UNITEDSTATESSECURITIES 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 March 31, 2009** |
| ** **                                             | ** **                                                                                               |
| **OR**                                                 |
| ** **                                             | ** **                                                                                               |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the Transition PeriodFrom             To             **

 

**COMMISSION FILE NUMBER: 000-52014**

 

----

 

**Techwell, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **77-0451738**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**408 E. Plumeria Drive**

**San Jose, CA  94134**

(Address of principal executive offices,including Zip Code)

 

**(408) 435-3888**

(Registrant’s telephone number, includingarea code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whetherthe registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during thepreceeding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o   No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Securities Exchange Act). Yes o No x

 

Asof April 30, 2009, 21,466,317 shares of the registrant’s common stock wereoutstanding.

 

 

 

----

Table ofContents

 

**TECHWELL, INC.**

**FORM 10-Q**

**March 31, 2009**

 
| ** **                                                                                                         | **Page** |
|--------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                               |     |
| **Part I.  Financial Information**                                                                            | 3        |
|                                                                                                               |     |
| **Item 1. Financial  Statements**                                                                                  | 3        |
| Condensed Unaudited Consolidated Balance Sheets as of  March 31, 2009 and December 31, 2008              | 3        |
| Condensed Unaudited Consolidated Statements of  Operations for the three months ended March 31, 2009 and 2008 | 4        |
| Condensed Unaudited Consolidated Statements of Cash  Flows for the three months ended March 31, 2009 and 2008 | 5        |
| Notes to Condensed Unaudited Consolidated Financial  Statements                                                    | 6        |
|                                                                                                               |     |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations**            | 14       |
|                                                                                                               |     |
| **Item 3. Quantitative  and Qualitative Disclosures about Market Risk**                                            | 24       |
|                                                                                                               |     |
| **Item 4. Controls and  Procedures**                                                                               | 24       |
|                                                                                                               |     |
| **Part II.  Other Information**                                                                               | 25       |
|                                                                                                               |     |
| **Item 1. Legal  Proceedings**                                                                                     | 25       |
|                                                                                                               |     |
| **Item 1A. Risk Factors**                                                                                          | 25       |
|                                                                                                               |     |
| **Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds**                                           | 36       |
|                                                                                                               |     |
| **Item 3. Defaults Upon  Senior Securities**                                                                       | 36       |
|                                                                                                               |     |
| **Item 4. Submission of  Matters to a Vote of Security Holders**                                                   | 36       |
|                                                                                                               |     |
| **Item 5. Other Information**                                                                                      | 36       |
|                                                                                                               |     |
| **Item 6. Exhibits**                                                                                               | 36       |
|                                                                                                               |     |
| Signatures                                                                                                         | 37       |

 

2

----

Table ofContents

 

**PART I. Financial Information**

 

**Item 1. Financial Statements**

 

**TECHWELL, INC.**

**CONDENSEDUNAUDITED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except par value amount)**

 
| ** **                                                                                                                                                                          | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                          |       |                     |       |                        |       |
|                                                                                                                                                                                |       |                     |       |                        |       |
| Current assets:                                                                                                                                                                     |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                           |       | $                        | 38,440     |                        | $          | 44,485 |   |
| Short-term investments                                                                                                                                                              |       | 20,957                   |       | 17,582                      |       |
| Accounts receivable                                                                                                                                                                 |       | 2,997                    |       | 1,985                       |       |
| Inventory                                                                                                                                                                           |       | 4,259                    |       | 4,780                       |       |
| Deferred income tax assets                                                                                                                                                          |       | 1,272                    |       | 1,353                       |       |
| Prepaid expenses and other current assets                                                                                                                                           |       | 1,072                    |       | 1,200                       |       |
| Total current assets                                                                                                                                                                |       | 68,997                   |       | 71,385                      |       |
| Property and equipment, net                                                                                                                                                         |       | 1,163                    |       | 1,290                       |       |
| Long-term investments                                                                                                                                                               |       | 21,376                   |       | 19,350                      |       |
| Deferred income tax assets                                                                                                                                                          |       | 5,048                    |       | 4,031                       |       |
| Other assets                                                                                                                                                                        |       | 995                      |       | 1,308                       |       |
| TOTAL ASSETS                                                                                                                                                                        |       | $                        | 97,579     |                        | $          | 97,364 |   |
|                                                                                                                                                                                |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                      |       |                     |       |                        |       |
|                                                                                                                                                                                |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                    |       | $                        | 1,985      |                        | $          | 2,221 |   |
| Accrued liabilities                                                                                                                                                                 |       | 1,806                    |       | 2,117                       |       |
| Total current liabilities                                                                                                                                                           |       | 3,791                    |       | 4,338                       |       |
|                                                                                                                                                                                |       |                     |       |                        |       |
| Deferred rent                                                                                                                                                                       |       | 108                      |       | 122                         |       |
| Total liabilities                                                                                                                                                                   |       | 3,899                    |       | 4,460                       |       |
|                                                                                                                                                                                |       |                     |       |                        |       |
| Contingencies (see Note 9)                                                                                                                                                          |       |                     |       |                        |       |
|                                                                                                                                                                                |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                                          |       |                     |       |                        |       |
| Preferred stock, $0.001 par value; 10,000 shares authorized and no  shares issued and outstanding                                                                                   |       | —                   |       | —                      |       |
| Common stock, $0.001 par value; 250,000 shares authorized; 21,445  shares and 21,347 shares issued and outstanding at March 31, 2009 and  December 31, 2008, respectively |       | 21                       |       | 21                          |       |
| Additional paid-in capital                                                                                                                                                          |       | 81,894                   |       | 80,240                      |       |
| Deferred stock-based compensation                                                                                                                                                   |       | (8                       | )          | (19                         | )          |
| Retained earnings                                                                                                                                                                   |       | 11,796                   |       | 12,493                      |       |
| Accumulated other comprehensive income (loss)                                                                                                                                       |       | (23                      | )          | 169                         |       |
| Total stockholders’ equity                                                                                                                                                     |       | 93,680                   |       | 92,904                      |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                     |       | $                        | 97,579     |                        | $          | 97,364 |   |

 

See accompanying notes to condensed unaudited consolidated financialstatements.

 

3

----

Table ofContents

 

**TECHWELL, INC.**

**CONDENSEDUNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2009**                               | ** ** | **2008** | ** ** |
|                                                                    |       |                                   |       |   |   |
| Revenues                                                                |       | $                                      | 10,339     |   | $ | 15,607 |   |
| Cost of revenues                                                        |       | 4,101                                  |       | 6,061 |   |
| Gross profit                                                            |       | 6,238                                  |       | 9,546 |   |
| Operating expenses:                                                     |       |                                   |       |   |   |
| Research and development                                                |       | 4,314                                  |       | 3,549 |   |
| Selling, general and administrative                                     |       | 3,533                                  |       | 3,692 |   |
| Total operating expenses                                                |       | 7,847                                  |       | 7,241 |   |
| Income (loss) from operations                                           |       | (1,609                                 | )          | 2,305 |   |
| Interest income                                                         |       | 368                                    |       | 755 |   |
| Income (loss) before income taxes                                       |       | (1,241                                 | )          | 3,060 |   |
| Income tax provision (benefit)                                          |       | (544                                   | )          | 1,189 |   |
| Net income (loss)                                                       |       | $                                      | (697       | ) | $ | 1,871 |   |
|                                                                    |       |                                   |       |   |   |
| Net income (loss) per share:                                            |       |                                   |       |   |   |
| Basic                                                                   |       | $                                      | (0.03      | ) | $ | 0.09 |   |
| Diluted                                                                 |       | $                                      | (0.03      | ) | $ | 0.09 |   |
|                                                                    |       |                                   |       |   |   |
| Weighted average shares used in computing net income (loss) per  share: |       |                                   |       |   |   |
| Basic                                                                   |       | 21,383                                 |       | 20,926 |   |
| Diluted                                                                 |       | 21,383                                 |       | 21,821 |   |

 

See accompanying notes to condensed unaudited consolidated financialstatements.

 

4

----

Table ofContents

 

**TECHWELL, INC.**

**CONDENSEDUNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                           | ** ** | **March 31,**     | ** ** |
| ** **                                                                                           | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                                            |       |                   |       |   |   |
| Net income (loss)                                                                                    |       | $                      | (697       | ) | $ | 1,871 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  (used for) operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                                        |       | 182                    |       | 180 |   |
| Stock-based compensation                                                                             |       | 1,844                  |       | 1,457 |   |
| Tax benefit from employee equity incentive plan                                                      |       | 21                     |       | 6 |   |
| Put option loss                                                                                      |       | 304                    |       | — |   |
| Gain from trading securities                                                                         |       | (304                   | )          | — |   |
| Changes in assets and liabilities:                                                                   |       |                   |       |   |   |
| Accounts receivable                                                                                  |       | (1,012                 | )          | (66 | ) |
| Inventory                                                                                            |       | 521                    |       | (556 | ) |
| Prepaid expenses and other current assets                                                            |       | 128                    |       | (228 | ) |
| Other assets                                                                                         |       | 9                      |       | (14 | ) |
| Deferred income tax assets                                                                           |       | (936                   | )          | (59 | ) |
| Accounts payables                                                                                    |       | (234                   | )          | (495 | ) |
| Accrued liabilities                                                                                  |       | (311                   | )          | 972 |   |
| Deferred rent                                                                                        |       | (14                    | )          | (11 | ) |
| Net cash provided by (used for) operating activities                                                 |       | (499                   | )          | 3,057 |   |
|                                                                                                 |       |                   |       |   |   |
| **Cash flows from investing activities:**                                                            |       |                   |       |   |   |
| Purchase of property and equipment                                                                   |       | (57                    | )          | (168 | ) |
| Purchase of investments                                                                              |       | (10,634                | )          | (14,363 | ) |
| Proceeds from maturities of short-term investments                                                   |       | 5,345                  |       | 20,097 |   |
| Net cash provided by (used for) investing activities                                                 |       | (5,346                 | )          | 5,566 |   |
|                                                                                                 |       |                   |       |   |   |
| **Cash flows from financing activities:**                                                            |       |                   |       |   |   |
| Proceeds from exercise of stock options                                                              |       | 26                     |       | 102 |   |
| Repurchases of common stock upon release of stock awards                                             |       | (226                   | )          | — |   |
| Net cash provided by (used for) financing activities                                                 |       | (200                   | )          | 102 |   |
|                                                                                                 |       |                   |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                                 |       | (6,045                 | )          | 8,725 |   |
| Cash and cash equivalents at beginning of period                                                     |       | 44,485                 |       | 27,177 |   |
| Cash and cash equivalents at end of period                                                           |       | $                      | 38,440     |   | $ | 35,902 |   |
|                                                                                                 |       |                   |       |   |   |
| **Supplemental disclosure of non-cash investing  and financing activity:**                           |       |                   |       |   |   |
| Gross issuance of restricted stock awards                                                            |       | $                      | 1,348      |   | $ | 1,079 |   |

 

See accompanying notes to condensed unaudited consolidated financialstatements.

 

5

----

Table of Contents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Note 1—The Company and Basis of Presentation**

 

***The Company***

 

Techwell, Inc.(“Techwell” or the “Company”) was incorporated in California on March 7,1997 and reincorporated in Delaware on March 30, 2006. The Company is afabless semiconductor company that designs, markets and sells mixed signalintegrated circuits for two primary markets: security surveillance andautomotive infotainment.

 

TheCompany’s headquarters is located in San Jose, California.  The Company’s international offices includebranch offices in South Korea and Taiwan and subsidiaries in China and Japan.These offices provide marketing support to customers. The China and Japanoffices are also involved in product development.

 

***Basis ofPresentation***

 

Theaccompanying condensed unaudited consolidated financial statements of theCompany have been prepared without audit in accordance with the rules andregulations of the Securities and Exchange Commission. The consolidatedbalance sheet at December 31, 2008 has been derived from the auditedconsolidated financial statements as of and for the year then ended. Certaininformation and disclosures normally included in financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates of America have been condensed or omitted in accordance with these rules andregulations. The information in this report should be read in conjunction withthe Company’s consolidated financial statements and notes thereto included inits Annual Report on Form 10-K for the year ended December 31, 2008.

 

Inthe opinion of management, the accompanying condensed unaudited condensedconsolidated financial statements reflect all adjustments (consisting only ofnormal recurring adjustments) necessary to summarize fairly the Company’sfinancial position, results of operations and cash flows for the interimperiods presented. The operating results for the three months ended March 31,2009 are not necessarily indicative of the results that may be expected for theyear ended December 31, 2009 or for any other future period.

 

***Principlesof Consolidation***

 

Thecondensed unaudited consolidated financial statements include the accounts ofthe Company and its subsidiaries. All significant intercompany transactions andbalances have been eliminated in consolidation. The Company reports itsfinancial results on a calendar fiscal year.

 

***Use of Estimates***

 

Thepreparation of condensed unaudited consolidated financial statements inaccordance with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the condensed unaudited consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from these estimates.

 

***Certain Significant Risksand Uncertainties***

 

The Company operates in a dynamic high technologyindustry and changes in any of the following areas could have a materialadverse effect on the Company’s financial position and results of operations:unpredictable volume and timing of customer orders, which are not fixed bycontract; loss of one or more of its customers; decrease in the overall averageselling prices of its products; changes in the relative sales mix of itsproducts; changes in its cost of finished goods; the quality and timely serviceof third-party vendors that manufacture, assemble and test the Company’sproducts; the Company’s customers’ sales outlook, purchasing patterns andinventory adjustments based on demand and general economic conditions; productobsolescence and the Company’s ability to manage product transitions; theCompany’s ability to successfully develop, introduce and sell new or enhancedproducts in a timely manner; and the timing of new product announcements orintroductions by the Company or by its competitors.

 

6

----

Table ofContents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 

***Accumulated Other Comprehensive Loss***

 

Accumulatedother comprehensive loss consists of net unrealized losses onavailable-for-sale investments. The change in unrealized losses on investmentswas an increase of $0.2 million in both the three months ended March 31,2009 and 2008.

 

***Note 2—Stock-BasedCompensation***

 

TheCompany has equity incentive plans (“Plans”) under which it may grant stockoptions, restricted stock awards, stock units and stock appreciation rights toemployees, consultants and directors. At March 31, 2009, the total numberof shares available for issuance under the Plans was 2,423,007.  Stock options and awards granted under thePlans have a contractual term of up to ten years, generally vest over fouryears at the rate of 25 percent on the one-year anniversary of the vestingcommencement date and ratably each month thereafter and are exercisable underconditions determined by the Board of Directors or committee thereof as permissibleunder the terms of the Plans. At March 31, 2009, 5,834 shares exercisedprior to vesting are subject to repurchase by the Company.

 

Forthe three months ended March 31, 2009 and 2008, stock-based compensationexpense includes compensation cost related to estimated fair values of stockoptions and awards granted after the date of adoption of SFAS No. 123(revised 2004), *Share-Based Payment*, (“SFAS 123(R)”) and stock-based compensation costs related to unvested stock options atthe date of adoption based on the intrinsic values as previously recorded underAccounting Principles Board Opinion (“APB”) No. 25, *Accountingfor Stock Issued to Employees*, (“APB 25”).

 

Thefollowing table summarizes the distribution of stock-based compensation expense(in thousands):

 

| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Cost of revenues                    |       | $                                      | 122        |   | $ | 113 |   |
| Research and development            |       | 900                                    |       | 693 |   |
| Selling, general and administrative |       | 822                                    |       | 871 |   |
| Related tax-effect                  |       | (747                                   | )          | (598 | ) |
| Total costs and expenses            |       | $                                      | 1,097      |   | $ | 1,079 |   |

 

Totalcompensation cost attributable to activities capitalized into inventory was notsignificant in any period presented.

 

SFAS123(R) requires the cash flows resulting from the tax benefits for taxdeductions resulting from the exercise of stock options in excess of thecompensation expense recorded for those options (excess tax benefits) to beclassified as cash from financing activities.

 

***Note 3—Net Income (Loss) PerShare***

 

TheCompany calculates net income (loss) per share in accordance with SFAS No. 128,*Earnings Per Share,*(“SFAS 128”). UnderSFAS 128, basic net income (loss) per common share is calculated by dividingnet income (loss) by the weighted-average number of common shares outstandingduring the reporting period excluding shares subject to repurchase. Diluted netincome (loss) per common share reflects the effects of potentially dilutivesecurities, which consist of common stock options and restricted awards andshares subject to repurchase. A reconciliation of shares used in thecalculation of basic and diluted net income (loss) per share is as follows (inthousands):

 

7

----

Table ofContents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 
| ** **                                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Weighted average common shares outstanding                                                                    |       | 21,391                                 |       | 20,949 |   |
| Weighted average shares subject to repurchase                                                                 |       | (8                                     | )          | (23 | ) |
| Shares used to calculate basic net income (loss) per share                                                    |       | 21,383                                 |       | 20,926 |   |
| Effect of dilutive securities:                                                                                |       |                                   |       |   |   |
| Common stock options and restricted awards and unvested common shares  subject to repurchase or cancellations |       | —                                 |       | 895 |   |
| Dilutive potential common stock                                                                               |       | —                                 |       | 895 |   |
| Shares used to calculate diluted net income (loss) per share                                                  |       | 21,383                                 |       | 21,821 |   |

 

For thethree months ended March 31, 2009, 3.2 million shares associated withstock option and restricted awards outstanding and unvested shares subject torepurchase have been excluded from the weighted-average number of common sharesoutstanding for the diluted net loss per share computation as they areanti-dilutive

 

For thethree months ended March 31, 2008, 1.3 million outstanding stockoptions and restricted awards have been excluded from the weighted-averagenumber of common shares outstanding for the diluted net income per sharecomputation as they are anti-dilutive.

 

**Note 4—Income Taxes**

 

The Company accounts forincome taxes under the provisions of SFAS No. 109,*Accounting for Income Taxes,*(“SFAS 109”). In applying SFAS 109,the Company is required to estimate its current tax expense together withassessing temporary differences resulting from differing treatments of itemsfor tax and accounting purposes. These differences result in deferred taxassets and liabilities. Significant management judgment is required to assessthe likelihood that its deferred tax assets will be recovered from futuretaxable income. As of March 31, 2009, the Company’s total deferred taxassets were principally comprised of net operating loss carryforwards, researchand other credit carryforwards, stock-based compensation and expense accruals.

 

The Company adopted the provisions of FinancialAccounting Standards Board (“FASB”), Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”), on January 1,2007. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s consolidated financial statements in accordancewith SFAS 109.

 

The Company and its subsidiaries file income taxreturns in the U.S. federal jurisdiction, various states and foreignjurisdictions.  The Company has not been under the examination of U.S.federal, state or foreign jurisdictions tax authorities.

 

The Company’s effective taxrate is based on the estimated annual effective tax rate. The effective taxrate was 44% and 39% for the three months ended March 31, 2009 and 2008,respectively. In the three months ended March 31, 2009 and 2008 theeffective tax rate differed from the statutory federal income tax rateprimarily due to stock-based compensation, research and development credits andstate income taxes.

 

**Note 5—Financial Instruments**

 

TheCompany’s investments consist of corporate bonds, US government agencysecurities, commercial paper and auction rate securities (“ARS”). Investments,with the exception of ARS which are currently classified as trading, areconsidered available-for-sale. With the exception of ARS, they are all carriedat fair market value based on market quotes. The Company’s investment in ARSwas intended to provide liquidity via an auction process that resets theapplicable interest rate at predetermined calendar intervals, allowinginvestors to either roll over their holdings or gain immediate liquidity byselling such interests at par. During 2008, uncertainties in the credit marketsaffected all of the Company’s holdings in ARS investments and auctions for theCompany’s investments in these securities failed to settle on their respectivesettlement dates. Consequently, the investments are not currently liquid andthe Company will not be able to access these funds until a future auction ofthese investments is successful or a buyer is found outside of the auctionprocess. All of the ARS investments were investment grade quality and were incompliance with the Company’s investment policy at the time of acquisition.

 

8

----

Table ofContents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 

Duringthe fourth quarter of 2008, the Company entered into an agreement with one ofits investment providers, which currently holds its ARS and from whom it hadpurchased the ARS, to sell, at the Company’s discretion, at par value all ofthe ARS the Company currently holds back to the investment provider at anytimestarting in June 2010. The rights granted under the agreement represent afirm agreement in accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities* (“SFAS 133”),which defines a firm agreement as an agreement with an unrelated party, bindingon both parties and usually legally enforceable, with the followingcharacteristics: a) the agreement specifies all significant terms, includingthe quantity to be exchanged, the fixed price and the time of transaction andb) the agreement includes a disincentive for nonperformance that issufficiently large to make performance probable. The enforceability of theagreement results in a put option and should be recognized as a free standingasset separate from the ARS. The put option does not meet the definition of aderivative instrument under SFAS 133. Therefore, the Company has elected tomeasure the put option at fair value under SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities —including an Amendment of FASB Statement No. 115, (“*SFAS 159”),which permits an entity to elect the fair value option for recognized financialassets. As a result, realized gains and losses will be included in earnings inthe period in which they arise.

 

In connection with the acceptance of theoffer, the Company recorded $1.0 million as the fair value of the put optionasset with a corresponding gain to interest income. Additionally, the Companytransferred its ARS from investments classified as available-for-sale totrading. The transfer to trading reflects the Company’s intent to exercise theput option, whereas, prior to the agreement, the Company’s intent was to holdthe ARS until the market recovered. Upon transfer to trading, the Companyrecognized a loss of $1.0 million, included in interest income, for the amountof unrealized loss not previously recognized in earnings. As a result of thistransfer unrealized gains or losses will be included in earnings in futureperiods, and the Company anticipates future changes in fair value of the putoption will approximate the fair value movement of the related ARS. The netimpact of the change in fair value of the ARS and related put option to theCompany’s operating results was nil for the three months ended March 31,2009.

 

As of March 31, 2009, the entire ARSinvestment balance of $6.3 million is classified as long-term investments onthe condensed unaudited consolidated balance sheet because the sale of the ARSback to the investment provider is expected to occur in June 2010.

 

Typically the fair value of ARS investmentsapproximates par value due to the frequent resets through the auction process.While the Company continues to earn interest on its ARS investments at themaximum contractual rate, these investments are not currently trading andtherefore do not currently have a readily determinable market value.Accordingly, the estimated fair value of ARS no longer approximates par value.

 

The Company has used a discounted cash flowmodel to determine the estimated fair value of its investment in ARS as of March 31,2009. The assumptions used in preparing the discounted cash flow model includeestimates for interest rates, estimates for discount rates using yields ofcomparable traded instruments adjusted for illiquidity and other risk factors,amount of cash flows and expected holding periods of the ARS. These inputsreflect the Company’s own assumptions about the assumptions market participantswould use in pricing the ARS, including assumptions about risk, developed basedon the best information available in the circumstances.

 

The put option is a free standing assetseparate from the ARS, and represents the Company’s contractual right torequire its investment provider to purchase the ARS at par at anytime startingin June 2010. The Company values the put option based on the intrinsicvalue, time value of money and the Company’s assessment of the creditworthiness of its investment provider.

 

9

----

Table ofContents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 

EffectiveJanuary 1, 2008, the Company adopted the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 157, *Fair Value**Measurement*, (“SFAS 157”), which definesfair value. In accordance with SFAS 157, the table below represents the fairvalue hierarchy of the Company’s financial instruments measured at fair valueas of March 31, 2009 (in thousands):

** **
| ** **                 | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|----------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Money market funds         |       | $         | 34,210     |        | $          | 34,210      |       | $           | —     |   | $ | — |   |
| Corporate bonds            |       | 24,872    |       | 24,872      |       | —      |       | —      |       |
| Mortgage-backed securities |       | 9,103     |       | 9,103       |       | —      |       | —      |       |
| Commercial paper           |       | 2,055     |       | 2,055       |       | —      |       | —      |       |
| Put option                 |       | 797       |       | —      |       | —      |       | 797         |       |
| Auction rate securities    |       | 6,303     |       | —      |       | —      |       | 6,303       |       |
| Total                      |       | $         | 77,340     |        | $          | 70,240      |       | $           | —     |   | $ | 7,100 |   |
| Amount included in:        |       |      |       |        |       |        |       |        |       |
| Cash and cash equivalents  |       | $         | 34,210     |        | $          | 34,210      |       | $           | —     |   | $ | — |   |
| Short-term investments     |       | 20,957    |       | 20,957      |       | —      |       | —      |       |
| Long-term investments      |       | 21,376    |       | 15,073      |       | —      |       | 6,303       |       |
| Other assets               |       | 797       |       | —      |       | —      |       | 797         |       |
| Total                      |       | $         | 77,340     |        | $          | 70,240      |       | $           | —     |   | $ | 7,100 |   |

 

Thefollowing table provides a reconciliation of the beginning and ending balancesfor the assets measured at fair value using significant unobservable inputs(Level 3) (in thousands):

 
| ** **                                      | ** ** | **Put Option** | ** ** | **Auction Rate  Securities** | ** ** |
|-------------------------------------------------|------------|----------------|------------|------------------------------|------------|
| Beginning balances as of December 31, 2008 |       | $              | 1,101      |                         | $          | 5,999 |   |
| Unrealized gains (losses) included in earnings  |       | (304           | )          | 304                          |       |
| Ending balances as of March 31, 2009       |       | $              | 797        |                         | $          | 6,303 |   |

 

**Note 6—Details of Certain Balance Sheet Components**

 
| ** **                                | ** ** | **March 31,  2009** | ** **  | **December 31,  2008** | ** ** |
|-------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| ** **                                | ** ** | **(in thousands)**       | ** **  |
| Inventory:                                |       |                     |        |                        |       |
| Finished goods                            |       | $                        | 2,318       |                        | $          | 2,750 |   |
| Work-in-process                           |       | 1,941                    |        | 2,030                       |       |
|                                      |       | $                        |  4,259 |                        | $          | 4,780 |   |
|                                      |       |                     |        |                        |       |
| Property and equipment, net:              |       |                     |        |                        |       |
| Equipment                                 |       | $                        | 1,907       |                        | $          | 1,888 |   |
| Software                                  |       | 804                      |        | 779                         |       |
| Furniture and fixtures                    |       | 309                      |        | 308                         |       |
| Leasehold improvements                    |       | 464                      |        | 454                         |       |
|                                      |       | 3,484                    |        | 3,429                       |       |
| Accumulated depreciation and amortization |       | (2,321                   | )           | (2,139                      | )          |
|                                      |       | $                        |  1,163 |                        | $          | 1,290 |   |
|                                      |       |                     |        |                        |       |
| Accrued liabilities:                      |       |                     |        |                        |       |
| Accrued compensation                      |       | $                        | 722         |                        | $          | 1,168 |   |
| Accrued inventory purchases               |       | 118                      |        | 104                         |       |
| Legal and professional service fees       |       | 136                      |        | 320                         |       |
| Other                                     |       | 830                      |        | 525                         |       |
|                                      |       | $                        |  1,806 |                        | $          | 2,117 |   |

 

10

----

Table ofContents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 

**Note 7—Segment Information**

 

TheCompany currently operates in one reportable segment, the designing, marketingand selling of mixed signal integrated circuits for multiple video applicationsprimarily for the security surveillance and automotive infotainment markets.The Company’s chief operating decision maker is the Chief Executive Officer.

 

Thepercentage of total revenues by geographic location is as follows:

** **
| ** **     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| China          |       | 47                                     | %          | 28 | % |
| Taiwan         |       | 15                                     |       | 34 |   |
| South Korea    |       | 26                                     |       | 30 |   |
| Japan          |       | 8                                      |       | 6 |   |
| United States  |       | 2                                      |       | 1 |   |
| Other          |       | 2                                      |       | 1 |   |
| Total revenues |       | 100                                    | %          | 100 | % |

 

Revenuesby product line are as follows (in thousands):

 
| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Security surveillance   |       | $                                      | 7,489      |   | $ | 11,609 |   |
| Automotive infotainment |       | 1,687                                  |       | 1,697 |   |
| Consumer                |       | 1,156                                  |       | 2,112 |   |
| Other (1)               |       | 7                                      |       | 189 |   |
| Total revenues          |       | $                                      | 10,339     |   | $ | 15,607 |   |

 

----

(1) Consists of contract development projects, earlygeneration mixed signal semiconductors for digital video applications and PCIvideo decoder products.

 

Therevenues and accounts receivable from customers representing 10% or more oftotal revenues and accounts receivable are as follows:

 
| ** **   | ** ** | ** **                  | ** ** | **Revenues**            | ** ** |
|--------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **   | ** ** | **Accounts  Receivable at** | ** ** | **Three  months ended** | ** ** |
| ** **   | ** ** | **March 31,**          | ** ** | **December 31,**   | ** ** | **March 31,** | ** ** |
| **Customer** | ** ** | **2009**                    | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| A            |       | 16                          | %          | 21                      | %          | 36 | % | 27 | % |
| B            |       | 14                          |       | *                       |       | * |   | * |   |
| C            |       | 13                          |       | 11                      |       | * |   | * |   |
| D            |       | 12                          |       | 20                      |       | * |   | * |   |
| E            |       | *                           |       | *                       |       | * |   | 13 |   |

 

----

*                 less than10%

 

Thefollowing is a summary of long-lived assets by geographic region (inthousands):

 
| ** **    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------|------------|--------------------------|------------|-----------------------------|------------|
| United States |       | $                        | 958        |                        | $          | 1,069 |   |
| Taiwan        |       | 68                       |       | 79                          |       |
| South Korea   |       | 8                        |       | 9                           |       |
| China         |       | 81                       |       | 73                          |       |
| Japan         |       | 48                       |       | 60                          |       |
| Total         |       | $                        | 1,163      |                        | $          | 1,290 |   |

 

11

----

Table ofContents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 

***Note 8—Related Party Transactions***

 

Oneof the Company’s Board members is a partner in a law firm that providesservices to the Company. The Company incurred fees of $7,000 and $9,000 fromthis law firm for legal services in the three months ended March 31, 2009and 2008, respectively. The amount payable to this law firm was $4,000 and$8,000 at March 31, 2009 and December 31, 2008, respectively.

* *

***Note 9—Contingencies***

* *

***Indemnification Obligations***

* *

Subjectto certain limitations, the Company is obligated to indemnify its current andformer directors, officers and employees in connection with governmentinquiries and litigation.  Theseobligations arise under the terms of the Company’s certificate ofincorporation, its bylaws, applicable contracts, and Delaware and Californialaw.  The obligation to indemnifygenerally means that the Company is required to pay or reimburse theindividuals’ reasonable legal expenses and possibly damages and otherliabilities incurred in connection with these matters.  Additionally, the Company has certainindemnification obligations to customers under its contract developmentprojects with respect to any infringement of third-party patents andintellectual property rights by its products.

* *

***Other Legal Matters***

 

TheCompany is named from time to time as a party to lawsuits in the normal courseof its business. Litigation in general and intellectual property and securitieslitigation in particular, can be expensive and disruptive to normal businessoperations.  Moreover, the results of legal proceedings are difficult topredict.

 

***Note 10—Recent AccountingPronouncements***

 

EffectiveJanuary 1, 2008, the Company adopted SFAS 157 with respect to itsfinancial assets and liabilities. In February 2008, FASB issued FASB StaffPosition (“FSP”) No. SFAS 157-2, *Effective Date of FASBStatement No. 157*, which provided a one year deferral of theeffective date of SFAS 157 for non-financial assets and non-financialliabilities, except those that are recognized or disclosed in the financialstatements at fair value at least annually. The Company adopted the provisionsof SFAS 157 for non-financial assets and non-financial liabilities effective January 1,2009. The adoption of SFAS 157 for non-financial assets and non-financialliabilities did not have an impact on the consolidated financial position,results of operations or cash flows.

 

In December 2007, FASB issued SFAS No. 141(R),*Business Combinations*, (“SFAS 141(R)”).SFAS 141(R) establishes principles and requirements for how anacquirer recognizes and measures in its consolidated financial statements theidentifiable assets acquired, the liabilities assumed, contractualcontingencies and contingent consideration at their fair value on theacquisition date, any controlling interest in the acquiree and the goodwillacquired. SFAS 141(R) also establishes disclosure requirements to enablethe evaluation of the nature and financial effects of the business combination.SFAS 141(R) is effective for fiscal years beginning after December 15,2008. The Company will apply the provisions of SFAS 141(R) to anyacquisitions occurring subsequent to January 1, 2009.

 

In April 2009 the FASB issued FSP No. SFAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies*,(“FSP 141(R)-1”). FSP 141(R)-1 amends the provisions in SFAS 141(R) forthe initial recognition and measurement, subsequent measurement and accounting,and disclosures for assets and liabilities arising from contingencies inbusiness combinations. FSP 141(R)-1 eliminates the distinction betweencontractual and non-contractual contingencies, including the initialrecognition and measurement criteria in SFAS 141(R) and instead carriesforward most of the provisions in SFAS No. 141 for acquired contingencies.FSP 141(R)-1 is effective for contingent assets and contingent liabilitiesacquired in business combinations for which the acquisition date is on or afterthe beginning of the first annual reporting period beginning on or after December 15,2008. The Company will assess the impact of FSP 141(R)-1 at the time of anysuch acquisition.

 

12

----

Table ofContents

 

**TECHWELL, INC.**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 

In April 2009 the FASB issued threerelated FSPs: (i) FSP No. SFAS 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or Liabilityhave Significantly Decreased and Identifying Transactions That Are Not Orderly*,(“FSP 157-4”), (ii) FSP No. SFAS 115-2 and FSP No. SFAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments*,(“FSP 115-2 and FSP 124-2”), and (iii) FSP No. SFAS 107-1 and APB No. 28-1,*Interim Disclosures about Fair Value of FinancialInstruments*, (“FSP 107-1 and APB 28-1”), which will be effective forinterim and annual periods ending after June 15, 2009. FSP 157-4 providesguidance on how to determine the fair value of assets and liabilities underSFAS 157 in the current economic environment and reemphasizes that theobjective of a fair value measurement remains an exit price. FSP 115-2 and FSP124-2 modifies the requirements for recognizing other-than-temporarily impaireddebt securities and revises the existing impairment model for such securities,by modifying the current intent and ability indicator in determining whether adebt security is other-than-temporarily impaired. FSP 107-1 and APB 28-1enhances the disclosure of instruments under the scope of SFAS 157 for bothinterim and annual periods. The Company is currently evaluating the impact that theseFSPs will have on the consolidated financial position, results of operations orcash flows.

 

13

----

Table ofContents

 

**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*The following discussion of our financial condition andresults of operations should be read in conjunction with the condensedunaudited consolidated financial statements and notes to those statementsincluded elsewhere in this Quarterly Report on Form 10-Q for the threemonths ended March 31, 2009 and our audited consolidated financialstatements for the year ended December 31, 2008 included in our AnnualReport on Form 10-K.*

 

*This Quarterly Report on Form 10-Q containsforward-looking statements that involve risks and uncertainties. Thesestatements relate to future periods, future events or our future operating orfinancial plans or performance. These statements can often be identifiedby the use of forward-looking terminology such as “expects,” “believes,”“intends,” “anticipates,” “estimates,” “plans,” “may,” or “will,” or thenegative of these terms, and other similar expressions. Theseforward-looking statements include statements as to the source of our revenues,our ability to generate revenues, our ability to sustain our growth rate andreturn to profitability, expected growth in our target markets andapplication-specific products, our expectation regarding the increase incertain expenses, our cash needs, our capital requirements, our market risksensitivity, our business and product strategies, our anticipated tax rate,industry trends and our anticipation that developments in our technologies andnew products will increase our target market share.*

 

*These forward-looking statements reflect our current viewswith respect to future events, are based on assumptions and are subject torisks and uncertainties. These risks and uncertainties could cause actualresults to differ materially from those projected and include, but are notlimited to, fluctuations in our revenue and operating results, our ability toreturn to profitability, the demand for our products in our target markets, ourability to compete, our dependence on key and highly skilled personnel, theability to develop new products and to enhance our existing products, thecontinued seasonality of our business due to our target markets and location ofour customers, our ability to integrate businesses that we may acquire, ourability to estimate and predict customer demand,**economic volatility in either domestic or foreign markets, the impactof any change in United States federal income tax laws and the loss of anybeneficial tax treatment that we currently enjoy, our reliance on independentfoundries and subcontractors for the manufacture, assembly and testing of ourproducts, the length of our sales cycle and reliance on distributors, ourability to protect our intellectual property, the cyclical nature of thesemiconductor industry, our ability to raise capital, the potential volatilityof our stock, the outcome of future litigation and the other risks set forthunder PART II — OTHER INFORMATION, Item 1A. “Risk Factors.” Given theserisks and uncertainties, you should not place undue reliance on theseforward-looking statements. Except as required by federal securities laws,we undertake no obligation to update any forward-looking statements for anyreason, even if new information becomes available or other events occur in thefuture.*

 

*In this report all references to “Techwell,” “we,” “us” or“our” mean Techwell, Inc.*

 

*Techwell is our registered trademark. We also refer totrademarks of other corporations and organizations in this Form 10-Q.*

 

***Overview***

 

Weare a fabless semiconductor company that designs, markets and sells mixedsignal integrated circuits for two primary markets: security surveillance andautomotive infotainment. We design application-specific products for our twoprimary markets that enable the conversion of analog video signals to digitalform and perform advanced digital video processing to facilitate the display,storage and transport of video content. We believe this application specificproduct strategy allows us to better address varying customer requirements,fully leverage our technology capabilities and achieve greater share within ourtwo core markets. To a lesser extent, we market and sell video decoders to theconsumer market. Our semiconductors are based on our proprietary architectureand mixed signal technologies that we believe provide high video quality undera wide range of signal conditions, enable high levels of integration and arecost-effective.

 

Wecommenced operations in 1997. From 1997 to 1999, we were primarily involved indeveloping our technology. We shipped our first generation video decoder in1999. Since 1999, our business has experienced significant growth primarily asa result of our ability to develop new products, obtain design wins and convertthese design wins into revenues. We generated revenues from the sale of over 25different products in the quarter ended March 31, 2009.

 

14

----

Table ofContents

 

Wehave three principal semiconductor product lines: security surveillanceproducts, automotive infotainment products and consumer products. Our securitysurveillance products integrate important functions required to display, storeand transport analog video signals from security surveillance cameras. Forexample, we integrate multiple video decoders into a single semiconductor. As aresult, this semiconductor is able to receive and decode analog video signalsfrom multiple cameras into a standard digital format. In addition, we integratea multiplexor, a key technology required to combine multiple video signals intoa single video signal, and a display processor, a key technology required todisplay multiple video channels. In 2007, we introduced our first integratedsecurity surveillance product, which integrated four video decoders and asystem controller and a multiplexor on a single semiconductor. In December 2008,we introduced a new security surveillance product which includes a 16 channelmultiplexer and supports the display of multiple standard definition and highdefinition video sources. We currently sell our security surveillance productsto customers for the following applications: embedded digital video recorders,or DVRs, PC-based DVRs, networked video recorders, or NVRs, and multiplexers.

 

Ourautomotive infotainment products integrate important functions required todisplay popular analog video, high definition video and PC graphics signals ona LCD display. These key functions include a video decoder, deinterlacer andscaler. In addition, our newer generation automotive infotainment productsintegrate a timing controller to interface directly with certain types of LCDdisplays and image enhancement functionality to improve overall video quality.In January 2008, we announced the introduction of five new LCD displayprocessors designed for the automotive end market. These new products aredesigned to provide advanced image processing, an integrated programmabletiming controller and multiple analog and digital video inputs.

 

Ourconsumer products are high performance mixed signal semiconductors that decodeanalog TV broadcast signals, including NTSC, PAL and SECAM, and popular analogvideo signals, including composite, S-Video, component and SCART, into astandard digital format. Our consumer products integrate proprietary syncprocessing, color demodulating and digital 2D and 3D comb filtering, which arethe key technologies required for high performance video decoding. We offer abroad range of consumer products at various price points and with varyingfeatures. We have developed our video decoder products for applications withinthe consumer markets such as advanced TV, multifunction LCD monitor, DVDrecorder and camcorders. In the future, however, we intend to focus ourdevelopment efforts specifically on applications for the security surveillanceand automotive infotainment markets and as a result, we anticipate our consumerrevenues will decline over the next several quarters.

 

Ourother products include early generation mixed signal semiconductors for digitalvideo applications and PCI video decoder products, which are video decodersthat utilize peripheral component interconnect, or PCI, technology for personalcomputer applications.

 

Althoughour revenues have grown rapidly in a short period of time, we do not expect toachieve similar growth rates in the future. For example, our revenues for thethree months ended March 31, 2009 were $10.3 million, a decline of $6.2million from the prior quarter. We currently expect to increase our expenselevels in each of the next several quarters to support increased research anddevelopment efforts. These expenditures may not result in increased revenue orprofitability in the future. In addition, our ability to increase our revenueswill depend on increased demand for digital video applications in the securitysurveillance and automotive infotainment markets. The growth of our targetmarkets is uncertain. In addition, the timing of orders by and shipments to ourcustomers, as well as general trends in our target markets, can cause ourrevenue growth to be inconsistent.

 

Weundertake significant product development efforts well in advance of aproduct’s release, and in advance of receiving purchase orders from ourcustomers. Our product development efforts, which are focused on developing newdesigns with broad demand and potential for future derivative products,typically take from six months to 24 months until production begins, dependingon the product’s complexity. If we secure a design win, the system designer islikely to continue to use the same or enhanced versions of our product across anumber of their models, which tends to extend the life cycles of our products.Conversely, if a competitor secures the design win, it may be difficult for usto sell into the customer’s application for an extended period. Our sales cycletypically ranges from six to 24 months. Due to the length of our productdevelopment and sales cycle, the majority of our revenues for any period isgenerally weighted toward products introduced for sale, meaning products forwhich we commenced placing orders with our manufacturing subcontractors, in theprior one or two years. As a result, our present revenues are not necessarilyrepresentative of future sales because our future sales are likely to becomprised of a different mix of products, some of which are now in the developmentstage.

 

15

----

Table ofContents

 

Asa fabless semiconductor company, we outsource all of our manufacturing,assembly and test functions to third-party vendors primarily located in Taiwan.This business model enables us to reduce our capital expenditures and fixedcosts, while focusing our engineering and design resources on our corestrength, the design of mixed signal semiconductors for digital videoapplications.

 

Wesell our products to distributors that fulfill third-party orders for ourproducts. We also sell directly, using independent sales representatives, tooriginal equipment manufacturers, or OEMs, and to original designmanufacturers, or ODMs. For the three months ended March 31, 2009, wederived 81% of our revenues from products sold to distributors and 19% fromproducts sold to OEMs or ODMs. For the year ended December 31, 2008,we derived 79% of our revenues from products sold to distributors and 21% fromproducts sold to OEMs or ODMs.  Our gross margins have not historicallybeen significantly different between sales to distributors and sales to OEMs orODMs through orders procured by independent sales representatives. However, ouroperating profit on sales through orders procured by independent salesrepresentatives can be less due to the payment of commissions to salesrepresentatives which we record as sales and marketing expense.

 

Wereceived an aggregate of 74% and 79% of our revenues from our ten largestcustomers for the three months ended March 31, 2009 and 2008,respectively. For the three months ended March 31, 2009, LacewoodInternational Corporation, or Lacewood, a distributor, accounted for 36% of ourrevenues. For the three months ended March 31, 2008, Lacewood and AV TechCorporation accounted for 27% and 13% of our revenues, respectively.

 

Wederive substantially all of our revenues from sales to foreign customers,particularly in Asia, which sales accounted for 96% and 98% of our revenues forthe three months ended March 31, 2009 and 2008, respectively. The tablebelow indicates the percentage of total revenues by geographic location for theperiods indicated:

 
| ** **     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| China          |       | 47                                     | %          | 28 | % |
| Taiwan         |       | 15                                     |       | 34 |   |
| South Korea    |       | 26                                     |       | 30 |   |
| Japan          |       | 8                                      |       | 6 |   |
| United States  |       | 2                                      |       | 1 |   |
| Other          |       | 2                                      |       | 1 |   |
| Total revenues |       | 100                                    | %          | 100 | % |

 

Wereceived 47% and 28% of our revenues from China in the three months ended March 31,2009 and 2008, respectively.  Theincrease was primarily due to an increase in revenues from our securitysurveillance market, whose products were primarily sold to customers in China.We received 15% and 34% of our revenues from Taiwan in the three months ended March 31,2009 and 2008, respectively.  Thedecrease was primarily due to a decline in revenues from consumer markets,whose products were primarily sold to customers in Taiwan.

 

Webelieve that a substantial majority of our revenues will continue to come fromcustomers located in Asia, where most of the electronic devices that use oursemiconductors are manufactured. As a result of this regional customerconcentration, we may be subject to environmental, economic, cultural andpolitical events as well as other developments that impact our customers inAsia. All of our sales currently are denominated in U.S. dollars. Therefore, anincrease in the value of the U.S. dollar relative to foreign currencies couldmake our products less competitive in international markets. Substantially allof our cost of revenues and a majority of our operating expenses are alsodenominated in U.S. dollars. As a result, we believe that our overall exposureto foreign exchange risk is low.

 

16

----

Table of Contents

 

Wehave two international subsidiaries, one in Japan and one in China. We alsohave two international branches, one in South Korea and one in Taiwan. At March 31,2009, 61 of our 159 employees were located in our international subsidiariesand branch offices. Our China and Japan subsidiaries are involved in bothproduct development and technical marketing support. Our Taiwan and Koreabranches primarily provide marketing support.

 

Itis difficult for us to forecast the demand for our products, in part because ofthe highly complex supply chain between us and the end markets that incorporateour products. Demand for new features changes rapidly. Distributors and ODMsadd an additional layer of complexity. We must, therefore, forecast demand notonly from our direct customers, but also from other participants in thismulti-level distribution channel. Because of our lengthy product developmentcycle, it is critical for us to anticipate changes in demand for our variousproduct features and the applications they serve, to allow sufficient time forproduct design. Our failure to accurately forecast demand can lead to productshortages that can impede production by our customers and harm our relationshipwith these customers. Conversely, our failure to forecast declining demand orshifts in product mix can result in excess or obsolete inventory.

 

Generally,the average selling price of our products will decline over the life of the product.Our experience to date is that the decline has not had a material effect on ourgross margins, as price reductions have been mitigated by lower per unit costsassociated with both high unit volume and the transition of our products tosmaller process geometries.

 

Weexpect our revenues to be lower in the first calendar quarter of each year. Themost significant factor for this decline is because most of our semiconductorsare sold to customers located in Asia, primarily to customers located in regionswho observe the Lunar New Year holiday. Typically, our customers’ offices areclosed for a week or more during the extended holiday period, which negativelyimpacts our business during the first calendar quarter of the year. As a resultof seasonality associated with our customer concentration in Asia, we expectour revenues to be lower in the first calendar quarter of each year.

 

***Critical Accounting Policies***

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our condensed unaudited consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these condensed unaudited consolidatedfinancial statements requires us to make estimates and judgments that affectthe reported amount of assets, liabilities, revenues and expenses and relateddisclosure of contingent assets and liabilities. We evaluate our estimates onan on-going basis, including those related to inventory valuations, valuationof investments, income taxes and stock-based compensation. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making the judgments we make about the carrying values of assets andliabilities that are not readily apparent from other sources. Because theseestimates can vary depending on the situation, actual results may differ fromthe estimates.

 

Webelieve the following critical accounting policies affect our more significantjudgments used in the preparation of our condensed unaudited consolidatedfinancial statements.

 

*Revenue Recognition.  *Revenuesfrom product sales are recognized upon shipment, provided that title and riskof loss has passed to the customer, persuasive evidence of an arrangementexists, the price is fixed or determinable and collectibility is probable. Wedo not allow for price protection or stock rotation rights with any of ourdistributors. If we change our practice and allow stock rotation or priceprotection in the future, we would have to evaluate the consequences on thetiming of our revenue recognition, which could lead to the deferral of therevenues subject to such uncertainties unless reasonable estimates can be madeat the time of shipment.

 

17

----

Table of Contents

 

*Fair Value Measurements. *Effective January 1,2008, we adopted the provisions of Statement of Financial Accounting Standards,or SFAS, No. 157,*Fair ValueMeasurements*, or SFAS 157, which defines fair value, establishes aframework for measuring fair value and expands disclosures about fair value measurementsrequired under other accounting pronouncements. SFAS 157 clarifies that fair value is an exit price, representing theamount that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants. SFAS 157 alsorequires that a fair value measurement reflect the assumptions marketparticipants would use in pricing an asset or liability based on the bestinformation available. Assumptions include the risks inherent in a particularvaluation technique (such as a pricing model) and/or the risks inherent in theinputs to the model. Refer to Note 2 to our consolidated financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2008 for the fair value hierarchy, and Note 5 to our condensed unauditedconsolidated financial statements included in this Quarterly Report on Form10-Q for inputs to valuation techniques and fair value measurements offinancial assets carried at fair value.

 

*Inventory Valuation.  * Inventory is valued at the lower of cost or market, computed on afirst-in, first-out basis. We evaluate inventory for excess and obsolescenceand write-down units that are unlikely to be sold based upon a six month demandforecast. This evaluation may take into account matters including expecteddemand, anticipated sales price, product obsolescence and other factors. Ifactual future demand for our products is less than currently forecasted,additional inventory write-downs may be required. Once inventory costs arewritten down, such revised costs are maintained until the product is sold orscrapped. If a unit that has been written down is subsequently sold, the costassociated with the revenue from this unit is reduced to the extent of thewrite-down, resulting in an increase in gross profit.

 

*Accounting for Income Taxes.  *Weaccount for income taxes under the provisions of SFAS No. 109, *Accounting for Income Taxes*, or SFAS 109.In applying SFAS 109, we are required to estimate our current tax expensetogether with assessing temporary differences resulting from differingtreatments of items for tax and accounting purposes. These differences resultin deferred tax assets and liabilities. We must assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and to theextent we believe that recovery is not likely, we must establish a valuationallowance. Significant management judgment is required to assess the likelihoodthat our deferred tax assets will be recovered from future taxable income. At March 31,2009, our total deferred tax assets were principally comprised of research andother credit carryforwards, stock-based compensation and expense accruals.

 

As required under the provisions of SFAS 109,we assess the recoverability of our deferred tax assets. To assess thelikelihood that the deferred tax assets will be recovered from taxable income,we applied the guidance provided in SFAS 109 and considered both positiveevidence that indicates a valuation allowance is not needed and negativeevidence that indicates a valuation allowance is needed. As of March 31,2009, we believe that our predictable strong earnings provide ample evidencethat no valuation allowance is required at this time as it ismore likely than not the deferred tax assets will be realized in the future.

 

We file income tax returns in the U.S.federal jurisdiction, various states and foreign jurisdictions. We have notbeen under the examination of U.S. federal, state or other foreignjurisdictions tax authorities.

 

*Stock-Based Compensation.  * For the three months ended March 31,2009 and 2008, stock-based compensation expense includes compensation costsrelated to estimated fair values of stock options and awards granted after thedate of adoption of SFAS No. 123 (revised 2004), *Share-BasedPayment*, or SFAS 123(R), and compensation costs related tounvested stock options at the date of adoption based on the intrinsic values aspreviously recorded under Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, or APB 25.

 

Foroptions granted after January 1, 2006, and valued in accordance with SFAS No. 123(R),we use the straight-line method for expense attribution. For options grantedprior to January 1, 2006, we use the multiple grant approach for expenseattribution, which results in substantially higher amounts of amortization inearlier years as opposed to the straight-line method, which results in equalamortization over the vesting period of the options.

 

Thefair value of options granted after January 1, 2006 is estimated on thegrant date using the Black-Scholes option valuation model. The expected termassumption calculation was based on historical data as suggested by StaffAccounting Bulletin No. 107 adjusted for any changes in futureexpectations. We relied exclusively on historical volatility in the expectedvolatility assumption calculation since we do not have any publicly tradedoptions. The risk-free rate is based on the U.S. Treasury yield curve in effectat the time of grant for periods corresponding with the expected term of theoption and the estimated forfeiture rate is based on our historical forfeitureexperience.

 

18

----

Table of Contents

 

The following assumptions are used to valuestock options granted in the periods presented:

 
| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Expected term (years)   |       | 4.34                                   |       | 4.28 |   |
| Risk-free interest rate |       | 1.52                                   | %          | 2.57 | % |
| Expected volatility     |       | 54.00                                  | %          | 64.00 | % |
| Expected dividend       |       | —                                 |       | — |   |

 

Stock-based compensation expense forrestricted stock awards is determined using the fair value of our stock on thedate of the grant and is recognized on a straight-line basis over the serviceperiod.

 

Stock-based compensation expense is allocatedamong cost of revenues, research and development expenses and selling, generaland administrative expenses, respectively, based upon the employee’s jobfunction. We expect to continue to recognize substantial amounts of stock-basedcompensation expense relating to our employee stock options and awards infuture periods.

 

**Results of Operations**

 

The following table isderived from our selected financial data and sets forth our historicaloperating results as a percentage of revenues:

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Revenues                             |       | 100.0                                  | %          | 100.0 | % |
| Cost of revenues*                    |       | 39.7                                   |       | 38.8 |   |
| Gross profit                         |       | 60.3                                   |       | 61.2 |   |
| Operating expenses:                  |       |                                   |       |   |   |
| Research and development*            |       | 41.7                                   |       | 22.7 |   |
| Selling, general and administrative* |       | 34.2                                   |       | 23.7 |   |
| Total operating expenses             |       | 75.9                                   |       | 46.4 |   |
| Income (loss) from operations        |       | (15.6                                  | )          | 14.8 |   |
| Interest income                      |       | 3.6                                    |       | 4.8 |   |
| Income (loss) before income taxes    |       | (12.0                                  | )          | 19.6 |   |
| Income tax provision (benefit)       |       | (5.3                                   | )          | 7.6 |   |
| Net income (loss)                    |       | (6.7                                   | )%         | 12.0 | % |

 

----

* Percentages includestock-based compensation

 

The following tableindicates the percentage of stock-based compensation attributed to each item asa percentage of revenues:

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Cost of revenues                    |       | 1.2                                    | %          | 0.7 | % |
| Research and development            |       | 8.7                                    |       | 4.4 |   |
| Selling, general and administrative |       | 8.0                                    |       | 5.6 |   |

 

19

----

Table of Contents

 

Revenues by product line are as follows (inthousands):

 
| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Security surveillance   |       | $                                      | 7,489      |   | $ | 11,609 |   |
| Automotive infotainment |       | 1,687                                  |       | 1,697 |   |
| Consumer                |       | 1,156                                  |       | 2,112 |   |
| Other (1)               |       | 7                                      |       | 189 |   |
| Total revenues          |       | $                                      | 10,339     |   | $ | 15,607 |   |

 

----

(1) Consists of contract development projects, earlygeneration mixed signal semiconductors for digital video applications and PCIvideo decoder products.

 

**Comparisons of the Three Months Ended March 31, 2009 andMarch 31, 2008**

* *

*Revenues.*   Our revenuesconsist of sales of our mixed signal integrated circuits for digital videoapplications. We have three principal product lines: security surveillance,automotive infotainment and consumer. All of our sales are denominated in U.S.dollars.

 

Revenues were $10.3million for the three months ended March 31, 2009 and $15.6 million forthe three months ended March 31, 2008, a decrease of 34% due to decreaseddemand primarily as a result of current economic conditions.  Revenues from our security surveillanceproducts decreased $4.1 million, or 35%, in the three months ended March 31,2009 compared to the three months ended March 31, 2008. Revenues from ofour automotive infotainment products decreased slightly by $10,000, or 1%, inthe three months ended March 31, 2009 compared to the three months ended March 31,2008. Revenues from consumer products decreased $1.0 million, or 45%, in thethree months ended March 31, 2009 compared to the three months ended March 31,2008. Other revenues decreased $0.2 million, or 96%, in the three months ended March 31,2009 compared with the three months ended March 31, 2008.

* *

*Gross Profit and Gross Margin*.  Gross profit isthe difference between revenues and cost of revenues, and gross marginrepresents gross profit as a percentage of revenues. Costs of revenues, alsoknown as costs of goods sold, consists primarily of cost of processed siliconwafers, costs associated with assembly, test and shipping of our productionsemiconductors, cost of personnel and related expenses associated withsupporting our outsourced manufacturing activities and write-downs for excessand obsolete inventory.

 

Grossprofit was $6.2 million for the three months ended March 31, 2009 and $9.5million for the three months ended March 31, 2008, a decrease of 35%.Gross margin was 60% for the three months ended March 31, 2009 decreasingslightly from 61% for the three months ended March 31, 2008. The decreasein gross profit was primarily due to a decrease in revenues of $5.3 million, or34%.

 

We incurredstock-based compensation included in cost of revenues associated withoutsourced manufacturing support and quality assurance personnel of $0.1million in both the three months ended March 31, 2009 and March 31,2008.

 

*Research and Development Expenses.*  Research anddevelopment expenses consist primarily of compensation and associated costs ofemployees engaged in research and development, contractor costs, tape-outcosts, development testing and evaluation costs, occupancy costs and depreciationexpense. Before releasing new products, we incur charges for mask sets,prototype wafers and mask set revisions, which we refer to as tape-outcosts. Tape-out costs cause our research and development expenses tofluctuate because they are not incurred uniformly every quarter. We expectour research and development costs to increase in absolute dollars in thefuture as we increase our investment in developing new products.

 

Researchand development expenses were $4.3 million, or 42% of revenues, for the threemonths ended March 31, 2009 and $3.5 million, or 23% of revenues, for thethree months ended March 31, 2008, an increase of 22%. The increase inresearch and development expense was primarily attributable to increasedcompensation-related expenses of $0.6 million reflecting both increases instock-based compensation and in headcount to support the development ofnew products and technologies and an increase of $0.2 million of tape-outexpenses as a result of our development of new products and our migration to smallergeometry process technologies.

 

20

----

Table ofContents

 

We incurredstock-based compensation expense associated with research and developmentpersonnel of $0.9 million and $0.7 million in the three months ended March 31,2009 and 2008, respectively. The increase in stock-based compensation expenseswas a result of the increase in research and development personnel.

 

*Selling, General and Administrative Expenses.*  Selling,general and administrative expenses consist primarily of compensation andassociated costs for marketing, selling and administrative personnel, salescommissions to independent sales representatives, contractor compensation,public relations, promotional and other marketing expenses, insurance and feespaid for professional services, travel, depreciation expenses and occupancycosts. Costs associated with audit and tax services, corporate governance andcompliance and financial reporting are also included in selling, general andadministrative expenses. We expect selling, general and administrative expensesto remain flat in absolute dollars throughout the rest of fiscal 2009.

 

Selling,general and administrative expenses were $3.5 million, or 34% of revenues, forthe three months ended March 31, 2009 and $3.7 million, or 24% of revenues, forthe three months ended March 31, 2008, a decrease of 4%. The slightdecrease in selling, general and administrative expenses was attributable to adecrease of $0.2 million in compensation-related expenses.

 

We incurredstock-based compensation expense associated with selling, general andadministrative personnel of $0.8 million and $0.9 million in the three monthsended March 31, 2009 and 2008, respectively.

 

*Interest Income.*  Interest income was $0.4million for the three months ended March 31, 2009 and $0.8 million for thethree months ended March 31, 2008, a decrease of 51%. The decrease wasprimarily due to lower rates of returns due to lower interest rates offset byhigher cash equivalents and investment balances.

 

*Provision (Benefit) for Income Taxes.*  Our benefit for incometaxes was $0.5 million in the three months ended March 31, 2009 comparedwith a provision for income taxes of $1.2 million for the three months ended March 31,2008. Our effective tax rate was 44% and 39% for the three months ended March 31,2009 and 2008, respectively. The effective tax rate for both the three monthsended March 31, 2009 and 2008 differed from the statutory federal incometax rate primarily due to non-deductible stock-based compensation expenses andstate income taxes.

 

##### ***Liquidity and Capital Resources***

 

Sinceour inception, we have financed our growth primarily with proceeds from theissuance of preferred stock and common stock and cash flow generated by ouroperations. In June 2006, we received approximately $17.5 million in cash,net of underwriting discounts, commissions and other offering costs, from ourinitial public offering of common stock. In July 2006, we receivedaggregate proceeds of $1.1 million, net of underwriting discounts andcommissions, from the sale of an additional 130,000 shares following theunderwriters’ partial exercise of their over-allotment option related to ourinitial public offering. Our cash and cash equivalents and short-terminvestments were $59.4 million as of March 31, 2009.

 

*Net cash from operating activities*

 

Netcash used for operating activities was $0.5 million in the three monthsended March 31, 2009. The net cash used for operating activities in thethree months ended March 31, 2009 was primarily due to our net loss of$0.7 million, an increase in accounts receivable of $1.0 million due to timingof customer collections, an increase in deferred tax assets of $0.9 million dueto differences resulting from differing treatments of items for tax andaccounting purposes and a decrease in accrued liabilities of $0.3 millionprimarily related to compensation-related accruals.  These were partially offset by a decrease ininventory of $0.5 million due to lower inventory purchases, as well as non-cashcharges for stock-based compensation expenses of $1.8 million.

 

Netcash provided by operating activities was $3.1 million in the three monthsended March 31, 2008. The net cash provided by our operating activities inthe three months ended March 31, 2008 was primarily due to our net incomeof $1.9 million and an increase of accrued liabilities of $1.0 millionprimarily attributable to the income tax expenses, as well as non-cash chargesfor stock-based compensation expenses of $1.5 million.  These were partially offset by increases ininventory of $0.6 million and a decrease in accounts payable of $0.5 milliondue to the timing of payments to vendors.

 

21

----

Table ofContents

 

*Net cash from investing activities*

 

Netcash used for investing activities was $5.3 million in the three monthsended March 31, 2009 due to the purchases of short and long-terminvestments of $10.6 million offset by maturities of our investments of$5.3 million.

 

Netcash provided by our investing activities was $5.6 million in the threemonths ended March 31, 2008 due to the maturities of our investments of$20.1 million offset by purchases of short and long-term investments of$14.4 million and capital expenditures of $0.2 million.

 

*Net cash from financing activities*

 

Netcash used for financing activities of $0.2 million in the three months ended March 31,2009 primarily consisted of repurchases of common stock upon release ofrestricted stock awards.

 

Netcash provided by financing activities of $0.1 million in the three months endedMarch 31, 2008 consisted of proceeds from the exercise of stock options.

 

AtMarch 31, 2009, we held $6.3 million of investments with an auction resetfeature, which are referred to as auction rate securities, or ARS, whoseunderlying assets are generally student loans which are substantially backed bythe federal government. In February and March of 2008, auctionsfailed for our ARS, and there is no assurance that successful auctions of anyARS in our investment portfolio will occur in the future. An auction failuremeans that the parties wishing to sell securities could not. All of our ARSwere rated AAA at the time of purchase, and continue to be rated AAA, thehighest rating, by a rating agency.

 

Duringthe fourth quarter of 2008, we entered into an agreement with one of ourinvestment providers, which currently holds our ARS and from whom we hadpurchased the ARS, to sell, at our discretion, at par value all of the ARS wecurrently hold back to the investment provider at anytime starting in June 2010.Our ability to liquidate our ARS investment and fully recover the carryingvalue of our investment in the near term may be limited or not existent. Wehave classified these ARS investments as long-term investments because our saleof the ARS back to the our investment provider is expected to occur in June 2010.We are continuing to evaluate the credit quality, classification and valuationof our ARS, but based on our expected operating cash flows, and our othersources of cash, we do not anticipate the potential lack of liquidity on theseinvestments will affect our ability to execute our current business plan.

 

Webelieve our existing cash and cash equivalents and short-term and long-terminvestments, as well as cash expected to be generated from operating activitieswill be sufficient to meet our anticipated cash needs for a least the next 12months. Our long-term future capital requirements will depend on many factors,including our level of revenues, the timing and extent of spending to supportour product development efforts, the expansion of sales and marketingactivities, the timing of our introductions of new products, the costs toensure access to adequate manufacturing capacity, the continuing marketacceptance of our products and our ability to liquidate our ARS in a timelymanner. We could be required, or could elect, to seek additional fundingthrough public or private equity or debt financing and additional funds may notbe available on terms acceptable to us or at all.

* *

***Off-Balance Sheet Arrangements***

 

Asof March 31, 2009, we have no off-balance sheet arrangements as defined inItem 303(a)(4) of the Securities and Exchange Commission’sRegulation S-K.

 

22

----

Table of Contents

 

**Contractual Obligations**

 

Thefollowing table identifies our commitments to settle contractual obligations asof March 31, 2009 (in thousands):

 
| ** **                | ** ** | **Payments Due by Period** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** |
| Minimum lease commitments |       | $                                         | 1,625      |   | $ | 632 |   | $ | 982 |   | $ | 11 |   |
| Purchase commitments      |       | 1,484                                     |       | 1,484 |   | — |   | — |   |
| Total commitments         |       | $                                         | 3,109      |   | $ | 2,116 |   | $ | 982 |   | $ | 11 |   |
|                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

***Recent AccountingPronouncements***

 

Effective January 1, 2008, we adoptedSFAS 157 with respect to our financial assets and liabilities. In February 2008,the Financial Accounting Standards Board, or FASB, issued FASB Staff Position,or FSP, No. SFAS 157-2, *Effective Date of FASBStatement No. 157*, which provided a one year deferral of theeffective date of SFAS 157 for non-financial assets and non-financialliabilities, except those that are recognized or disclosed in the financialstatements at fair value at least annually. We adopted the provisions of SFAS157 for non-financial assets and non-financial liabilities effective January 1,2009. The adoption of SFAS 157 for non-financial assets and non-financialliabilities did not have an impact on the consolidated financial position,results of operations or cash flows.

 

In December 2007,the FASB issued SFAS No. 141(R), *“Business Combinations,”*or SFAS 141(R). SFAS 141(R) establishes principles and requirements forhow an acquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, contractual contingencies andcontingent consideration at their fair value on the acquisition date, anycontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. SFAS 141(R) is effectivefor fiscal years beginning after December 15, 2008. We will apply theprovisions of SFAS 141(R) to any acquisitions occurring subsequent to January 1,2009.

 

In April 2009the FASB issued FSP No. SFAS 141(R)-1, *Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies*, or FSP 141(R)-1. FSP 141(R)-1 amends the provisionsin SFAS 141(R) for the initial recognition and measurement, subsequentmeasurement and accounting, and disclosures for assets and liabilities arisingfrom contingencies in business combinations. FSP 141(R)-1 eliminates thedistinction between contractual and non-contractual contingencies, includingthe initial recognition and measurement criteria in SFAS 141(R) andinstead carries forward most of the provisions in SFAS No. 141 foracquired contingencies. FSP 141(R)-1 is effective for contingent assets andcontingent liabilities acquired in business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. We will assess the impactof FSP 141(R)-1 at the time of any such acquisition.

 

In April 2009 the FASB issued threerelated FSPs: (i) FSP No. SFAS 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or Liabilityhave Significantly Decreased and Identifying Transactions That Are Not Orderly*,or FSP 157-4, (ii) FSP No. SFAS 115-2 and FSP No. SFAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments*,or FSP 115-2 and FSP 124-2, and (iii) FSP No. SFAS 107-1 and APB No. 28-1,*Interim Disclosures about Fair Value of FinancialInstruments*, or FSP 107-4 and APB 28-1, which will be effective forinterim and annual periods ending after June 15, 2009. FSP 157-4 providesguidance on how to determine the fair value of assets and liabilities underSFAS 157 in the current economic environment and reemphasizes that theobjective of a fair value measurement remains an exit price. FSP 115-2 and FSP124-2 modify the requirements for recognizing other-than-temporarily impaireddebt securities and revises the existing impairment model for such securities,by modifying the current intent and ability indicator in determining whether adebt security is other-than-temporarily impaired. FSP 107-1 and APB 28-1enhance the disclosure of instruments under the scope of SFAS 157 for bothinterim and annual periods. We are currently evaluating the impact that these FSPs willhave on the consolidated financial position, results of operations or cashflows.

 

23

----

Table of Contents

 

***Item 3. Quantitative andQualitative Disclosures about Market Risk***

 

The primary objectives of our investmentactivities are to preserve principal, provide liquidity and maximize incomewithout significantly increasing the risk. Some of the securities we invest inare subject to market risk. This means that a change in prevailing interestrates may cause the principal amount of the investment to fluctuate. Tominimize this risk, we maintain our portfolio of cash equivalents, short andlong-term investments in demand accounts, money market funds, commercial paper,corporate bonds, U.S. government agency securities and ARS which are investmentgrade securities with a maximum dollar weighted maturity of two years or less.The risk associated with fluctuating interest rates is limited to ourinvestment portfolio, and we believe that a 10% change in interest rates wouldnot have a significant impact on our interest income.

 

At March 31, 2009, we held $6.3 millionof investments with an auction reset feature, whose underlying assets aregenerally student loans which are substantially backed by the federalgovernment. In February and March of 2008, auctions failed for ourARS. An auction failure means that the parties wishing to sell securities couldnot. All of our ARS were rated AAA at the time of purchase, the highest rating,by a rating agency. During the fourth quarter of 2008, we entered into anagreement with one of our investment providers, which currently holds our ARS andfrom whom we had purchased the ARS, to sell, at our discretion, at par valuethe ARS we currently hold back to the investment provider at anytime startingin June 2010. We have classified our ARS investment as a long-terminvestment on the consolidated balance sheet because our sales of the ARS backto our investment provider is expected to occur in June 2010.  Refer to Note 5 to our condensed unauditedconsolidated financial statements for additional discussions regarding our ARSand related put option.

 

To date, our international customeragreements have been denominated solely in U.S. dollars, and accordingly, wehave not been exposed to foreign currency exchange rate fluctuations fromcustomer agreements, and do not currently engage in foreign currency hedgingtransactions. However, the functional currency of our operations in Taiwan,South Korea and China is the U.S. dollar and our local accounts are maintainedin the local currency in Taiwan, South Korea and China, respectively, and thuswe are subject to foreign currency exchange rate fluctuations associated withremeasurement to U.S. dollars. Such fluctuations have not been significanthistorically and we believe that a 10% change in exchange rates would not havea significant impact on our operating expenses.

 

**Item 4. Controls and Procedures**

** **

**Evaluation of Disclosure Controls and Procedures**

 

We maintain “disclosure controls and procedures,” assuch term is defined in Rule 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”), that are designed toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in Securities and Exchange Commissionrules and forms, and that such information is accumulated and communicatedto our management, including our chief executive officer and chief financialofficer, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating our disclosure controls and procedures,management recognized that disclosure controls and procedures, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the disclosure controls and procedures aremet. Our disclosure controls and procedures have been designed to meet thereasonable assurance standards. Additionally, in designing disclosure controlsand procedures, our management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible disclosure controls andprocedures. The design of any disclosure controls and procedures also is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under potential future conditions.

 

Based on the evaluation as of the end of the periodcovered by this Quarterly Report on Form 10-Q, our chief executive officerand chief financial officer have concluded that, as of such date, ourdisclosure controls and procedures were effective at the reasonable assurancelevel.

 

**Changes in Internal Control Over Financial Reporting**

 

There was no change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) and 15d-15(f) underthe Exchange Act) that occurred during the period covered by this QuarterlyReport on Form 10-Q that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

24

----

Table ofContents

 

**Part II. Other Information**

 

**Item 1. Legal Proceedings**

 

We are currently not a party to any material legalproceedings. We may from time to time become involved in litigation relating toclaims arising from our ordinary course of business. These claims, even if notmeritorious, could result in the expenditure of significant financial andmanagerial resources.

 

**Item 1A. Risk Factors**

 

If any of the following risks actually occur,our business, results of operations and financial condition could suffersignificantly.

 

**Risks Related to Our Business**

 

***Fluctuations in our revenue andoperating results on a quarterly basis could cause the market price of ourcommon stock to decline.***

 

Our revenue and operating results aredifficult to predict, have in the past fluctuated, and may in the futurefluctuate from quarter to quarter. It is possible that our operating results insome quarters will be below market expectations. This would likely cause themarket price of our common stock to decline. Our quarterly operating resultsare affected by a number of factors, including:

 

*·*       unpredictable volume andtiming of customer orders, which are not fixed by contract and vary on apurchase order basis;

*·*       uncertain demand in theautomotive infotainment market for our products;

*·*       the loss of one or more ofour customers, causing a significant reduction or postponement of orders from thesecustomers;

*·*       decreases in the overallaverage selling prices of our products;

*·*       changes in the relativesales mix of our products;

*·*       changes in our cost offinished goods;

*·*       the availability, pricingand timeliness of delivery of other components used in our customers’ products;

*·*       our customers’ salesoutlook, purchasing patterns and inventory adjustments based on demands andgeneral economic conditions;

*·*       product obsolescence andour ability to manage product transitions;

*·*       our ability tosuccessfully develop, introduce and sell new or enhanced products in a timelymanner;

*·*       the timing of new productannouncements or introductions by us or by our competitors; and

*·*       fluctuations in oureffective tax rate.

 

We base our planned operating expenses inpart on our expectations of future revenue, and a significant portion of ourexpenses is relatively fixed in the short-term. We have limited historicalfinancial data from which to predict future sales for our products. As aresult, it is difficult for us to forecast our future revenue and budget ouroperating expenses accordingly. If revenue for a particular quarter is lowerthan we expect, we likely will be unable to proportionately reduce ouroperating expenses for that quarter, which would harm our operating results forthat quarter.

 

***We incurred a net loss for the threemonths ended March 31, 2009, and may not return to profitability in thefuture, which may cause the market price of our common stock to decline.***

 

We first became profitable in the second quarterof 2005. We incurred significant net losses prior to that quarter and incurreda net loss for the three months ended March 31, 2009. To return toprofitability, we will need to generate and sustain substantially higherrevenue while maintaining reasonable cost and expense levels. We currentlyexpect to increase expense levels in each of the next several quarters tosupport increased research and development efforts. These expenditures may notresult in increased revenue or customer growth. Because many of our expensesare fixed in the short-term, or are incurred in advance of anticipated sales,we may not be able to decrease our expenses in a timely manner to offset anyshortfall of sales. We also believe our future effective tax rate will be at ornear the current statutory tax rate of 35%, which is higher than our averagehistorical annual effective tax rate which has been less than 10% of ourpre-tax income since our inception. This will harm our future financial resultsand negatively impact our profitability. We may not be able to return toprofitability on a quarterly or an annual basis. This may, in turn, cause theprice of our common stock to decline.

 

25

----

Table ofContents

 

***The demand for our products isaffected by general economic conditions, which could impact our business.***

 

The United States and international economiesare currently experiencing a period of economic downturn. The timing ofsustained economic recovery, if any, is uncertain. In addition, terrorist actsand similar events, turmoil in the Middle East or war in general, couldcontribute to a slowdown of the market demand for our products. If the economycontinues to slow down as a result of the recent economic, political and socialturmoil, or if there are further terrorist attacks in the United States orelsewhere, we may experience decreases in the demand for our products, whichmay harm our operating results. Our business has been adversely affected by thecurrent economic downturn. Demand for our products has suffered as consumersdelay purchasing decisions or change or reduce their discretionary spending.

 

***Fluctuations in demand for ourproducts may harm our financial results and are difficult to forecast.***

 

Current uncertainty in global economicconditions pose a risk to the overall economy as consumers and businesses maydelay or postpone purchases in response to tighter credit and negativefinancial news, which could negatively affect demand for our products.Consequently, demand could be different from our expectations due to manyfactors including:

 

*·*       changes in business andeconomic conditions, including conditions in the credit market that couldaffect consumer confidence;

*·*       customer acceptance of ourproducts;

*·*       changes in customer orderpatterns including order cancellations; and

*·*       changes in the level ofinventory at customers.

 

 

***If the growth of demand for digitalvideo applications for the security surveillance and automotive infotainmentmarkets does not continue, our ability to increase our revenue could suffer.***

 

Our ability to increase our revenue willdepend on increased demand for digital video applications in the securitysurveillance and automotive infotainment markets. If our target markets do notgrow as rapidly or to the extent we anticipate, our business could suffer. Thegrowth of our target markets is uncertain and will depend in particular upon:

 

*·*       the pace at which newdigital video applications are adopted;

*·*       a continued reduction inthe costs of products in these markets;

*·*       the availability, at areasonable price, of components required by such products, such as LCD panels;and

*·*       consumer confidence andthe continued increase of consumer spending levels.

 

***Our success depends on our abilityto develop and introduce new products, which we may not be able to do in atimely manner, as product development in smaller wafer fabrication geometriesbecomes more complex and costly.***

 

The development of new products is highlycomplex, and we have experienced some delays in bringing new products to themarket in the past. As our products integrate new, more advanced functions,they become more complex and increasingly difficult to design. In addition, inour effort to decrease cost, we intend to design new products in smallerfabrication geometries, some of which we may have no prior experience ofsuccess. In the past, we have experienced some difficulties in shifting tosmaller geometry process technologies.

 

26

----

Table of Contents

 

Completing these projects is extremelychallenging, time-consuming and expensive, and we can give no assurance that wewill succeed or succeed in a timely and cost-effective manner. Productdevelopment delays may result from unanticipated engineering complexities,changing market or competitive product requirements or specifications,difficulties in overcoming resource limitations, the inability to licensethird-party technology or other factors. If we are unable to develop productssuccessfully, in a timely and cost-effective manner, our business, financialcondition and results of operations could suffer.

 

***The average selling prices of oursemiconductor products may be subject to rapid price declines, which could harmour revenue and gross profits.***

 

The semiconductor products we develop andsell may be subject to rapid declines in average selling prices. From time totime, we have had to reduce our prices significantly to meet customerrequirements, and we may be required to reduce our prices in the future. Thiswould cause our gross margins to decline which in turn may negatively impactour operating results. Our financial results will suffer if we are unable tooffset any reductions in our average selling prices by increasing our salesvolumes, reducing our costs or developing new or enhanced products on a timelybasis with higher selling prices or gross margins.

 

***We face intense competition and maynot be able to compete effectively, which could reduce our market share anddecrease our revenue and profitability.***

 

The markets in which we operate are extremelycompetitive and are characterized by rapid technological change, continuousevolving customer requirements and declining average selling prices. We may notbe able to compete successfully against current or potential competitors. If wedo not compete successfully, our market share and revenue may decline. Wecompete with large semiconductor manufacturers and designers, and our currentand potential competitors have longer operating histories, significantlygreater resources and name recognition and a larger base of customers than wedo. This may allow them to respond more quickly than we can to new or emergingtechnologies or changes in customer requirements. In addition, thesecompetitors may have greater credibility with our existing and potentialcustomers. Many of our current and potential customers have their owninternally developed semiconductor solutions and may choose not to purchaseproducts from third-party suppliers like us.

 

***We depend on key and highly skilledpersonnel to operate our business, and if we are unable to retain our currentpersonnel and hire additional personnel, our ability to develop and market ourproducts could be harmed.***

 

We believe our future success will depend inlarge part upon our ability to attract and retain highly skilled managerial,engineering and sales and marketing personnel. The loss of any key employees orthe inability to attract or retain qualified personnel could delay thedevelopment and introduction of, and harm our ability to sell, our products andharm the market’s perception of us. We believe that our future success ishighly dependent on the contributions of Fumihiro Kozato, our president andchief executive officer, and Dr. Feng Kuo, our chief technical officer. Wedo not have long-term employment contracts with these or any other keypersonnel, and their knowledge of our business and industry would be extremelydifficult to replace.

 

***If we fail to develop new productsand enhance our existing products in order to react to rapid technologicalchange and market demands, our business will suffer.***

 

We must develop new products and enhance ourexisting products with improved technologies to meet rapidly evolving customerrequirements. We need to design products for customers who continually requirehigher performance and functionality at lower costs. We must, therefore,continue to cost-effectively add features that enhance performance andfunctionality to our products. The development process for these advancementsis lengthy and requires us to accurately anticipate market trends. Our failureto accurately anticipate market trends in a timely manner will harm the marketacceptance of our products and the sales of our products.

 

27

----

Table of Contents

 

Developing and enhancing these products isuncertain and can be time-consuming, costly and complex. There is a risk thatthese developments and enhancements will be late, fail to meet customer ormarket specifications or not be competitive with products from our competitorsthat offer comparable or superior performance and functionality. Any newproducts or product enhancements may not be accepted in new or existingmarkets. Our business will suffer if we fail to develop and introduce newproducts or product enhancements on a cost-effective basis.

 

***If we fail to achieve initial designwins for our products, we may lose the opportunity for sales for a significantperiod of time to customers and be unable to recoup our investments in ourproducts.***

 

We expend considerable resources in order toachieve design wins for our products, especially our new products and productenhancements. Once a customer designs a semiconductor into a product, it islikely to continue to use the same semiconductor or enhanced versions of thatsemiconductor from the same supplier across a number of similar and successorproducts for a lengthy period of time due to the significant costs associatedwith qualifying a new supplier and potentially redesigning the product toincorporate a different semiconductor. If we fail to achieve an initial designwin in a customer’s qualification process, we may lose the opportunity forsignificant sales to that customer for a number of its products and for alengthy period of time. This may cause us to be unable to recoup ourinvestments in our products, which would harm our business.

 

***If we fail to develop, in a timelymanner, or at all, technologies that address the demands of a shift from analogvideo signals to digital video signals our operating results could suffer.***

 

Our semiconductors are principally designedto decode analog video signals into digital images. By June 12, 2009,transmission of broadcast TV signals will no longer be permitted in analog andall signals must be in a digital format. We are developing mixed signal anddigital technologies to decode digital signals. However, transmission ofdigital video involves a combination of emerging technologies. The complexitiesof these technologies and the variability in implementations betweenmanufacturers may cause our development of semiconductors to be costly andtime-consuming. We may never obtain the benefits of our investment indeveloping these technologies. The complexities of digital broadcasttechnologies may also cause some of the semiconductors we are developing toultimately work incorrectly for reasons that may be either related or unrelatedto our products, or not be interoperable with other key products. Delays ordifficulties in integrating our semiconductors into digital broadcast productsor the failure of products incorporating digital video to achieve broad marketacceptance could have an adverse effect on our business.

 

***A significant portion of ourproducts are sold into the security surveillance market, and if sales of oursemiconductors into this market decline or do not increase, or if we do notincrease our sales into the automotive infotainment market, our business andfinancial results could suffer.***

 

We sell semiconductors targeted for thesecurity surveillance and automotive infotainment markets. For the three monthsended March 31, 2009, 72% of our revenues was derived from the sale of ourproducts designed for the security surveillance market. If sales ofsemiconductors into this market decline or do not increase, or if demand slowsin this market generally, our operating results would suffer. In addition, wehave increased our focus on the automotive infotainment market and devotedsubstantial resources to the development of semiconductors for digital video applicationsthat address this market. If we are not successful in selling oursemiconductors into this market, or if the automotive infotainment industry ingeneral continues to experience weak demand, we may not recover the costsassociated with our efforts in this area and our operating results couldsuffer.

 

***Our business is subject toseasonality, which is likely to cause our revenues to fluctuate.***

 

Our business is subject to seasonality as aresult of our target markets and the location of our customers. We sell asignificant number of our semiconductors to customers located in Asia,primarily to customers located in regions who observe the Lunar New Yearholiday, also referred to as Chinese New Year. Typically, our foreign officesand those of our customers are closed for a week or more during the extendedholiday period. For the three months ended March 31, 2009, 88% of ourrevenues was attributable to customers located in regions that observe theLunar New Year holiday. As a result, we typically experience fluctuations inour first calendar quarter due in part to a slowing of business activity aroundthe period of the Lunar New Year holiday.

 

28

----

Table ofContents

 

***We manufacture our products based onour estimates of customer demand, and if our estimates are incorrect ourfinancial results could be negatively impacted.***

 

Our sales are made on the basis of purchaseorders rather than long-term purchase commitments. In addition, our customersmay cancel purchase orders or defer the shipments of our products. Wemanufacture our products according to our estimates of customer demand. Thisprocess requires us to make multiple demand forecast assumptions, each of whichmay introduce error into our estimates. If we overestimate customer demand, wemay manufacture products that we may not be able to sell. As a result, we wouldhave excess inventory, which would increase our losses. Conversely, if weunderestimate customer demand or if sufficient manufacturing capacity wereunavailable, we would forego revenue opportunities, lose market share anddamage our customer relationships.

 

***We do not expect to sustain thegrowth rate of our recent revenues.***

 

Our revenues increased 109% in 2005 from 2004and 49% in 2006 from 2005. We do not expect to achieve similar growth rates infuture periods. For example, our revenues increased 11% in 2007 from 2006 and13% in 2008 compared to 2007 and decreased 34% in the three months ended March 31,2009 compared to three month ended March 31, 2008. You should not rely onthe results of any prior quarterly or annual periods as an indication of ourfuture operating performance. If we are unable to maintain adequate revenuegrowth, our stock price may decline and we may not have adequate financialresources to execute our business objectives.

 

***We may pursue acquisitions orinvestments in complementary technologies and businesses, which could harm ouroperating results and may disrupt our business.***

 

In the future, we may pursue acquisitions of,or investments in, complementary technologies and businesses. Acquisitionspresent a number of potential risks and challenges that could, if notsuccessfully addressed, disrupt our business operations, increase our operatingcosts and reduce the value to us of the acquired company. Even if we aresuccessful, we may not be able to integrate the acquired businesses, productsor technologies into our existing business and products. Furthermore, potentialacquisitions and investments, whether or not consummated, may divert management’sattention and require considerable cash outlays at the expense of existingoperations. In addition, to complete future acquisitions, we may issue equitysecurities, incur debt, assume contingent liabilities or have amortizationexpenses and write-downs of acquired assets, which could adversely affect ourprofitability.

 

***Changes in our tax rates will affectour future results.***

 

Our future effective tax rates will befavorably or unfavorably affected by the absolute amount and future geographicdistribution of our pre-tax income, our ability to take advantage of theavailable tax planning strategies and the availability of tax credits. Oureffective tax rate for the three months ended March 31, 2009 and 2008 was44% and 39%, respectively. In addition, we are subject to the examination ofour income tax returns by the Internal Revenue Service and other taxauthorities. The outcomes of these examinations, if they occur, could harm ourfinancial condition.

 

***We may not be able to manage ourfuture growth effectively, and we may need to incur significant expenditures toaddress the additional operational and control requirements of our growth.***

 

We have experienced a period of significantgrowth and expansion, which has placed, and any future expansion will continueto place, a significant strain on management, personnel, systems and financialresources. We have hired additional employees to support an increase in researchand development as well as increase our sales and marketing efforts, whichresulted in increasing our headcount from 96 employees at the end of 2006 to159 employees at March 31, 2009. To manage our growth successfully, webelieve we must effectively:

 

*·*       train, integrate andmanage additional qualified engineers for research and development activities,sales and marketing personnel and financial and information technologypersonnel;

*·*       continue to enhance ourcustomer resource management and manufacturing management systems;

*·*       implement additional andimprove existing administrative, financial and operations systems, proceduresand controls, including the requirements of the Sarbanes-Oxley Act of 2002;

*·*       expand and upgrade ourtechnological capabilities; and

*·*       manage multiplerelationships with our customers, distributors, suppliers and otherthird-parties.

 

29

----

Table ofContents

 

Our efforts may require substantialmanagerial and financial resources and may increase our operating costs eventhough these efforts may not be successful. If we are unable to manage ourgrowth effectively, we may not be able to take advantage of market opportunities,develop new products, satisfy customer requirements, execute our business planor respond to competitive pressures.

 

***We may experience unforeseen delays,expenses or lower than expected product yields for our semiconductorsmanufactured by our third-party vendors, which could increase our costs andprevent us from recognizing the benefits of new technologies we develop.***

 

We occasionally have experienced delays incompleting the development and introduction of new products and productenhancements, and we could experience delays in the future that may render ournew or enhanced products, when introduced, obsolete and unmarketable. Inaddition, it is often difficult for semiconductor foundries to achievesatisfactory product yields. Product yields depend on both our product designand the manufacturing process technology unique to the semiconductor foundry.Since low yields may result from either design or process difficulties,identifying yield problems can only occur well into the production cycle aftera product that can be physically analyzed and tested exists. Poor yields fromour foundry could cause us to sell our products at lower gross margins andtherefore harm our financial results.

 

***Defects in our products couldincrease our costs, cause customer claims and delay our product shipments.***

 

Although we test our products,they are complex and may contain defects and errors. In the past, we haveencountered defects and errors in our products. For example, in the past, wewere unable to sell certain products to a customer for whom these products werespecifically designed as a result of our failure to produce a product that metthis customer’s specifications. We believe this customer secured the productfrom another vendor. Delivery of products with defects or reliability, qualityor compatibility problems may damage our reputation and our ability to retainexisting customers and attract new customers. In addition, product defects anderrors could result in additional development costs, diversion of technicalresources, delayed product shipments, increased product returns and productliability claims against us, which may not be fullycovered by insurance. Any of these could harm our business.

 

***We rely on a limited number ofindependent subcontractors for the manufacture, assembly and testing of oursemiconductors, and the failure of any of these third-party vendors to deliverproducts or otherwise perform as requested could damage our relationships withour customers, decrease our sales and limit our growth.***

 

We do not have our own manufacturing orassembly facilities and have very limited in-house testing facilities.Therefore, we must rely on third-party vendors to manufacture, assemble andtest the products we design. We currently rely on Taiwan SemiconductorManufacturing Company, or TSMC, to produce the majority of our semiconductors.We rely on Advanced Semiconductor Engineering, Inc., or ASE, to assemble,package and test many of our products. If these vendors do not provide us withhigh-quality products, services and production and test capacity in a timelymanner, or if one or more of these vendors terminates its relationship with us,we may be unable to obtain satisfactory replacements to fulfill customer orderson a timely basis, our relationships with our customers could suffer and oursales could decrease. Other significant risks associated with relying on thesethird-party vendors include:

 

*·*       reduced control overproduct cost, delivery schedules and product quality;

*·*       potential price increases;

*·*       inability to achieverequired production or test capacity and achieve acceptable yields on a timelybasis;

*·*       longer delivery times;

*·*       increased exposure topotential misappropriation of our intellectual property;

*·*       shortages of materialsthat foundries use to manufacture products;

*·*       labor shortages or laborstrikes; and

*·*       quarantines or closures ofmanufacturing facilities due to the outbreak of viruses, such as SARS, theavian flu or any similar future outbreaks in Asia.

 

30

----

Table ofContents

 

We currently do not have long-term supplycontracts with any of our third-party vendors. Therefore, they are notobligated to perform services or supply products to us for any specific period,in any specific quantities or at any specific price, except as may be providedin a particular purchase order. Neither TSMC nor ASE has provided contractualassurances to us that adequate capacity will be available for us to meet futuredemand for our products. These third-party vendors may allocate capacity to theproduction of other companies’ products while reducing deliveries to us onshort notice. In particular, other customers that are larger and betterfinanced than we are or that have long-term agreements with TSMC or ASE maycause either or both of them to reallocate capacity to those customers,decreasing the capacity available to us.

 

***We plan to retain additionalfoundries to manufacture our semiconductors, which could disrupt our currentmanufacturing process and negatively impact our sales volumes and revenue.***

 

We are a fabless semiconductor company whichrelies on third-party manufacturers or foundries to manufacture oursemiconductors. We are reliant on these foundries for the manufacture of ourproducts as well as providing services to assist us in getting our productsinto production. As a result of the complexity in manufacturing oursemiconductors, it is difficult to determine if a new foundry will be able tosuccessfully produce our products. We may not be able to enter into arelationship with a new foundry that produces satisfactory yields on acost-effective basis. If we need another foundry because of increased demand,or the inability to obtain timely and adequate deliveries from our currentprovider, we might not be able to cost-effectively and quickly retain othervendors to satisfy our requirements. Any failure to successfully integrate anew foundry could negatively impact our sales volumes and revenue.

 

***Our business depends on customers,suppliers and operations in Asia, and as a result we are subject to regulatory,operational, financial and political risks, which could adversely affect ourfinancial results.***

 

The percentage of our revenues attributableto sales to customers in Asia was 96% and 98% for the three months ended March 31,2009 and 2008, respectively. We expect that revenues from customers in Asiawill continue to account for substantially all of our revenues. All our salescurrently are denominated in U.S. dollars. As a result, an increase in thevalue of the U.S. dollar relative to foreign currencies could make our productsless competitive in international markets.

 

Currently, we maintain international salesoffices in Asia, and we rely on a network of third-party sales representativesto sell our products internationally. We have also established offices inChina, Japan, Taiwan and South Korea, which serve various aspects of ourbusiness. Moreover, we have in the past relied on, and expect to continue torely on, suppliers, manufacturers and subcontractors primarily located inTaiwan. Accordingly, we are subject to several risks and challenges, any ofwhich could harm our business and financial results. These risks and challengesinclude:

 

*·*       difficulties and costs ofstaffing and managing international operations across different geographicareas and cultures;

*·*       compliance with a widevariety of domestic and foreign laws and regulations, including those relatingto the import or export of semiconductor products;

*·*       legal uncertaintiesregarding taxes, tariffs, quotas, export controls, export licenses and othertrade barriers;

*·*       foreign currency exchangefluctuations relating to our international operating activities;

*·*       our ability to receivetimely payment and collect our accounts receivable;

*·*       political, legal andeconomic instability, foreign conflicts and the impact of regional and globalinfectious illnesses, such as the SARS outbreak or avian flu in the countriesin which we and our customers, suppliers, manufacturers and subcontractors arelocated;

*·*       legal uncertaintiesregarding protection for intellectual property rights in some countries; and

*·*       fluctuations in freightrates and transportation disruptions.

 

31

----

Table ofContents

 

***Our sales cycle can be lengthy,which could result in uncertainty and delays in generating revenue.***

 

Because our products are based on constantlyevolving technologies, we have experienced a lengthy sales cycle for some ofour semiconductors, particularly those designed for digital video applicationsin the automotive infotainment market. Our sales cycle typically ranges fromsix to 24 months. We may experience a delay between the time we increaseexpenditures for research and development, sales and marketing efforts andinventory to the time we generate revenue, if any, from these expenditures. Inaddition, because we do not have long-term commitments from our customers, wemust repeat our sales process on a continual basis even for current customerslooking to purchase a new product. As a result, our business could be harmed ifa customer reduces or delays its orders, chooses not to release productsincorporating our semiconductors or elects not to purchase a new product orproduct enhancements from us.

*** ***

***We primarily sell our semiconductorsthrough a limited number of distributors, and if our relationships with one ormore of those distributors were to terminate, our operating results may beharmed.***

 

We market and distribute our productsprimarily through a limited number of distributors, most of which are locatedin Asia. This distribution channel has been characterized by rapid change andconsolidations. Distributors have accounted for a significant portion of ourrevenues in the past. Sales to our distributors represented 81% and 73% of ourrevenues for the three months ended March 31, 2009 and 2008, respectively.

 

Our operating results and financial conditioncould be significantly disrupted by the loss of one or more of our currentdistributors and sales representatives, volume pricing discounts, ordercancellations, delays in shipment by one of our major distributors or salesrepresentatives or the failure of our distributors or sales representatives tosuccessfully sell our products.

 

***We rely primarily upon copyright andtrade secret laws and contractual restrictions to protect our proprietaryrights and if these rights are not sufficiently protected, our ability tocompete and generate revenue could suffer.***

 

We seek to protect our proprietary designprocesses, documentation and other written materials primarily under tradesecret and copyright laws. We also typically require employees and consultantswith access to our proprietary information to execute confidentialityagreements. The steps taken by us to protect our proprietary information maynot be adequate to prevent misappropriation of our technology. In addition, ourproprietary rights may not be adequately protected because:

 

*·*       the laws of othercountries in which we market our semiconductors, such as some countries in theAsia/Pacific region, may offer little or no protection for our proprietarytechnologies;

*·*       people may not be deterredfrom misappropriating our technologies despite the existence of laws orcontracts prohibiting these actions; and

*·*       policing unauthorized useof our intellectual property may be difficult, expensive and time-consuming,and we may be unable to determine the extent of any unauthorized use.

 

Reverse engineering, unauthorized copying orother misappropriation of our proprietary technologies could enablethird-parties to benefit from our technologies without compensating us fordoing so. For example, if the foundry that manufactures our semiconductorsloses control of our intellectual property, it would be more difficult for usto take remedial measures since it is located in Taiwan, which does not havethe same protection for intellectual property as is provided in the UnitedStates. Any inability to adequately protect our proprietary rights could harmour ability to compete, generate revenue and grow our business.

 

***We may not obtain sufficient patentprotection on the technology embodied in the semiconductors we currentlymanufacture and market, which could harm our competitive position and increaseour expenses.***

 

Although we rely primarily on trade secretlaws and contractual restrictions to protect the technology in thesemiconductors we currently manufacture and market, our success and ability tocompete in the future may also depend to a significant degree upon obtainingpatent protection for our proprietary technology. As of December 31, 2008,we had two issued patents in the United States and five patent applicationspending in the United States and two applications pending in foreignjurisdictions. These patents and patent applications cover aspects of the

 

32

----

Table of Contents

 

technology in thesemiconductors we currently manufacture and market, including a patent for ourvideo decoding architecture. Patents that we currently own do not cover all ofthe semiconductors that we presently manufacture and market. Our patentapplications may not result in issued patents, and even if they result inissued patents, the patents may not have claims of the scope we seek. Inaddition, any issued patents may be challenged, invalidated or declaredunenforceable. The term of any issued patents would be 20 years from its filingdate and if our applications are pending for a long time period, we may have acorrespondingly shorter term for any patent that may issue. Our issued patentshave expiration dates ranging from September 2, 2019 to March 27,2020. Our present and future patents may provide only limited protection forour technology and may not be sufficient to provide us with competitiveadvantages. For example, competitors could be successful in challenging anyissued patents or, alternatively, could develop similar or more advantageoustechnologies on their own or design around our patents. Also, patent protectionin certain foreign countries may not be available or may be limited in scopeand any patents obtained may not be as readily enforceable as in the UnitedStates, making it difficult for us to effectively protect our intellectualproperty from misuse or infringement by anyone in these countries. Ourinability to obtain and enforce our intellectual property rights in somecountries may harm our business. In addition, given the costs of obtainingpatent protection, we may choose not to protect certain innovations that laterturn out to be important to our business or our competitive position.

 

***Intellectual property litigation,which is common in our industry, could be costly, harm our reputation, limitour ability to sell our products and divert the attention of management andtechnical personnel.***

 

Our industry is characterized by frequentlitigation regarding patent and other intellectual property rights. Forexample, during 2005 and 2006, we were a party to an administrative proceedingin front of the intellectual property tribunal in South Korea in which anotherparty unsuccessfully sought a determination that our TW2824 and TW2834 productsinfringed a South Korean patent allegedly held by that party. We have certainindemnification obligations to customers under our contract development projectswith respect to any infringement of third-party patents and intellectualproperty rights by our products. If a lawsuit were to be filed against us inconnection with claims of infringement, our business would be harmed.

 

Questions of infringement in the digitalvideo applications market involve highly technical and subjective analyses.Litigation may be necessary in the future to enforce any patents we may receiveand other intellectual property rights, to protect our trade secrets, todetermine the validity and scope of the proprietary rights of others or todefend against claims of infringement or invalidity, and we may not prevail inany future litigation. Litigation, whether or not determined in our favor orsettled, could be costly, could harm our reputation, could cause our customersto use our competitors’ products and could divert the efforts and attention ofmanagement and technical personnel from normal business operations. Inaddition, adverse determinations in litigation could result in the loss of ourproprietary rights, subject us to significant liabilities, require us to seeklicenses from third-parties or prevent us from licensing our technology orselling our products, any of which could seriously harm our business.

 

***Our headquarters are located in theState of California and our third-party manufacturing, assembly and testingvendors have facilities in the State of Washington and in Taiwan, areas subjectto significant earthquake risks. Any disruption to our or their operationsresulting from earthquakes or other natural disasters could cause significantdelays in the production or shipment of our product.***

 

TSMC, which manufactures substantially all ofour semiconductors, has facilities in the State of Washington and in Taiwan.Our assembly and testing vendors’ facilities are primarily located in Taiwan.In addition, our headquarters are located in Northern California. The risk ofan earthquake or extreme weather in the Pacific Rim region or an earthquake inNorthern California or Washington State is significant due to the proximity ofmajor earthquake fault lines. In September 1999, a major earthquake inTaiwan affected the facilities of TSMC and ASE, our primary assembly vendor, aswell as other providers of foundry, packaging and test services. In March 2002and June 2003, additional earthquakes occurred in Taiwan. In 2005, severaltyphoons also disrupted the operations of TSMC and ASE. As a result of thesenatural disasters, these contractors suffered power outages and disruptionsthat impaired their production capacity. The occurrence of earthquakes or othernatural disasters could result in the disruption of our foundry or assembly andtest capacity. We may not be able to obtain alternate capacity on favorableterms, if at all, which could harm our operating results.

 

33

----

Table of Contents

 

***Management may apply our cash, cashequivalents and short-term and long-term investments to uses that do notincrease our market value or improve our operating results.***

 

We intend to use our cash, cash equivalentsand short-term and long-term investments for general corporate purposes,including working capital and capital expenditures. We may also use a portionof our cash, cash equivalents and short-term and long-term investments toacquire or invest in complementary technologies, businesses or other assets. Wehave not reserved or allocated our cash, cash equivalents and short-term andlong-term investments for any specific purpose, and we cannot state withcertainty how management will use our cash, cash equivalents and short-term andlong-term investments. Accordingly, management has considerable discretion inapplying our cash, cash equivalents and short-term and long-term investmentsand may use our cash, cash equivalents and short-term and long-term investmentsfor purposes that do not result in any increase in our results of operations ormarket value. Until the cash, cash equivalents and short-term and long-terminvestments are used, they may be placed in investments that do not produceincome or lose value.

 

**Risks Related to Our Industry**

 

***Due to the cyclical nature of thesemiconductor industry, our operating results may fluctuate significantly,which could adversely affect the market price of our common stock.***

 

The semiconductor industry is highly cyclicaland subject to rapid change and evolving industry standards and, from time totime, has experienced significant downturns. These downturns are characterizedby decreases in product demand, excess customer inventory and acceleratederosion of prices. These factors have caused and could cause substantialfluctuations in our revenue and in our operating results. Any downturns in thesemiconductor industry may be severe and prolonged, and any failure of thisindustry to fully recover from downturns could harm our business. Thesemiconductor industry also periodically experiences increased demand andproduction capacity constraints, which may affect our ability to ship products.Accordingly, our operating results have varied and may vary significantly as aresult of the general conditions in the semiconductor industry, which couldcause our stock price to decline.

 

***The recent financial crisis couldnegatively affect our business, results of operations and financial condition.***

 

The recent financial crises affecting thebanking system and financial markets and the going concern threats toinvestment banks and other financial institutions have resulted in a tighteningin the credit markets, a low level of liquidity in many financial markets andextreme volatility in credit and equity markets. There could be a number offollow on effects from the credit crisis on our business, including insolvencyof key suppliers resulting in product delays, inability of customers to obtaincredit to finance purchases of our products and customer insolvencies.

 

**Risks Related to Our Common Stock**

 

***Our stock price has been volatileand you may not be able to resell shares of our common stock at or above theprice you paid, or at all.***

 

The trading price of our common stock hasexperienced wide fluctuations due to the factors discussed in this risk factorssection and elsewhere in this Quarterly Report on Form 10-Q. For example,in the three months ended March 31, 2009, the closing price of our stockranged from a low of $5.16 on March 5, 2008 to a high of $7.18 on January 7,2009. In addition, the stock market in general has, and The NASDAQ GlobalMarket and technology companies in particular have, experienced extreme priceand volume fluctuations. These trading prices and valuations may not besustainable. These broad market and industry factors may decrease the marketprice of our common stock, regardless of our actual operating performance. Inaddition, in the past, following periods of volatility in the overall marketand the market price of a company’s securities, securities class actionlitigation has often been instituted against companies that experienced suchvolatility. This litigation, if instituted against us, regardless of itsoutcome, could result in substantial costs and a diversion of management’sattention and resources.

 

34

----

Table ofContents

 

***If securities or industry analystsdo not publish research or reports about our business, or if they change theirrecommendations regarding our stock adversely, our stock price and tradingvolume could decline.***

 

The trading market for our common stock isinfluenced by the research and reports that industry or securities analystspublish about us or our business. If one or more of the analysts who cover usdowngrade our stock, our stock price would likely decline. If one or more ofthese analysts cease coverage of our company or fail to regularly publishreports on us, we could lose visibility in the financial markets, which in turncould cause our stock price or trading volume to decline.

 

***Our ability to raise capital in thefuture may be limited and our failure to raise capital when needed couldprevent us from executing our growth strategy.***

 

We believe that our existing cash and cashequivalents and short-term and long-term investments will be sufficient to meetour anticipated cash needs for at least the next 12 months. The timing andamount of our working capital and capital expenditure requirements may varysignificantly depending on numerous factors, including:

* *

*·*       market acceptance of ourproducts;

*·*       the need to adapt tochanging technologies and technical requirements;

*·*       the existence ofopportunities for expansion; and

*·*       access to and availabilityof sufficient management, technical, marketing and financial personnel.

 

If our capital resources are insufficient tosatisfy our liquidity requirements, we may seek to sell additional equitysecurities or debt securities or obtain debt financing. The sale of additionalequity securities or convertible debt securities would result in additionaldilution to our stockholders. Additional debt would result in increasedexpenses and could result in covenants that would restrict our operations. Wehave not made arrangements to obtain additional financing and there is noassurance that financing, if required, will be available in amounts or on termsacceptable to us, if at all.

 

***Substantial future sales of ourcommon stock in the public market could cause our stock price to fall.***

 

Additional sales of our common stock in thepublic market, or the perception that these sales could occur, could cause themarket price of our common stock to decline. At March 31, 2009, we had21,444,894 shares of common stock outstanding. A substantial portion of theseshares of common stock are entitled to rights to cause us to register the saleof those shares under the Securities Act. Registration of these shares underthe Securities Act would result in these shares, other than shares purchased byour affiliates, becoming freely tradable without restriction under the SecuritiesAct immediately upon the effectiveness of the registration.

 

***Our corporate actions aresubstantially controlled by officers, directors, principal stockholders andaffiliated entities.***

 

Our directors, executive officers andaffiliated entities beneficially own a significant percentage of ouroutstanding common stock. These stockholders, if they acted together, couldexert substantial control over matters requiring approval by our stockholders,including electing directors and approving mergers or other businesscombination transactions. This concentration of ownership may also discourage,delay or prevent a change in control of our company, which could deprive ourstockholders of an opportunity to receive a premium for their stock as part ofa sale of our company and might reduce our stock price. These actions may betaken even if they are opposed by our other stockholders.

 

***Delaware law and our corporatecharter and bylaws contain anti-takeover provisions that could delay ordiscourage takeover attempts that stockholders may consider favorable.***

 

Provisions in our certificate ofincorporation, as amended and restated, may have the effect of delaying orpreventing a change of control or changes in our management. These provisionsinclude the following:

 

*·*       the right of the board ofdirectors to elect a director to fill a vacancy created by the expansion of theboard of directors;

*·*       the prohibition ofcumulative voting in the election of directors, which would otherwise allowless than a majority of stockholders to elect director candidates;

*·*       the requirement foradvance notice for nominations for election to the board of directors or forproposing matters that can be acted upon at a stockholders’ meeting;

*·*       the ability of the boardof directors to alter our bylaws without obtaining stockholder approval;

*·*       the ability of the boardof directors to issue, without stockholder approval, up to 10,000,000 shares ofpreferred stock with terms set by the board of directors, which rights could besenior to those of common stock;

* *

*35*

----

*Table of Contents*

* *

*·*       the required approval ofholders of at least two-thirds of the shares entitled to vote at an election ofdirectors to adopt, amend or repeal our bylaws or amend or repeal theprovisions of our certificate of incorporation regarding the indemnification ofdirectors and officers and the ability of stockholders to take action;

*·*       the required approval ofholders of at least a majority of the shares entitled to vote at an election ofdirectors to remove directors for cause; and

*·*       the elimination of theright of stockholders to call a special meeting of stockholders and to takeaction by written consent.

 

In addition, because we are incorporated inDelaware, we are governed by the provisions of Section 203 of the DelawareGeneral Corporation Law. These provisions may prohibit or restrict largestockholders, in particular those owning 15% or more of our outstanding votingstock, from merging or combining with us. These provisions in our certificateof incorporation and bylaws and under Delaware law could discourage potentialtakeover attempts and could reduce the price that investors might be willing topay for shares of our common stock in the future and result in our market pricebeing lower than it would without these provisions.

 

***We have incurred and will continueto incur increased costs as a result of being a public company.***

 

As a public company, we have incurred andwill continue to incur significant legal, accounting and other expenses that wedid not incur as a private company. In addition, the Sarbanes-Oxley Act of2002, as well as new rules subsequently implemented by the SEC and NASDAQ,have required changes in corporate governance practices of public companies. Weexpect these new rules and regulations to increase our legal and financialcompliance costs and to make some activities more time-consuming and costly.For example, as a result of becoming a public company, we have added anindependent director, created additional board committees and adopted policiesregarding internal controls and disclosure controls and procedures. Inaddition, we have incurred and will continue to incur costs associated with ourpublic company reporting requirements. We continue to evaluate and monitordevelopments with respect to these new rules, and we cannot predict or estimatethe amount of additional costs we may incur or the timing of such costs.

 

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

 

Not applicable

 

**Item 3. Defaults Upon SeniorSecurities**

 

Not applicable

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

Not applicable

 

**Item 5. Other Information**

 

Not applicable

 

**Item 6. Exhibits**

 

a.     Exhibits

 
| **Exhibit  Number** | ** ** | **Description** |
|---------------------|------------|-----------------|
|                | 31.1       |            | Certification of Chief Executive Officer pursuant to  Securities Exchange Act rules 13a-15(e), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
|                | 31.2       |            | Certification of Chief Financial Officer pursuant to  Securities Exchange Act rules 13a-15(e), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
|                | 32.1 (1)   |            | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|                | 32.2 (1)   |            | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

----

| (1) | The material contained in  Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC  and is not to be incorporated by reference into any filing of the Company  under the Securities Act of 1933 or the Securities Exchange Act of 1934,  whether made before or after the date hereof and irrespective of any general  incorporation language contained in such filing, except to the extent that  the registrant specifically incorporates it by reference. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

36

----

Table of Contents

 

**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act, as amended, the registrant has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
|  Date: May 7, 2009 | /s/ Fumihiro Kozato                                                       |
|------------------------------|---------------------------------------------------------------------------|
|                         | Fumihiro Kozato                                                           |
|                         | President and Chief Executive Officer                                     |
|                         |                                                                      |
|                         |                                                                      |
|  Date: May 7, 2009 | /s/ Mark Voll                                                             |
|                         | Mark Voll                                                                 |
| * *                     | Vice President of Finance and  Administration and Chief Financial Officer |

 

37

----

Table ofContents

 

**EXHIBITINDEX**

** **
| **Exhibit  Number** |     | **Description** |
|---------------------|----------|-----------------|
|                | 31.1     |            | Certification of Chief Executive Officer pursuant to Securities  Exchange Act rules 13a-15(e), as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|                | 31.2     |            | Certification of Chief Financial Officer pursuant to Securities  Exchange Act rules 13a-15(e), as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|                | 32.1 (1) |            | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|                | 32.2 (1) |            | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

----

| (1) | The material contained in Exhibit 32.1  and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be  incorporated by reference into any filing of the Company under the Securities  Act of 1933 or the Securities Exchange Act of 1934, whether made before or  after the date hereof and irrespective of any general incorporation language  contained in such filing, except to the extent that the registrant  specifically incorporates it by reference. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

38

----